As Andrew Goodall, a long time supporter of tax justice has noted on his blog:
Taxing multinationals: Lords committee sets out the case for unitary taxation and then dismisses it
As he says:
The House of Lords economic affairs committee's report "Tackling corporate tax avoidance in a global economy: is a new approach needed?" contains some surprises, including a call for the Treasury to conduct a wide-ranging review of the UK's system and to consider the merits of a "destination-based tax". The report also sets out some very persuasive arguments for unitary taxation, before dismissing the idea.
Andrew thinks they're wrong to do so:
Something has to be done about the ability of multinationals to exploit gaps in the system and accumulate huge sums in tax havens, and peers are right to point out that the present international system "offers great scope for multinational companies to shift their profits between countries to reduce their tax liabilities and creates an uneven playing field".
The committee also recognises that the inadequacies of the tax framework "do not absolve corporate taxpayers and their advisers from responsibility for their actions".
It notes that Professor John Kay, writing in the Financial Times last month, said governments were mainly responsible for ensuring that taxation remains fit for purpose. The correct starting point, he said, was "the flawed structure and implementation of corporation tax".
So you'd think they'd want to do something, but no, they don't despite noting the current "separate entity" approach itself may also defy reality and reporting that:
Professor Sol Picciotto of Lancaster University said: 'What is needed is a new perspective, a new way of looking at multinational companies … When you think of a company like Google, it looks like a unitary entity. But from a legal point of view, they actually consist of hundreds of different individual companies ... Instead of trying to treat them as if they were independent entities in different countries, the perspective should be to accept that they are unitary entities and build on that.'
But the committee then identifies "significant obstacles" standing in the way of any move towards unitary taxation. It concludes that "treating multinational companies (sic) as single entities in a global economy is attractive in theory [but] there would be formidable difficulty in reaching global agreement, or even within the EU, on a common tax base, let alone on the appropriate allocation".
Instead they support Mike Devereux's destination based sales tax, an unsurprising conclusion since he was technical adviser to the committee and no doubt wrote the report for it. Now let's look at the significant obstacles to Mike's proposal, based on a paper he gave in Oxford in June this year:
So the only minor obstacle to Devereux's scheme is that it has no proven benefit unless everyone does it at once. And the case for it is made on the basis that an impossible agreement is reached.
And this was proposed instead of the programme of gradual reform within the OECD framework Sol Picciotto, the Tax Justice Network, I and others have proposed. That's straightforward dogmatic folly. As Andrew Goodall argues:
Unitary taxation has its potential problems, but it is at least arguable that the separate-entity approach defies reality. Advocates of unitary taxation argue that it could eliminate profit-shifting. The idea should be given serious consideration.
Absolutely.
And Devereux should get back to the blackboard and the world of economic fantasy where, unfortunately, he belongs until he can bring forward ideas of real world usefulness.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Richard, just to clarify … I’m not expressing a view on the “destination-based tax on corporate cash flows”, which I haven’t considered yet in any detail. The committee said: “A tax levied on profit in the customers’ country would mean that companies could not easily shift their tax base.” I did say that the committee’s recommendation, that a detailed study of that proposal should be undertaken, was one of a number of surprises in the report. I do think, however, that the committee, and the OECD, are wrong to exclude unitary taxation before it has been given a fair hearing.
While I agree we need to do something to tackle large corporates ability to shift profits, having invested in many companies I struggle with how it would not create some very strange results in certain circumstances. For instance, how would unitary taxation deal with a company having two distinctly different subsidiaries, which have very different operating models, asset bases and margins. for instance a company having a software development arm in the US (low asset, low staff, very high margin) and computer hardware manufacturer in China (high asset, high staff, low margins). My understanding of unitary taxation would be that it would end up attributing part of the US profit into China.
Anyway you may be interested in Goldmans Sachs US strategy piece last week where they were reporting how many of their asset manager clients are focusing on companies effective tax rates. Goldmans has constructed a low tax basket of 50 US stocks having an average effective rate of 19%, and this has underperformed US high tax stocks by 5% in the last six months. So investors are punishing companies that have low effective tax rates. It would be interesting to see how your tax ranking system here in the UK impacts company valuations over time. That is probably a quicker way of getting action on tax than waiting for lawmakers to slowly change laws.
Oh why, I wonder do all these people run away from the obvious forms of taxation and come up with others that if not unworkable are impossible to either impose or police?
You win some, you lose some….
Surely your criticism of DBCT is almost identical to criticism levelled at unitary taxation, namely that it requires almost unanimous agreement of the global community to implement.
That’s where you are wrong
Unitary tax does not in any way require that
And progress towards it is entirely possible, as Sol Picciotto, I and others are sowing, within the existing OECD framework
So what you are claiming of UT is untrue
I think it is this head-in- the sand approach of yours that will will see you sidelined as a serious player in the debate. Even such luminaries as Avi-Yonah, Durst and Clausing have identified issues that can cause complications and have sought to address them to some extent and suggested some option and global acceptance of FA/UT is one of them.
Three major hurdles you have to face with your model that I (and many others) believe will require international agreement: How are “profits” to be determined, agreeing a formula on who has what bite of the “profit” (which will be major sticking point between developed and developing nations (payroll v headcount) and global agreement on what consists of a unit. None of these can be done unilaterally, even at EU level.
You also seem to avoid the fact that countries will stress test these recommendations for economic and social outcomes, as suggested out by Clausing (March 2013):
“Since formulary apportionment would base tax liabilities on the factors in the formula, it would increase the real responsiveness to tax differences among countries, thus exacerbating possible adverse effects associated with a reallocation of capital due to tax rate differences among countries. While formulary approaches would dramatically reduce international tax avoidance due to accounting manipulations of the source of income, the silver lining of tax avoidance would also be reduced, since mobile multinational firms could become more tax sensitive in their real decisions.”
I’m all for a good and informed debate on the subject but yours and Picciotto’s is one of many and is certainly not the panacea you assume it to be.
Picciotto, Avi-Yonah, Durst, Clausing and I are all working together on these issues at present – and the profit issue is one I am working on in a funded project with Prem Sikka
Which pretty much undermines all your arguments