There appears to be a tax justice theme to this morning. The following is cross posted from the Tax Justice Network because of its significance:
The Independent Commission for the Reform of International Corporate Taxation (ICRICT) has launched a ‘roadmap' for taxing multinationals. This important intervention not only confirms the failure of current tax rules to deliver fair outcomes internationally, but sets the course for a specific alternative that would significantly strengthen fiscal sovereignty for countries at all income levels: unitary taxation with formulary apportionment.
“ The fairest and most effective version of unitary taxation is multi-factor global formulary apportionment with a minimum corporate tax rate. We urge global leaders to adopt a roadmap towards this goal, including more short-term measures which would be more effective, easier to administer, and provide greater certainty, than the current defective methods.”
ICRICT
The commission includes a range of leading international thinkers, from Magdalena Sepulveda and Joseph Stiglitz to Eva Joly and Leonce Ndikumana. It was established by a broad coalition of civil society and labour organisations, including TJN, with the aims of:
- promoting the international corporate tax reform debate through a wider and more inclusive discussion of international tax rules than is possible through any other existing forum;
- to consider reforms from a perspective of public interest rather than national advantage; and
- to seek fair, effective and sustainable tax solutions for development.
The appointment of two new commissioners has just been announced: Thomas Piketty and Gabriel Zucman.
Comparative assessment of unitary approaches
The Commission's earlier work led it to the conclusion that current international tax rules are simply not fit for purpose — based as they are on the economically illogical accounting fiction that each entity within a multinational group can be assessed as if it maximised profits independently by transacting with the group using market (“arm's length”) prices.
The alternative is to treat multinational groups according to their reality, that they aim to maximise profits at the unit of the overall group. This respects the economic rationale, which is that multinational enterprises (MNEs) exist precisely because they can outperform a collection of independent smaller firms performing the same functions but without a common management control. The question then is how to distribute taxable profits that arise at the unit of the group (rather than that of individual entities in different countries), between the various countries where the group operates.
A range of unitary tax approaches exists, and ICRICT commissioners have heard evidence over the last year about each of the three leading options.
The report lays out the strengths and weaknesses of each. Briefly, residence-based taxation is found attractive in principle only: “the manipulability of the definition of the residence jurisdiction, which is central to [such a] regime, is a fatal flaw when it comes to taxing MNEs.”
The commission identifies a wide range of weaknesses for the destination-based cash flow tax (DBCFT) which for a period dominated policy discussions in the United States. First, it would require much greater cooperation between states to resolve issues around MNE operations where there is minimal physical presence in a jurisdiction. Second, the likely violation of World Trade Organisation rules would encourage protectionist conflict. And third, importantly but completely overlooked in the US debate, a global shift towards DBCFT would exacerbate rather than ameliorating the tax injustices that lower-income countries already face.
Therefore:
“It is the Commission view that global formulary apportionment is
the only method that allocates profits in a balanced way using
factors reflecting both supply (e.g., assets, employees, resources used)
and demand (sales). Neither can create value without the other.”
Steps on the road
There has for some time now been a growing sense that the arm's length approach is finished, and that the OECD BEPS process of 2013-2015 would come to be seen as the last great defence of a set of international tax rules that were left behind by globalisation.
But change comes painfully slowly, especially when multinationals and their ‘big four' tax advisers are so heavily invested in the status quo. Valuably, therefore, the ICRICT report does not stop at indicating the direction of travel for international rules. Instead, it lays out a series of steps along the way — recommendations for the here and now.
“While a system of formulary apportionment is the long-term aim, we are
convinced that additional measures can be adopted in the short term leading in this direction. Such reforms can move the current system away from the dysfunctional independent entity principle and use of transfer pricing rules, and realign the rules to treating MNEs according to the economic reality that they operate as unitary enterprises.”
The options discussed include profit-split and shared net margin methods, as well as my own proposal for a formulary alternative minimum corporate tax (although unthinkably, the commission eschews the acronym, FAMICT).
“In the absence of global coordination and agreement, an individual country or region could consider implementing formulary apportionment as part of a domestic alternative minimum tax regime. In such a regime, formulary apportionment would determine the income base for computing an alternative minimum corporation tax.
The country could define the local corporation tax base by applying a multi-factor formula to a MNE's global income, and compute the minimum tax payable on that apportioned income, for example at 80 percent of the regular corporation tax rate. The minimum tax would be payable if it exceeds the jurisdiction's regular corporation tax payable computed on the MNE's local income as determined under conventional arm's-length transfer pricing methods.
Such an alternative minimum tax regime could be enacted as domestic legislation without the need to repudiate existing multilateral agreements and commitments to the arm's-length principle, including the OECD transfer pricing guidelines. This would extend the concept of ‘safe harbors'…”
Finally, the commission highlights the critical importance of changing the political context from the rich countries' club of the OECD, to the fully inclusive UN:
“Only the UN's universal membership and open and democratic structure can give full voice to the tax policymakers and the entire civil society from all countries. We therefore renew our call for international taxation to be brought under the aegis of the UN, which alone can provide the legitimacy for rules to coordinate such a central element in the sovereignty of all states.”
And so say all of us… The ICRICT report is available in English, French and Spanish, and the press release also in Italian and Portuguese.
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:
Let’s see how many column inches this gets in The Smite (sic) eh?
I wish that the tax justice movement would promote LVT round the world as the best form of local taxation. (Not a panacea!) The LVT movement has made frankly zilch progress when it comes to implementation, which could be relatively simple, but no one is showing how in different parts of the world. After all, you can’t hide land in a tax haven.
I include it in all my recommendations
The commission seems to be dominated by economists, civil servants, politicians, etc. Has there been much engagement with representatives from the multinationals companies and their advisers (accountants, lawyers, etc) around how such proposals might work in practice?
If some countries move away from the arm’s length standard and introduce formulary apportionment or some sort of alternative minimum taxes, and indeed if different jurisdiction use different formulae, isn’t there a risk of double taxation? Which country would give credit where the same item is taxed more than once?
The Big Four already have armies of people doing for transfer pricing under net margin or profit split methods. There is always scope for arguing up or down the relevant factors and I’m sure they would be very happy if those methods became more important more generally. I rather suspect they would be just as happy to have similar armies of people advising on how to deal with the apportionment formula.
The multinational corporations have reacted on twitter
To summarise their argument they say the rules of international tax can’t be changes because the rules they have established for international tax say they cannot be changed
That’s probably why they weren’t useful members: having a closed mind does not help
“The multinational corporations have reacted on twitter” – what, all of them, with one voice? Which twitter account should we be following?
Please don’t have a closed mind about international businesses and the people who work for them. They are not a monolithic bloc.
The so-called rules of international tax change all the time. If they can be changed in a way that simplifies cross-border tax compliance, gives certainty of the result, and prevents double taxation, many businesses will be very happy with that.
Many of their best known representatives
This stuff is becoming harder to follow. Not the concepts so much as the language. There is increasing, often majority, support around the world for MNC tax justice in broad principle but the details and developments have become an exclusively expert area, very technocratic, or so it seems.
Some benign dumbing-down may be helpful?
The detail always will be technical
Sorry, but that’s inevitable
Richard, does global formulary apportionment necessarily have to include both supply and demand factors? Why not just a sales based formula, i.e. you’ve earned $1 billion this past year in our jurisdiction, so you pay x dollars?
The answer is yes
Us3 one factor and it will be too easy to manipulate matters e.e.g sell all product to a distributor based in Cayman