The report, Towards unitary taxation of transnational corporations, stems from the TJN’s view that the current system of taxing multinational companies is outdated and failing.
It finds that multinationals cannot be seen as loose collections of separate entities operating in different countries because weak cooperation between tax authorities allows these companies too much scope to shift profits into tax havens.
“The only rational way to tax modern multinational companies is to tax them according to where their genuine economic activity is, rather than where their tax advisers pretend it is,” said Sol Picciotto, emeritus professor at Lancaster University, who wrote the report.“The way to do this is to treat them as unitary businesses that are much more than the sum of their parts – which is exactly what they are.”
Under unitary taxation, companies would submit a global consolidated account in each country in which they are present, then apportion the global profits among these countries by a formula reflecting the genuine economic activity of the company in each jurisdiction. Each portion of the profits can then be taxed at their local rate.
The TJN argues that unitary taxation would simplify tax administration and reduce compliance costs for companies. However tax authorities have yet to jump on board with the idea.
Speaking at International Tax Review’s Global Transfer Pricing Forum in September, representatives of the Canadian, UK, South African and French tax authorities all backed the idea of country-by-country reporting (another key TJN demand) to end transfer pricing abuse, but said they were not convinced on the need for formulary apportionment.
Ray McCann of Pinsent Masons says the main difficulty with it is that it would require international cooperation at the level of the OECD.
He also suggested that, while “we should not tolerate companies going into developing countries and ripping them off”, the TJN’s demands for unitary taxation and country-by-country reporting would lead to more transfer pricing disputes as the tax authorities in developing countries are becoming more aggressive.
However, unitary taxation has gained a powerful backer in Margaret Hodge who, as the chairman of the UK Parliament’s Public Accounts Committee (PAC), grilled Google, Amazon and Starbucks last month over their UK tax affairs.
“Country-by-country reporting and unitary taxation both seem like really good ideas,” Hodge told International Tax Review.
The TJN believes the path to reforming the tax system must begin now. And while that path may not be a short one, the fallout from the PAC hearing shows there is significant public, if not corporate, support for embarking down it.
