In December the Tax Justice Network published a paper by Sol Picciotto outlining a 21st Century blueprint for taxing multinational companies.
Amid rising public concern at how multinational firms ride roughshod over international tax rules, the paper advocated a shift to a system of Unitary Taxation under which the global profits of a multinational are 'apportioned out' to countries according to the genuine economic substance of what it does in each place. Each country can then tax its share of global profits at its own rate.
This paper, Towards Unitary Taxation of Transnational Corporations focused the debate on a viable alternative approach to remedy the obvious failings of the current international taxation system. But it provoked, as we had expected, some critical responses.
The new document, also written by Prof. Picciotto, organises the criticisms leveled at Unitary Taxation into ten points.
The document is in two parts: Section 1 outlines each criticism followed by a very brief riposte, and Section 2 provides fuller responses.
NB: reposted from TJN, with permission
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With the greatest respect, this does not respond to the most serious problems with unitary taxation – (i) that it allocates higher profits to less efficient and less profitable jurisdictions – the opposite of where the profits are actually made, (ii) that it’s easy to manipulate via outsourcing, and (iii) that the problem with the valuation of intangibles – the very thing you criticise in the current system – is not resolved. You still need to value them!
Intangibles are ignored altogether – that solves that one
As for allocating profits – they go to where value is generated, not where recorded
And that’s the key point
Value is never generated in tax havens
Two examples of why this is a problem.
1) You have two identical factories – one in the UK and one in France. Both produce 1000 cars a week. In France however the workforce are less efficient and require additional staff and additional capital to produce the same result. Clearly the most profitable factory is in the UK, but under unitary taxation you assign more profits to France.
2) You have two identical banking groups. Both have UK subsidiaries with offices in the UK and those offices are involved in derivatives trading – relatively few staff, potentially massive profits and losses. One bank, however, does not employ any admin or cleaning staff in the UK – these are outsourced to a third party provider. By outsourcing staff who don’t create much value, this bank reduces its global exposure to UK taxation. Thus although in essence both banks are doing the same thing and obtaining profits in the same manner, there is a material impact on overall tax exposure.
Thus there is an incentive for multinational groups to sack admin and non-fee earning staff in high tax jurisdictions.
Also – wow – no brands, patents, goodwill or anything. None of the unitary taxation proposals I’ve ever read have gone that far.
Ever heard of the profit motive
This is pure silo – and utterly absurd – thinking
And you clearly haven’t read many unitary proposals either – many now just consider sales