I have been asked overnight and this morning how I would tax digital companies. My answer is that I would apply to the what I have called an Alternative Minimum Corporation Tax (AMCT). I have previously explained this here.
Using country-by-country reporting data the global profits of multinational tech companies should be apportioned to countries based on where their customers, staff and assets are. The formula should be weighted to customers since in the case of these companies they are clearly the major drivers of profit and they create the intangible worth of these entities.
Then I would apply a tax rate of at least 80% of that charged as standard in the UK to this sum. That should more than allow for the impact of tech investing on current tax liabilities. Some may say I am being generous. Some may argue that the monopolistic position of these companies may justify a higher rate. That is a detail I will leave aside for now. My point is that if the sum due on this basis was more than that due on declared profits the AMCT would be payable instead.
I have previously suggested that the advantages are that, firstly, tax payment on profits is ensured.
Second, the objective of taxing profit once only is greatly assisted.
Third, profit shifting becomes a largely meaningless exercise.
Fourth, as a result most tax game playing will come to an end: in effect most tax haven usage will cease to be of benefit.
Fifth, certainty on taxation will increase: this is what business always says it wants.
Sixth, stakeholder confidence in business will grow.
Seventh, investor risk will fall, which is likely to improve share prices.
Eighth, the focus in business will be on the actual location of economic activity and not tax, which is likely to improve decision-making and so the rate of return on capital.
Ninth, tax administration, audit and dispute costs are likely to fall as any sums under dispute will be reduced.
Tenth, there will be a focus on improved tax and profit reporting as parallel tax books will cease to have as much relevance as they have in the past.
So is it a panacea? No, full unitary taxation based on much improved tax reporting that eliminates the anomalies of financial accounting when used for tax purposes in the accounts of multinational companies would be better than an AMCT. But for now, AMCT could pave the way to that outcome. I believe the time has come to give it serious consideration.
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I find it interesting that what you are suggesting should, according to your theory, be advantageous to the companies involved aswell as to the hosting countries.
*Fifth, certainty on taxation will increase: this is what business always says it wants.
*Sixth, stakeholder confidence in business will grow.
*Seventh, investor risk will fall, which is likely to improve share prices.
*Eighth, the focus in business will be on the actual location of economic activity and not tax, which is likely to improve decision-making and so the rate of return on capital.
*Ninth, tax administration, audit and dispute costs are likely to fall as any sums under dispute will be reduced.
It is increasingly obvious that the corporate sector needs to be saved from itself. The relentless shift of wealth from its potential customers to wealthy rentier private sector is not sustainable. Can’t be. We haven’t reached the tipping point yet, but it can’t be very far away.
Is anybody running a book on whether Debenhams will still be open for Christmas ? Could be worth waiting to buy the aftershaves and perfumes in the January closing down, stock clearance sale ! Adopt the Spanish tradition of exchanging gifts at Epiphany,”El DÃa de los Reyes” and you might save a fortune ??!!
Thank you Richard. Totally agree. A few minor points:
– Third paragraph, fourth sentence: I think you meant to type “companies”, not “countries”.
– Don’t disagree with 80% but to reduce outrage and give the multinationals time restructure their transaction flow to better represent reality, maybe the figure could ratchet up to this over a few (e.g. 3) years.
– I fear that most double tax treaties would prevent this tax from applying. This might be overcome by introducing it as a payment on account of tax rather than a payment of tax. As it would not be a tax, the DTT should not apply. Needless to say, the payment on account would not be refundable. It would simply be carried forward and set against actual corporation tax liabilities.
Interesting ideas
The edit has been made…
Following through on this, the multinational is unlikely to get tax credit relief in its home country for an AMT payment on account of tax. It will therefore be incentivised to restructure its transaction flow so that profit recognition more accurately reflects economic substance. Its corporation tax liability will then equal or exceed the AMT payment on account. AMT payments on account will not therefore raise any revenue in their own name but will result in a substantial increase in the amount of corporation tax that is paid. Most or all of this additional corporation tax will be creditable against the multinational’s home country tax due when the profits are remitted so it will actually cost the multi-national little or nothing. It will just alter the place where tax is paid from where the multinational is based to where the profits are generated.
As a result, expect the greatest opposition to such an initiative to come not from the taxpayers themselves but from their home country governments as it is they who will be footing the bill.
Staying on this theme but moving sideways a bit, maybe that’s why Apple has decided to pay the circa. EUR13billion in Irish tax that the EU has demanded. Following the recent US corporate tax changes, it has decided to remit most of the gazillions of profits it has stashed offshore so it will get tax credit relief for this Irish tax. It won’t cost Apple a penny. Uncle Sam will be footing the bill. I realise I am take a risk by suggesting such heresy in advance of the US mid-term elections.
It is of course utterly ridiculous to base a profits tax on where a businesses’ customers are.
You talk at other times of a business having to contribute to the infrastructure that supports it.
So if a factory is in France, its workers french, the schools and hospitals that support the workers and their families are in France, the subsidies that might help the factory or workers all provided by the French government……you are saying that if all the customers are in the UK that this should determine where profits are taxed? Utterly ridiculous.
