I happily repost the following from the Tax Justice Network blog, excluding the main sections relating to the OECD, to which I refer you to the original. The demand for unitary taxation was in the founding manifesto of the Tax Justice Network that John Christensen and I co-authored in 2005:
Today sees the crystallisation of two potentially pivotal moments in the development of international tax rules towards the Tax Justice Network’s long-favoured approach: unitary taxation.
In Paris, the OECD is hosting a public consultation on the biggest reform to the taxation of multinational companies in almost a century — and there is a growing demand for a comprehensive shift to unitary taxation. And in London, the UK Labour party has today become the first major political party in one of the world’s leading economies to make a manifesto commitment to introduce unitary tax.
What is unitary taxation?
Unitary taxation is the approach that treats a multinational group as the taxable unit, rather than the individual subsidiaries in different countries that make up the group. Current international tax rules are based on separate entity accounting, where transfer pricing mechanisms are used to establish the taxable profit that each entity within the multinational group would obtain, if it was operating at arm’s length (independently) from each other entity in the group. This allows gross abuses, with huge volumes of profits being shifted from where they arise, into low- or no-tax jurisdictions. Unitary tax recognises that in reality, profits are maximised at the unit of the group as a whole. ‘Formulary apportionment’ is the name for the process that allocates those global profits as tax base between the different countries where the multinational has real economic activity (employment and final customer sales, say).
The OECD Base Erosion and Profit Shifting (BEPS) process of 2013-2015 had the single, agreed goal of reducing the misalignment between where profits are declared, and where multinationals’ real economic activity takes place. BEPS failed because OECD countries could not agree to move beyond the arm’s length principle. But the new reforms, sometimes dubbed BEPS 2.0, start from an explicit acceptance of the need to move beyond arm’s length pricing. Each of the proposals under consideration include aspects of unitary taxation, of which the proposal from the G24 group of countries is the most comprehensive. The Tax Justice Network has long called for such a reform, estimating the failure to align profits with the location of real economic activity imposes global revenue losses of around $500 billion each year.
What’s the Labour manifesto commitment?
In the UK, the Labour party has today committed to introducing unitary taxation by the end of the next parliamentary term. This is significant internationally because it marks the first such manifesto commitment from a major political party, with a realistic prospect of election success, in a major OECD member country. Coupled with the leadership of the G24 group of developing countries, the Labour commitment represents an important further normalisation of unitary taxation, and a potentially important step to ending the great damage done by corporate tax abuse internationally.
How much revenue would the Labour policy bring in for the UK?
The Labour party estimates that in the fifth year of the next parliament, the tax would bring in £6.3bn. This comes from the work of Prof Sol Piccciotto, who is perhaps the leading international expert on unitary taxation and a Tax Justice Network senior adviser, and Daniel Bertossa.
Picciotto and Bertossa lay out a full proposal, and refer to our analysis (with Prof Valpy FitzGerald of the University of Oxford, and Tommaso Faccio of the University of Nottingham) of data on US multinationals for the revenue impact. We found a revenue impact of nearly $4bn for the UK, from an international shift to unitary taxation with full formulary apportionment. Scaling up to include non-US multinationals, and depending on the approach taken, this implies a total revenue gain of between £6bn and £14bn.
The Labour party have taken the lower extreme of this range (i.e. the most conservative estimate). They then reduce it by 30% to allow for possible behavioural changes (multinationals moving away, or finding other ways to dodge tax). This seems on the high side for a behavioural response, so this again looks a conservative assumption. Finally, they roll forward five years, allowing for inflation. That gives an estimate of revenue at the end of the next parliament of some £6.3bn.
Can the UK do this unilaterally?
Yes. Countries including OECD members have quite different approaches to international tax, whether in terms of defining the tax base or setting the rates, so there is no reason the UK couldn’t go ahead and do this. As above, however, there is an increasing chance that this would be in line with an emerging international consensus to adopt unitary taxation, so the UK could be well positioned to play a leading role in that process.
Wouldn’t the UK have to renegotiate all its double tax treaties?
Many believe that current tax treaties would not pose an obstacle, just as they already allow the application of related ‘profit split’ approaches. However, a renegotiation is not out of the question. The OECD secretariat has confirmed that its current, more complex proposal, for example, would require revisions to the whole global tax treaty network. As George Turner of TaxWatch has written, instead of renegotiating it is also possible for the UK parliament to “legislate to unilaterally disapply the provisions of tax treaties. This last happened in the UK in 2008, when the government legislated to unilaterally override all of their tax treaties to close down a disguised remuneration scheme (FA 2008 ss 58 and 59, which amended ICTA 1988). The action by the UK government was subsequently upheld by the European Court of Human Rights, which noted that double tax treaties should do no more than seek to relieve double taxation, and should not be permitted to become an instrument of avoidance.”
Wouldn’t multinationals leave the UK rather than pay this tax?
Multinationals operate in the UK because they make money in the UK. A distribution of some percentage of that profit towards the UK exchequer, just as any domestic business makes, doesn’t stop it being profitable to operate in the country. While there would no doubt continue to be a lot of work from professional service firms including accountants and lawyers trying to game the system, unitary tax offers a much simpler way to determine taxable profit than the current rules and so is likely to be much less open to abuse. As noted, the Labour party’s revenue estimate assumes a 30% reduction due to behaviour change, which may well be on the high side.
Is the information available to make unitary tax work?
Yes. Following the G20 decision in 2013, the OECD has developed a version of the Tax Justice Network’s proposed standard for country-by-country reporting. This, together with corporate tax returns, provides all the information needed to apply unitary taxation. It would be advisable to ensure that the data to be relied upon is fully audited, and to sharpen the definitions in places to reduce scope for chicanery, but the instruments are in place.
Unitary tax infographic