The Guardian has, in its coverage of the OECD's Base Erosion and Profits Shifting report noted what that report has not done, giving most space to this comment:
Wholesale scrapping of existing tax treaty principles, as advocated by campaign groups such as Tax Justice Network. These groups argue that the current system is so open to abuse it should be replaced with a new model — known as unitary taxation — which they claim would better link the apportionment of taxable profits by multinationals to the territories in which economic activities occur. The OECD claimed there was international consensus at the G20 against such a radical approach. Pascal Saint-Amans, director of the OECD's Centre for Tax Policy, said he was "agnostic" but that member nations regarded such proposals as "unfeasible".
I believe the reporting of what Pascal said: he is not averse to more study on unitary taxation. It is the obvious solution to the problems that exist in the OECD's arm's length pricing regime - which are acknowledged in the BEPS report.
"Unfeasible" should be read as "the US does not want it" right now.
OK, so there's an obstacle to overcome. We've been here before......
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If unitary taxation is the panacea to transfer pricing issues, why is there a need to scrap existing tax treaty principles, which have nothing to do with transfer pricing.
Unitary taxation doesn’t cover issues that tax treaties do!
Muddled thinking or just protesting for protest sake?
If you had bothered to read what we have proposed you’d realise just how inappropriate your comment is
We have never suggested crapping DTAs
Nor have we suggested scrapping OECd standards
We have suggested evolution in them
It is you who has made all the false assumptions
“Wholesale scrapping of existing tax treaty principles, as advocated by campaign groups such as Tax Justice Network. These groups argue that the current system is so open to abuse it should be replaced with a new model — known as unitary taxation……”
OK, so I misunderstood.
So what exactly does “wholesale scrapping of existing tax treaty principles” and “replaced with a new model” mean?
We haven’t called for that
See http://www.taxjustice.net/cms/upload/pdf/OECD_Beps_130327_No_more_shifty_business.pdf
Shall we stick to what we’ve said?
Richard
The OECD appear to see matters as a straight choice between “tweaking the existing system” and a move to full unitary taxation. They don’t trust unitary taxation, which therefore only leaves the status quo.
You won’t like this comment…but in my view the formulary basis of unitary taxation is fundamentally flawed. It taxes profits in the wrong place.
If a company in country A manufactures a product at a cost of £20, then exports it to a customer in country B for a sale price of £30, then ALL of the £10 profit is attributable to country B and should be taxed there.
Not 50%, 75%, or 90%, but 100%, of the profit should be taxed in the destination country. Without the customer, the product is worth not £30, but £20 (at best). Any answer other than 100% is therefore inaccurate.
Country A gets its fair share of tax when the taxpaying suppliers there are paid their £20.
I challenge anyone who might be reading this to provide a reasoned refutation of this view.
In a “digital age”, the whole concept of permanent establishment, which links taxability to physical presence, is simply outdated.
Destination based taxation is the most principled model. There are bound to be practical challenges; the OECD and others should be studying those challenges.
Few people (for example, a couple of professors who are not exactly “household names”) are currently advocating destination based taxation. It needs a high profile person like yourself to get behind it.
If that doesn’t happen then everyone might as well resign themselves now to decades of meaningless “tweaking” of the global tax system….and of course, the increasingly inevitable destruction of the taxpaying High Street on an uneven playing field.
What I have read of Mike Devereux’s destination tax at the moment defies economic logic, tackles none of the issues in transfer pricing or tax haven abuse, requires global adoption simultaneously and shows no understanding of VAT
Apart from that it’s got lots going for it I.e. about nothing that I can see so far
Allow me to give an example of some strange distortions, imagine we make the situation slightly more complex:
Company A buys a partially completed product from Company B for £19 and does about £1 of work on it, bringing it to £20. It then exports the product and sells it for £30. It them pays tax on the whole of its profits of £10 in the second country under your arrangement.
Company A decides Company B is so good that they buy Company B. They are now able to produce the partially completed for £10, before doing £1 of work on it, bringing it to £11. It then exports the product and sells it for £30 as before, but now £19 is taxed in the second country and far less tax is paid in the country producing the goods, despite the fact that very little, has changed.
Imagine now that Company C gets involved, they buy the goods from Company A for £29 and do some very minor tweaks before selling for £30 in the other country, so only £1 is taxed in the other country.
In all three scenarios the production price may well be the same, the value of the item might be too, but the tax outcome is all over the place.
These are all complex problems, there are no simple answers. There wouldn’t be so many pages of tax legislation if life was a simple as you are proposing.
What changes, in your examples, is the profit which results from the sale to the customer in country B.
The sale to the customer is the entire raison d’être of the product.
Companies/groups can make cost savings by efficiency improvements/corporate acquisitions, and so on, but without an end customer to which to sell their products, such savings are meaningless.
Yes. Tax law is complex because the business world is complex. I agree. I am not proposing some kind of massive naïve simplification. I am saying that one specific concept – the permanent establishment concept – is outdated.
In UK legislation this rule is stated by s.5 (2) CTA 2009: “A non-UK resident company is within the charge to corporation tax only if it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom.”
In my opinion a replacement for this rule is required.
Yes of course PE is outdated
But sales based taxation ignores the fundamental realities of business life
And that can’t be a basis for tax
It would also be very easy to abuse