My Tax Justice Network colleagues Nick Shaxson and Sol Picciotto are in the FT this morning. Their argument is a simple one. They say:
It is time for a new approach to international tax.
I think few would argue, although few also put it as clearly as they do that:
The international tax system in effect provides vast subsidies for multinationals, helping them outcompete local rivals on a factor — tax — that has nothing to do with economic productivity. They free-ride on tax-funded benefits — roads, educated workforces, reliable courts — provided by the countries where they do business, while others pay for those benefits. This distortion is inefficient and unproductive, and corrupts the very fabric of markets.
And, as they say:
The world's tax rules have not kept pace with profound changes in the global economy.
Again few would disagree. Unfortunately though, although such statements are obviously true, and it is clear that the existing OECD sponsored method for taxing international companies is intellectually bankrupt and is actually help bankrupt countries, the obvious alternative they promote has yet to receive enough attention:
Fortunately, a far better system is available: unitary tax. Instead of taxing multinationals according to the legal forms that their tax advisers conjure up, they are taxed according to the genuine economic substance of what they do and where they do it. Each company submits to the tax authorities of each country where it does business a “combined report” providing consolidated accounts for the whole global group, ignoring all internal transfers. The report specifies the group's physical assets, workforce and sales and the overall profits are then divided up among jurisdictions according to a formula weighing these three factors. This system would benefit everyone, particularly developing countries.
Tax experts have long argued that this approach is better. It is proved, too: most US states already use it successfully for state taxes. The EU's proposal for a common consolidated corporate tax base goes a long way towards this, though its geographical focus should be expanded to require a worldwide combined report. It is possible to move towards unitary taxation without widespread international co-ordination, though that would certainly help.
This is the only way forward. The alternative, is not. They note:
George Osborne, the UK chancellor of the exchequer, and his German counterpart Wolfgang Schäuble have said they will engage with the OECD to tackle the problems in international tax. If the initiative ends up merely tinkering with the “arm's-length” method, they will fail. Citizens should demand a new and serious approach.
I agree.
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I agree this could be an excellent way forward Richard. How do you envisage this fitting in with your country by country reporting idea? My initial impression is that it seems to take a different approach
Country-by-country reporting provides information to make unitary tax worked
I designed it that way
not sure i understand richard. your approach is a very detailed/comprehensive country by country income statement upon which the tax would be based and the above appears to be a simple allocation of global profits using % sales, % workforce and % assets in each respective country.
the above method would surely be open to the same abuse as offshoring IP.
i imagine you have thought through the implications of this new system for companies like apple (where workforce mainly in China) with your usual rigour. would you share the impact with us?
I have never once said tax would be based on country-by-country reporting
I want it for disclosure
CBC has always been designed to support unitary taxation – as is very clear from my publications
So is Unitary taxation better or worse than country by country?
The complement each other perfectly
probably being slow, but how does reporting what turnover is made in each country help you apply a unitary formula to a global turnover number based on employee numbers etc? turnover by country would be a completely redundant measure surely?
Please read what I have actually written on cbc for answers – I address all this here http://www.taxresearch.org.uk/Documents/CBC2012.pdf
Sorry Richard but this is just extra onerous disclosure in Global accounts, when tax is based on local statutory accounts under local GAAP not global accounts.
There is only a lack of visibility if you look at the global accounts in isolation.
We need no further granuality for local tax unless you are talking about branches/PE where there are no requirements for local statutory accounts.
This would be nice to have and no wonder the politicians love it, but it is not practical. Do you honestly think a company like GE could produce a set of global stats with a country by country income statement for every juriscication it works in (probably 100+) and get it signed off by their under pressure auditors within 6 months of year end?
And nothing in your 68 page document tells us how this helps unitary tax
Respectfully, you clearly have not bothered to inform yourself on all the issues to which CBC relates and have decided to apply a decidedly selective and biased criteria for assessment
That is of course your right
But the world is not taking such approaches seriously
i have read your cbc publication and its left me wondering whether you have changed your position on all this.
your post above is calling for unitary apportionement as a basis for taxation. The cbc paper is suggesting that the unitary apportionment formula is used as a basis for assessing the risk of an international group artificially moving profits around (presumably then prompting a TP enquiry or similar) rather than an actual basis of taxation.
para 7.3.1 reads:
“Whichever approach is used, without having to actually put a unitary apportionment formula system of calculation of taxable profits in place country-Ââ€by-Ââ€country reporting would allow the use of such data to determine whether the
profits declared in a jurisdiction were likely to be appropriate given the allocation
of the underlying drivers of profit that the formula method of attribution recognises with the jurisdiction.
If the declared profits accorded closely with the formula apportioned profits then there would be little point in pursuing a tax investigation into the affairs of the multinational corporation in question on the basis of transfer mispricing; no serious error would be likely to be found. Alternatively, of course, high risk might be identified and then an investigation could follow with a much increased chance of the cost incurred proving to be remunerative for the jurisdiction in question. “
CBC is a tax risk assessment tool
And it is an accounting system for a much, much wider audience tackling a wide range of needs
It has never by itself and never will be atax collection tool per se
It is about reporting the consequence of behaviour
It will disclose who is abusing
That is one of its many purposes
I have never changed opinion on this, ever
Fair comment Richard. I have now spent a couple of hours reading the report, which I must say is remarkably concise and well written, and have only one question…which i have no doubt you can answer for me.
paragraph 7.3.1 states:
“Whichever approach is used, without having to actually put a unitary apportionment formula system of calculation of taxable profits in place country-â€by-Âcountry reporting would allow the use of such data to determine whether the
profits declared in a jurisdiction were likely to be appropriate given the allocation of the underlying drivers of profit that the formula method of attribution recognises with the jurisdiction”.
Does this not suggest we do not need unitary tax if we have your country by country reporting was in place?
What it means is that a proxy for what unitary would look like can easily be calculated using CBC which would then ensure HMRC resources could be allocated quickly and effectively to the most likely to be abusing companies
Thanks for kind comments
“The report specifies the group’s physical assets, workforce and sales and the overall profits are then divided up among jurisdictions according to a formula weighing these three factors.”
Given that many multinationals sell the same product at vastly different selling prices and hence margins in different countries, surely using sales, assets and workforce will give results far from reality. And with country by country reporting, the high margin countries will see that they aren’t getting their share of the tax.
And what happens to subsidiaries that aren’t wholly owned, where shareholders that have nothing to do with the larger group suddenly end up paying tax unconnected to the profitability of their entity.
It seems a good idea but very difficult practically
Which is no doubt why it has been used in the USA for many years
I make no claim it is perfect
Or that it will solve all problems
But at least it will tax all profits once
Arm’s length pricing will never do that as it can’t, even in theory
What’s better? A closer approximation to the truth or an utterly intellectually flawed approach?