Taxing multinationals: a new approach

Our headline is also the title of an important new report by Public Services International, a global trade union federation, looking at the fast-changing international tax system.

Co-authored by Public Services International’s Daniel Bertossa and Sol Picciotto, a Tax Justice Network Senior Adviser, it explains in clear and straightforward terms the deep flaws in the principles and practices of the international tax system, and lays out the case for a clear alternative: Formula Apportionment (with unitary taxation.)

The timing is especially appropriate, since it is only in the last few months that we have started to see the unravelling of a philosophical consensus that has underpinned international tax for the past century or so, which is no longer fit for purpose in the digital age of financial globalisation. As the report explains:

Underpinning the system is the “arm’s-length principle” – the quaint notion that legal entities controlled by the same multinational will set prices for transactions between themselves as if they were independent market transactions (i.e. at arm’s-length).

The problem is, of course, multinationals aren’t just loose bundles of independent affiliates trading with each other, which can be taxed separately by each place where they do business:

an MNE is not a collection of independent businesses – it acts as one global company through central coordination of its various activities.

And the way forward:

The answer is simply to tax each multinational as a single entity – the “unitary principle”. Companies can then structure themselves any way they wish, knowing that they will be taxed on their total global profits by each country according to where they have real activities.

This simple change in paradigm eliminates the ability of companies to shift profits to tax havens. It would benefit everybody except tax avoiders and tax havens.

For the details, read on.

The paper focused on the United Kingdom, arguing that it can play a leading role in pushing for reform. Although Brexit is top of most senior UK politicians’ agendas right now, the UK’s main opposition the Labour Party has just outlined a new tax strategy, which aligns with the new Public Services International report. As The Times newspaper explains:

It won’t be easy to change a century-old system, whose principles are baked into all manner of tax laws and international commitments. But now the OECD, which co-ordinates global tax rules, and the IMF, which also has great influence in them, have both finally and publicly accepted that such radical medicine may be required. That suggests that it is only a matter of time before this alternative — for which we have campaigned for some years — is widely accepted.

N.B. The Tax Justice Network apologises for the use of an image of a palm tree in this article to represent tax havenry. The palm tree trope is widely used across media to associate international tax abuse largely or exclusively with small tropical islands whose populations are predominantly non-white and/or Black-majority. Evidence shows that the vast majority of international tax abuse is driven by rich OECD countries like the UK, US, Switzerland, Luxembourg and the Netherlands – yet it is small island nations that are often targeted by international policymakers while rich OECD countries are afforded exemptions. This colonial and structurally racist situation is bolstered by the use of the palm tree/island trope in media coverage of tax abuse. While the Tax Justice Network took the internal decision years ago to ban the use of the palm tree trope in our publications, we have kept our past uses of the trope up in order to be transparent about our past actions, rather than erase them, and to reaffirm our commitment to reject the trope going forward.