Forbes has a column up on country-by-country reporting today.
OK, I should declare an interest: I wrote it.
The argument is a simple one: country-by-country reporting pays for us all if we wants corporations to pay their fair share of the cost of bailing out government deficits.
NB: note to those who argue companies can’t pay tax. If you’re right why do they work so hard to avoid it? And why do they claim when doing so that it’s the company that gets the saving?
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If the problem is intra-group trading, and the resulting allocation of profit to low-tax jurisdictions, then surely the “solution” (to the extant that higher tax charges can ever be a desirable outcome) lies in the definitintion and enforcement of transfer pricng rules.
Country-by-country reporting (which by the way looks horribly cumbersome to preare) would only highlight the outcome of intra-company transactions; as long as the terms of these transactions are legal, there is not much that tax authorities can do about them.
@Ted B
a) I agree we need better transfer pricing rules – but CBC is a major risk assessment tool to concentrate effort on those who look like they may be abusing most – so compliant companies should welcome it – it could reduce their admin hassle and documentation requirements
b) CBC is not cumbersome – in practice an MNC has to have the necessary data now for tax purposes – so the need is for audit. Several MNCs have confirmed it is technically entirely feasible
c) $1 trillion of flows come out of developing countries each year illicitly – $650 bn is estimated to be transfer mispricing
So there is illegality that needs to be addressed
Richard
“note to those who argue companies can’t pay tax.”
Nobody says that “companies can’t pay tax”. We see them handing in cheques all the time.
What we do say is that companies do not bear the economic burden of a tax. As with your recent agreement with me on who bears the burden of National Insurance payments. The company hands over the cheque, certainly, but we both agree that it’s the employee who is actually carrying that burden.
Don’t forget, both Vince Cable and Larry Elliott are on my side of this particular point. The economic burden of corporate taxation is carried by some combination of the workforce, customers and shareholders: not by the company itself.
@Tim Worstall
Of course Vince and Larry agree in principle that “the economic burden of corporate taxation is carried by some combination of the workforce, customers and shareholders: not by the company itself.”
But I’m sure they’ll also agree that we do not which bear it, or where, and when
In which case theoretically agreeing is not the same as saying let’s increase the effectiveness and yield from taxation on business – as they both say.
Your argument has no value – the reality is that even if corporations are only agents eliminating them from consideration would result in lower tax yields (which is your real aim, I am sure) and Larry and Vince also (from discussion with them) both believe that the result would be higher tax burden on labour, less on capital and the outcome would be regressive i.e. they are sure corporate taxes are progressive because they fall mainly on the owners of capital and they tend to have higher incomes and so in any properly designed tax system pay higher income tax rates
And don’t bother to quote Devereux in response – his work is fundamentally flawed – not least because rather oddly he never tested his hypotheses bi-directionally thereby revealing their pure political purpose i.e. his work was not objective, in my opinion
Richard
PS I always recall the PWC tax partner’s response to tax incidence arguments – which had been explained to him by Joel Slemrod – and which he described as “wrong” because no one in business, accountancy or tax authorities behaved as if they were true – which in his view suggested economic theory was meaningless in this area
I agree with him. You can beat your drum forever – and the reality is we will still tax corporate income to ensure the tax base is comprehensively addressed by the tax system
“But I’m sure they’ll also agree that we do not which bear it, or where, and when”
“Know which bear it” I’m assuming you meant.
But we do know some things about who bears it. For example, in a closed economy capital will bear most if not almost all of it. In an open economy, depending upon how open it is, labour will bear a higher portion of it.
Without relying on Mike Deveraux, I would point you to the Congressional Budget Office report on the incidence of the corporate income tax. They estimate, in an economy about as open as the US, that labour bears 70% of the burden, capital only 30%.
No, I don’t claim that this is the entirely 100% correct answer. Only that if it is anywhere near close to being true then the corporate income tax is not progressive. It is in fact regressive in which case we might want to think about lowering/getting rid of it purely on equity grounds.
And if we want to tax returns to capital then we should do just that: tax returns to capital. Not think we are taxing returns to capital but actually taxing returns to labour.
Tim
You wilfully ignore the fact that much capital is in tax havens
If we don’t tax it at source in companies it will fall entirely out of tax
And you also fail to note that if companies do not distribute capital it will not fall (by and large) to be taxed in the hands of shareholders
Your arguments are therefore disingenuous
You are actually seeking ways to avoid capital being taxed
I believe it essential that it be taxed
And I know of no one in business who would agree with a 70% burden falling on labour
Richard
How would one deal with genuine cross-border trade? There was a discussion on this blog about Google, but I suppose the question is the same for all e-retailers: given that they sell into countries often without any physical presence there, where does one consider the economic activity to be?
Richard,
a) I remain unconvinced nthat CBC would do much to address transfer procing abuse. Moreover, if a multinational company manages to “locate” its profits in low-tax jurisdictions, I view this as clever, not abusive. I beleve that is to the shareholders’ benefits (i.e. me through my pension arrangements, and I assume you as well)
b) Where does the estimate of $650 billion of transfer mis-pricing come from? As a newcomer to this site, I have noticed that some of the figures you use somtetimes rely on fairly heroic extrapolations or asumptions.
@Ted B
a) The OECD does not seem to agree – which is why CBC is on its agenda
b) If you think tax abuse is good I really have little left to discuss with you
c) The World Bank based on the work of Global Financial Integrity
Richard
I don’t think anyone supports tax abuse. However, one expects a company to maximize profits and returns to shareholders, and that implies minimizing its tax expenses wihin exisitng legal frameworks.
Is there a link to the world Bank’s work on these issues, and in particular this estimate? The $650 billion figure equates to c. 2x Argentina’s GDP, and I find it therefore incredibly high, and worthy of atttention.
Transfer mispricing is not within existing legal frameworks
Yes the number is big
Look at the stats
They support it
Why do you think the north is so much richer than the south?
“Why do you think the north is so much richer than the south?”
Because total factor productivity is, on average, higher in the North than the South. Most certainly labour productivity is higher. Which is why that labour gets paid more.
No, this isn’t some strange right wing idea. This is straight from Paul Krugman. Average wages in an economy are determined by average productivity in that economy. High wages equal high productivity and vice versa. Even Marx managed to get this point (yes, he did, he noted that in the absence of capital being a monopoly employer, in the presence of multiple capitalists competing for access to labour, then wages will rise as productivity rises).
The south is afflicted by the low productivity of labour. Thus the south is poor.
I aree the number is very significant, and therefore I would appreciate if you could point out to the source. Is there a World Bank document or publication that details the basis of this estimate? Thank you.
@Ted B
http://www.gfip.org/index.php?option=content&task=view&id=274
@Tim Worstall
If all the capital from the south has flowed north via tax havens of course what you say follows
In other words you confirm my argument
“If all the capital from the south has flowed north via tax havens of course what you say follows”
If capital were all there was to it then the Soviet Union would have been one of the richest countries on the planet. See the Paul Samuelson textbooks from the 70s and 80s for the calculations. And the Soviet Union wasn’t one of the richest countries on the planet so it can’t just be capital….
I suspect that the low productivity and the proverty feed off each other. When wealth is being extracted via tax havens, this worsens the poverty, increasing social instability, reducing opportunity, reducing the ability to fund education healthcare etc and thus damaging the prospect of increasing productivity.
In other words the low productivity cannot be looked at in isolation from other factors that may indirectly reduce it.