I wonder what the French government would say? I wonder how you would go about collecting the tax or even getting a tax return. Then what happens when all the countries around the world try the same. Monaco imports many Rolls Royce cars. So now Monaco gets to tax RR profits? How silly.
This idea seems like your work on the tax gap “deeply and systematically flawed” as the parliamentary report called it.
I really think you should look at the EU CCCTB
It works on this basis
As do all unitary taxation models
I regret to say that it is you who is clearly wrong and there are strong economic reasons why you must be
Neat reply and yes the reallocation of tax to its rightful place will have the biggest objectors be those who are currently getting the greatest advantage in the internet age. Well thought out Richard
Er… aside from that my Opera browser is today flagging this site as having a certificate problem. You might want to look into that if you get more comments on it.
I am dealing with it
Richard
Ah! The digital companies getting their retaliation in first 🙂
Thanks for this, Richard. I had just written a short note to myself about how LVT cannot capture the value which such companies extract from public expenditure which is reflected in national land values, such as on law enforcement. This is because such companies only have a physical presence in generally low value locations, such as for warehousing. I had concluded that a tax on profits is the only way. Of course ‘georgists’ believe that the owners of capital earn their return and shouldn’t be taxed, although they concede that digital businesses rely on IP privileges.
Does the need for this form of taxation even enter the considerations of Brexiters when it comes to their understanding of global trading?
Schofield wonders about the consideration of Brexiteers.
The driving motivation of Brexiteers is not ‘social’. They are extreme individualists who seek to be entirely unregulated and do what the hell they like, at anyone else’s expense. Because they are clever, in the sense of manipulative, they manage to persuade a lot of gullible folk that they share a common interest in obtaining a similar freedom. They will not. They will give away the few freedoms they already possess and be prey to those who wish to exploit their vulnerability.
It always works, because most people are stupid, and underestimate the ruthlessness of those who would abuse them. Those who would be powerful know no bounds in their ambition to have and to wield power.
The structures in which this power play works well, are Religion, Politics, Finance and the Military. Sometimes you can’t tell t’other from which because they are incestuous bedfellows.
so many ways around this. digital co sets up a UK company to contract with UK customers and hence is taxed in the UK on its UK profits but all the content is bought from an overseas content provider so the profits in the UK are minimal.
unless you deny a deduction for the payments out of UKco for the content (presumably on the basis its a connected party) in which case we wheel out all the de-control structures we have used since time began to avoid that.
you need to try harder
The apportionment will be in group profits
Please get up to speed
Presumably it’s not a group if ukco is decontrolled. The clue is in the word “decontrolled”
I’m assuming you are aware of decontrol structures?
You mean shams easily tackled by anti-avoidance arrangements?
They are still in use and aren’t at risk by any anti avoidance measures.
They would be
New law requires new anti-avoidance rules
Is it that hard to reach a logical conclusion?
You place much faith in anti avoidance regulations but you must surely admit they are ineffective. The anti-abuse panel has had what 1 referral to it since it was set up all that time ago?
If you know anything about my relationship with the GAAR you will know that I am well aware of this issue
The reason good sense is not implemented is something of a touchstone of organisational analysis. The problem with Richard’s argument on this is not immanent (in its own terms). It is attacked by analytic counter-argument that usually conceals its own values and root metaphors. The good sense of country by country is “defeated” because of what the powerful status quo sees coming – its inability to dodge tax and keep the money in the circle of profitability and hand-outs of bonuses and so on. The reasoning (which I am not privvy to) is similar to the domino theory on communism in the Far East. First this tax concession, then genuinely democratic foreign policy and so on. This isn’t open argument at all, but more virtue signalling to establishments that one is onside and that actual arguers (like Richard on this) are “iffy”. Global warming is a cunning plot by greens to redistribute the world’s wealth and so on. Laffer would no doubt say the tax money is best left with the cheaters than collected by profligate governments and so on. Keep it up Richard.
Richard
Those on this thread, and indeed this forum, who take issue with you about this sort of issue, simply don’t have the first idea about the extent to which MNEs avoid, nay evade, corporate taxes in the developed countries in which their profits genuinely arise. And I don’t just mean new technology companies whose online presence can easily be manipulated away from their physical one.
I have. It’s enormous, it’s abusive, and it’s ugly. Whilst we might have a lot of posturing on the subject from politicians of a neoliberal persuasion, any constructive solution to the problem doesn’t just need real support from the OECD, it needs political support in the US, and the current occupant of 1600 Pennsylvania Avenue is light years away from such a stance.
Anthony is right. Groups that outsource their UK operations to third parties will escape the tax. There wouldn’t be a group relationship at all. Funny to tax people who outsource less than people who don’t.
If you are not aware, groups can be deemed to exist without any common ownership under EU law
on what basis?
Deemed commonality of systems and control
I’m sorry, I don’t think I was being clear. I was talking about actually outsourcing to a real third party in the UK, with no commonality of systems or control. A US business that does that would pay a lot less tax than another group that appoints a UK affiliate. That seems odd.
But that is not how digital can be supplied
It would be impossible for them to claim this