I've just had a conversation with Prof Mike McIntyre of Wayne State University in the USA. He's at the TJN transfer pricing conference in Helsinki.
Our discussion focussed on how easy it is for multinational companies to abuse transfer pricing rules. And it's obvious why. As Mike put it, and I hope I paraphrase correctly:
"The whole logic on which we tax multinationals is wrong. We assume we should compare them with a bunch of unrelated companies. But they aren't. They don't think like that. They don't behave like that. So we try to be force them to be something they're not for tax.
What we should do instead is assume they're what they are - one company with lots of branches.
Mike is right. But of course, as he also knows, just because we should tax them as whole units at the group level we still need to know how to properly allocate that group income to states who can actually collect tax. And for that country-by-country reporting is vital to provide data, and so is a formula based method of allocating profits.
It's not perfect - of course - but as is already clear from the presentations made this morning, the OECD transfer pricing model does not work for lack of data and intellectual and economic incoherence; the Brazilian model works only to the extent that it offers a range of compromises which are accepted as reasonable over-rides to reality and China is struggling to tax whole supply chains - which is great, except they have problems with data capture too, although the method is coherent and recognisably related to the position Mike and I share.
The reality is we're seeking to find a compromise that might mean companies pay something like the right amount of tax in the right place at the right time. The odds are in their favour right now. The challenge is to balance the risks between companies and states. And without reform to existing OECD transfer pricing systems I see now way that will happen.
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Readers will have observed that any amount of transfer pricing or tax haven uses will have not prevented even Vodafone from paying VAT dues – and at the right time and place at the right amount. Throw in the contributions from vistors and those in the black economy and we can see that an extension and simplification of VAT would be deeply effective in raising the revenues needed to fund public services and help eliminate poverty.
Before you say ‘but its regressive’ consider that its a necessary tax to get those contributions noted above and that the proceeds can be targeted to those in need much more effectively than any manipulation of goods and service pricing.
A shift from the theoretical income and corporate tax theories which your excellent blog demonstrates is so so defective to heavier reliance on less avoidable VAT regimes deserves greater focus.
Craig – you do offer evidence free policy
The reality is that VAT is just about the most evaded tax – just check HMRC’s data for the UK
In that case your basic hupothesis is fundamentally wrong and everything that follows on in that case misses the mark as well
Richard – you are quite right to argue that hypotheses require evidence. With respect though here I have raised just facts. Tourists don’t pay income tax but they do pay VAT, those in the black economy whether carpenters or drug dealers don’t pay income tax but they do pay VAT, the thousands of companies that don’t file returns don’t pay income tax but do pay VAT when they spend as do the clever tax avoiders like Vodaphone.
So happens that the UK VAT regime is so hugely complicated and exemption ridden that it is no surprise it is open to evasion as you say.
The positive impact of extending it and simplifying it along the lines of say the Singapore model is in my view worthy of greater focus. Hope you take a closer look.
No. As ever you are wrong. They pay other people. Who do not then pay HMRC
You really aren’t very good at this Craig. As you prove repeatedly .
Richard – a shame you won’t take VAT seriously as perhaps THE tax that is paid at the right time, the right place and at the agreed amount. A tax paid by everyone. Your website includes the title Tax Research and I can only encourage you to enhance the credibility of your blog by including research into this crucial source of public revenues.
Craig
I lectured on VAT for a number of years
i do not dispute we need a VAT
But based on sound research, facts and clear economic thinking I am happy to say your claims about VAT are evidence of dogmatic but not reasoned analysis
Richard
Richard I could send you a folder of research on sales taxes emanating from Singapore, New Zealand, Jersey and the US.
Can’t seem to get a link but this report should be read and sure you can google it:
TAX DESIGN INSIGHTS FROM THE
NEW ZEALAND GOODS AND SERVICES TAX
(GST) MODEL
WORKING PAPER SERIES
Working Paper No. 60
April 2008
Ian Dickson and David White
The point is that by extending and simplifying VAT in the UK we could raise revenues notably from tourists, those in the black economy, tax avoiders and evaders that could be put to good use. Well worth applying your talents to its study and possible advocacy.
I read this stuff often
And I also read about why the theory doesq not become reality
You miss out that crucial stage