Nick Shaxson ■ New paper: Taxing Multinational Enterprises as Unitary Firms

Prof. Sol Picciotto

Prof. Sol Picciotto

A new paper by TJN Senior Adviser Sol Picciotto, for the International Center for Tax and Development (ICTD). 


This paper explores the issues raised for international tax rules of explicitly treating multinational enterprises (MNEs) as single or unitary firms. It first briefly explains why reform of international corporate taxation is important particularly for developing countries, then outlines the flaws in the current system.

It discusses the impetus created for reforms, and the political and institutional dynamics of the tax treaty system. An evaluation is provided of the results of the G20/OECD project on base erosion and profit shifting (BEPS), focusing essentially on the extent to which they moved towards a unitary approach, and the problems created by their continued adherence to the independent entity principle.

It then outlines several proposals which, in different ways, would apply a unitary approach to MNEs. The remainder of the paper focuses more particularly on one variant: unitary taxation with formulary apportionment – this was the focus of the ICTD’s research programme, which resulted in the outputs discussed here. It outlines the main findings on optimal design of an international formulary apportionment system, evaluates the evidence about its possible effects on national tax revenue, and considers the possibilities and prospects for adoption of such a system regionally.

It contains some devastating critiques of the OECD’s BEPS (“Base Erosion and Profit Shifting”) project to tackle corporate tax cheating, including, among many other things:

“The political mandate for the BEPS project was expressed in broad and simple terms. It called for a reform of international tax rules to ensure that firms could be taxed ‘where economic activities occur and value is created’ (OECD 2013: 4). However, it also insisted that ‘changes to international tax rules must be designed to address the gaps between different countries’ tax systems, while still respecting the sovereignty of each country to design its own rules’ (G20 2013: 4). These aims are contradictory. . . .  The conflict is exacerbated when a government decides that its tax system must be competitive in order to be business-friendly.”

So how have the contradictions been resolved?

“Instead of resolving the central issue by a principled agreement, the problems have been deferred to be decided on an ad hoc basis. The main beneficiaries are the specialists, particularly in transfer pricing, which has grown to be an enormous field of professional practice in the past thirty years. Their considerable investments in intellectual capital make it hard for most of them to envisage or accept a new approach, and the increased complexity will further enhance the value of their expertise. It will also create an even higher entry barrier for newcomers, particularly from the many developing countries that have introduced transfer pricing regulations only in the last five to ten years. Many aspiring professionals will no doubt relish this challenge, but if the rewards for some individuals are high, so is the social cost of devoting scarce skills to operating a defective system.”

What a triumph.

“A more effective solution, which would entail explicit abandonment of the independent entity principle and treating MNEs as unitary firms, would largely deprive them of this power to tweak national tax rules to try to attract investment by MNEs.”

Anyway, there is plenty more in here. Now read on.

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