A better way to tax corporations: my article in the Financial Times

There have been major debates in Britain in recent weeks following a series of stories showing how multinationals including Starbucks, Amazon and Google have been using the international system of tax havens to cut their UK tax bills, often down to zero, while reporting big profits to their shareholders there.

I have a comment article in the Financial Times today, co-authored with Professor Sol Picciotto, entitled Make Corporate Tax Rules Fairer For All. It’s  about corporate tax avoidance and a proposal for reform, known as unitary tax. The article is a fair bit shorter than what was submitted but still they did a good edit. It states:

“The world’s tax rules have not kept pace with profound changes in the global economy.”

Then it goes on briefly to describe the hocus-pocus of international corporate income tax avoidance, and our original article (though not the published version) went on to say:

“The rules, dominated by the OECD club of rich countries, are supposed to tackle this prestidigitation by pretending that it is possible to set an “arm’s length,” market-determined price for these transactions, based on comparables elsewhere. But multinationals generally produce unique products and services and enjoy economies of scale and scope, so even the world’s most sophisticated tax authorities cannot find appropriate comparables. Developing countries find it nigh on impossible.”

The OECD’s methods are, as former top US international tax official Michael Durst explains, “based on a fundamental misunderstanding of practical economics.” The published version then notes a better, simpler alternative: unitary tax.

“Instead of taxing multinationals according to the legal forms that their tax advisers conjure up, they are taxed according to the genuine economic substance of what they do and where they do it.”

Europe’s proposals for a Common Consolidated Corporate Tax Base (CCCTB) is a version of this, but its scope is too narrow, as the article continues:

“Tax experts have long argued that this approach is better. It is proved, too: most US states already use it successfully for state taxes. The EU’s proposal for a common consolidated corporate tax base goes a long way towards this, though its geographical focus should be expanded to require a worldwide combined report. It is possible to move towards unitary taxation without widespread international co-ordination, though that would certainly help.”

If you want to know more about unitary tax, see Prof. Picciotto’s draft paper here. It has some discussion of the CCCTB, but it far broader. A substantially edited final version of the paper will be available soon.