There has been a lot of heat about Apple's tax abuse, and rightly so. There has been less focus on how to solve the problem and yet that answer is known. It is to be found in unitary taxation. I wrote about this in The Courageous State, saying:
If country-by-country reporting were to be introduced to make multinational corporations accountable, whether they were quoted on a stock exchange or not, then a new method for the allocation of profits between states that would ensure that there was fair taxation of the profits of multinational corporations between countries could also be introduced.
Country-by-country reporting would provide the essential data to check the credibility of such a system which would allocate the total profits made by a company for a year to each and every one of the jurisdictions in which it operates on the basis of a formula. The normal formula used is called the Massachusetts formula and it allocates one-third of the profit on the basis of the state where sales take place, one-third on the basis of the state where staff are engaged and one-third on the basis of where physical assets owned by the corporation are located. Since it is impossible to make a profit without customers, and it is impossible for a company to make profit without engaging people, and every company, without exception, must make use of physical assets at some point, then this formula is in itself complete and allocates profit as fairly as possible on the basis of the true factors of production that generate it. Adding another factor to allow for the use of natural resources would add to the credibility of the formula, as would allocating the tax bill on the basis of head count in a country and not the cost of paying staff in a jurisdiction.
This system of taxation is, inevitably, prejudicial to tax havens. It is rare that there are any physical assets located in these places: the average tax haven company only requires a slot in a filing cabinet in the lawyer's office to support its existence. It is also rare that any tax haven company employs real staff while very few sales actually take place to the population of tax havens, meaning that the overall allocation of profits to such places will be tiny if this system of allocation of profits were to be used to apportion income between states so that each could, in accordance with its own democratic mandate, then decide what rate of tax should be applied to them in the course of collecting its own taxation revenue.
The system is fair, it is democratic, it defeats one of the principal weapons of the financial/speculative economy in its attempt to withhold taxation payments from all states, whether Courageous or not, and the mechanisms to deliver this system of allocation of profits for taxation purposes can be put in place. That is precisely why Courageous States should support this method of taxation for all multinational corporations.
For more information on unitary taxation this Tax Justice Network briefing is first rate.
And tax justice campaigners are not alone in proposing the idea. This is from the FT's editorial of June 17 2013:
The best G8 outcome would be an international agreement on how to link tax bases to real economic activity and limit the creation of letterbox subsidiaries whose sole purpose is to locate the most profitable parts of businesses in low-tax jurisdictions — or in no jurisdiction at all.
In the short run, the UK could provide real leadership by backing a push for a common consolidated corporate tax base across the EU. Far from a thin end of the wedge of tax rate harmonisation, CCCTB can protect legitimate tax competition against claims of unfairness. The G8 should also advance the cause of the automatic exchange of tax information between governments, an essential tool for tax authorities to verify that democratically chosen tax structures are working.
The automatic information exchange is happening. The country-by-country reporting is happening. Now we just need the logical tax system to follow on.
This is the time for change to happen.
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Do you see this as something that one country could do alone. Eg simply send Apple a bill for total profits * 20% * proportion of apple’s workers/stores/sales in the country.
After country-by-country reporting is fully implemented that is.
In theory it is possible
In practice many countries in the EU want to do it – and could
It sounds like the above would involve quite a lot of work to implement, on an on-going basis, but well worth the effort I don’t doubt.
In terms of jurisdiction shopping, I don’t understand why the EU doesn’t have a uniform rate of corporation tax.
Equally, why does the Eurozone not have a uniform minimum wage?
In terms of jurisdiction shopping, I don’t understand why the EU doesn’t have a uniform rate of corporation tax. Equally, why does the Eurozone not have a uniform minimum wage?
Because it would be anti-democratic. The Germans (more accurately, the Bundesbank) would impose a rate that enforced the sort of neoliberal small state that is crucifying us.
If we had unitary tax there would be freedom on rates
That is a big democratic plus
Great way forward as this model would end the “race to the bottom” where countries compete for international investment by offering lower corporate tax rates. (Already the Irish model, and has been driving down UK corporate rates since 2010 under the Tories).
But how would this apply to investment companies? They have few employees, no physical sales, and only virtual assets. Yet they are a vital part of the system that drives Global tax evasion, corruption and inequality.
Where are their sales? That might be the key factor in their case
And that can be destination based
I thought the Massechusetts formula was based on railway line mileage? There was no 1/3 formula. If you believe that tax is a payment for the right to inhabit a country how can you support a tax on sales when the country in which the sale tskrs place may have paid nothing to support that sal
It seems you might need to read a bit more
Maybe another option would be to eliminate corporation tax entirely, given that the incidence of this tax tends to fall on employees and customers. This would mean it’d be impossible for sales not to be taxed where they take place (in the form of VAT).
To balance the books the government could save money on the HMRC budget while marginally increasing VAT and income tax.
Actually, thinking about it this would also help small businesses as their compliance costs would be proportionally a lot lower.
This is nonsense
Search Montreal on this site and you will find an article where I explain why
How are you proposing to force foreign countries to implement the tax laws that you declare that they should have against the wishes of their own government and usually their own voters? Send the gunboats in?
No ine is doing any such thing
Any country can do unitary in isolation once it has CBCR data
This unitary taxation will have perverse consequences. If you manufacture in Suffolk, and then ship your product to customers in Saudi for example, then the government of Saudi ( not elected ) are entitled to a share of the corporation tax from the sales.
It works out to be an even more rewarding scheme for governments that provide fewest services for their citizens, and let the citizens have more of their own money to spend as they choose on imports.
That is not true: it says Saudi could tax that part of they wish
They need not do so
It says that part was not earned in Suffolk
And that is true
The real problem comes if the customer in Saudi turns round and sells the product back to somebody in Suffolk and only a third of the margin on the re-sale is taxable in Suffolk. At that point you realise that significant tax savings could be made by routing sales through another country and a lot of complex anti-avoidance legislation will be needed and the system will be anything but simple to administrate.
Abuses are possible – but of the formula is split home and way that is much harder
And since all intra-group transactions are ignored you are creating a problem that may not exist
Richard, is it conceivable to adopt a unitary form of taxation based solely on sales, i.e. leaving out physical assets and staffing? With so many multinational corporations already shifting their workforces (and production)from western countries to developing world states, this might have to be a consideration.
This is conceivable
As are formulas that split sales between source and destination between labour and headcount
I prefer these split formulas
I do not like asset based formulas: asset valuation is far too subjective in my opinion