The twilight of the international tax consensus

That’s the headline of a provocative article by U.S. rock star tax expert Lee Sheppard, which states boldly in the opening column:

“Someone else’s multinationals are unfairly skipping out on their corporate tax obligations to OECD member and observer countries. That was the genesis of the OECD base erosion and profit-shifting project, which has produced an action plan that is designed to repair and preserve the fragile international consensus in the short run, but may end up upsetting it in the long run.

In the long run, the international consensus is dead, and everyone knows it, but BEPS has to be tried and allowed to fail first.”

Fiery stuff, and almost certainly correct. What will replace it?

Well, there is a long-running campaign to abolish the corporate tax altogether, based on particularly pathetic evidence and analysis – plus massive lobbying firepower. That can’t be allowed to succeed, as a first order of priority.

What is the international consensus? Sheppard answers:

It is a century old, mostly European gentlemen’s agreement to give residence countries tax jurisdiction over income earned by their residents in source countries. Legally, the source country has the superior right to tax income earned within its borders, so the consensus required countries to agree to be deprived of tax jurisdiction.

For “residence countries” read rich, OECD countries (where multinationals are resident) and for ‘source countries” read all countries where income is really earned, including developing countries. She continues:

“It has been an open secret for some time that multinationals — led by the Americans and their huge tax departments — have abused these privileges. The affected countries are no longer limited to corrupt, badly governed, resource-exporting countries. They now include European states with sophisticated tax administrations and the home governments of multinationals.

Every country is just another country to be exploited.”

We could not have said it better ourselves. And then there’s this:

“The United States and its overbanked crony, the United Kingdom, used the OECD as a vehicle to push their agendas. . . . The United States and Europe still think they run the world.”

And to cut a long story short:

“A new consensus cannot be built until the old one dies, weakened by
impossibility of administration.

In the short run, U.S. multinationals will pay some more tax to some foreign governments, but not the U.S. government. In the long run, we already know what the outcome will be — apportionment of multinationals’ profits based on sales.
. . .
The old order has to fail completely first.”

Radical stuff. Unitary taxation (profit allocation with formula apportionment) is on its way – though not just yet. We’d argue that it’s worth engaging to try and improve the OECD’s fatally flawed model, as an interim step before unitary comes. But, we think, we will see it in our lifetimes. We just need the OECD and others to accept that fact.

In fact, of course, it’s already here: lots of places are already using it, and as Prof. Picciotto notes, it’s even tacitly part of the OECD toolkit – even if their aversion to the concept is so extreme that they’d never admit it.

Update: more from Andrew Goodall on this issue just out, here.