Quite glorious on international corporate taxation

TJN and the Murph are complaining again:

The UK government is coming under mounting pressure to stop dragging its feet on reforming international tax rules in the wake of revelations that Starbucks and other large companies are shifting profits around the world and paying small tax bills.

The calls come after a string of controversies over the low levels of tax paid by US companies operating in Britain, while analysis by the Guardian shows that four of America\’s best known businesses – Amazon, Facebook, Google UK and Starbucks – have paid just £30m in tax over the past four years despite generating more than £3.1bn in sales.

Entirely missing the point that within the EU this is exactly how the system is supposed to work. That Single Market thing. You have one base, one company, anywhere in the EU and you get to sell to anywhere else in the 27 nation block. And you\’re taxed in wherever that one unit is. And that\’s it. This isn\’t an anomaly, it\’s not a perversion, it\’s not avoidance even. It\’s how the system was specfically set up to work. That\’s the aim of it.

And then there\’s this:

John Christensen, a director of TJN, also said pressure was mounting on Europe and US to overhaul what he said were increasingly abused and discredited rules governing how multinational companies can apportion profits around the world. Speaking outside the annual meeting of the UN committee of experts on international tax co-operation in Geneva, Christensen said current guidelines from the OECD were under attack from increasingly powerful countries, led by India, China and Brazil. \”The emerging countries say they don\’t want the OECD model any more. There is widespread recognition these rules are no longer fit for purpose. But until there is agreement abusing will continue – costs will be piled up artificially in some countries or profits are shipped out to low tax countries.\”

Emerging economies want the rules to be overhauled so that multinational companies are required to apportion their taxable profits according to factors such as where in the world sales are made, where the workforce is located and where capital is invested. Such tight rules are already well-established within the US, but they do not affect how American groups behave internationally. Moves toward tighter apportionment rules are most fiercely resisted in Europe by countries with the most aggressively competitive corporate tax arrangements, among them Ireland, Britain and the Netherlands.

That\’s unitary taxation. And places like California do indeed have it. But the joy here is that such a system entirely obviates the need to have Ritchie\’s beloved country by country reporting. Because under unitary taxation you don\’t care where the profits are made at all. You simply allocate them dependent upon sales and or workforce. If 20% of sales are in the UK then 20% of global profits should be taxed in the UK. Therefore, of course, you don\’t need to know where the profits are being made at all. You just look at the group accounts in aggregate and there you are.

So Ritchie\’s proposed solution destroys the need for Ritchie\’s proposed solution.

Fun, eh?

16 comments on “Quite glorious on international corporate taxation

  1. The complaint is that tax is determined by a bunch of formulae, which the biggest, cleverest companies have devised how to optimise in order to reduce their overall tax bills.

    The solution is to replace the way we calculate tax with another set of formulae.

    Why do Ritchie/Johnny and the rest of the TJN crew presume that the same won’t happen again, as the biggest, cleverest companies devise new ways to optimise their production and sales processes to minimise tax?

  2. Eh? California as an economy is economically thriving.

    The California *government* is unable to balance its books, because it has an insane referendum-based version of democracy. Voters have imposed unbreakable rules on the government both not to raise most taxes above a certain amount, and to spend money on various specific areas which together cost more than the amount that can be raised in taxes.

    It’s possible-to-likely that they’ve introduced unitary taxation as a way of getting round their tax straitjacket, admittedly.

  3. The UK is under pressure to reform international tax rules? I didn’t realise we still had that sort of clout. Do we send a gunboat around to hurry things up a bit?

    As for their rules, what if sales are in one country but staff in another, and capital invested in a third? Who gets the cash? In what proportion?

  4. one formula may be preferable to another… I haven’t thought or read about unitary taxation, but perhaps it has the virtue of simplicity. Less work for tax lawyers and accountants.

  5. Luis,

    It would be simple if you only used one factor – sales, capital or workforce. Once you have formulae (different, of course, for each jurisdiction) apportioning %ages of profit between these three (and, no doubt, a whole bunch of other clever input parameters the ‘all your money belong to us’ crowd think up) then you are going to end up with yet-another gameable system.

    Not to say that I am not in favour of simplifying this, any other or all tax regimes …

  6. “thriving” is a strange word to use when you read this report:
    http://sunshinereview.org/index.php/California_state_budget

    “Following the passage of the state budget, Standard and Poor’s boosted California’s credit outlook to stable from negative, and then on Feb. 14, 2012, it raised the outlook on the state’s credit to positive.[90]

    While S&P maintained its A- rating, the lowest for any state, on California’s $71.7 billion of general-obligation debt outstanding, the revision means a downgrade is less likely. The rating company said passage of the budget mitigated the potential for a cash shortage that weighed on its outlook. The revision reflects a budget that’s “light on smoke and mirrors and with real spending cuts and revenue increases that are credible,” said Josh Gonze, who helps oversee about $6.5 billion in municipal-bond assets as a co-portfolio manager at Thornburg Investment Management Inc. [91]

  7. @Diogenes ‘“thriving” is a strange word to use when you read this report’

    I prefer ‘fucking ludicrous’ to ‘strange’. It’s correct to say that some private businesses in Cali are doing well but the state is broke and getting broker. Their payroll and pension costs are going to bury them. They’re thriving all the way to the bottom!

  8. So Ritchie’s proposed solution destroys the need for Ritchie’s proposed solution.

    Not entirely you would still need country by country sales reporting – which is meant to occur under IFRS 8 but in many cases doesn’t at present.

  9. “Why do Ritchie/Johnny and the rest of the TJN crew presume that the same won’t happen again, as the biggest, cleverest companies devise new ways to optimise their production and sales processes to minimise tax?”

    Perhaps that is why we need auditors who do their job and general tax avoidance rules as well? Just because it is difficult to allocate taxes fairly between the different countries where they operate. largely because there is a whole bunch 0f clever people who should find more socially useful occupations, is not an argument for not trying to do so!

  10. That said I very mcuh doubt that unitary taxation would be a serious runner while we continue to belong to the EU – my guess is that Luxembourg and Eire would do all they could to veto any move in that direction.

  11. The other problem with this is that India and China are pushing for a system which would, necessarily, result in multinationals paying more tax in India and China and less tax in the UK/US/etc. There are good theoretical advantages to taxing on the basis of where a company sells its products rather than where its controlling “mind” is based – not least that it’s then quite hard to game the system. But it would be a very radical change and the UK fisc would most certainly lose out.

  12. California introduced Unitary Taxation as a way to screw more money out of companies that sold anything in that state. California’s array of regulations means that for many business sectors products sold in California cost more to make but do not comand a proportionately higher price because residents will simply buy stauff in Oregon or Nevada if the price differential is too great so profit is a lower 5age of sales in California than the global average. The state did a Murphy and demanded taxes even from companies that made a loss – it boosted revenues for a time but the inevitable result was that a lot of companies pulled out of California.

  13. Luxembourg is emphatically not a tax haven relative to the UK.

    The corporate tax rate of 25% in Luxembourg happens to coincide with German legislation regarding German-owned holding companies. In countries with less than 25% tax, there are German tax supplements on holding structures.

    If Amazon could predict that the UK would have the same, lower than Luxembourg, tax rates as today for the next ten years they might consider relocating, but Luxembourg is very predictable. Rather, predictably stable. (The UK, is sadly also pretty predictable.)

    Besides, taxes are based on profit, not on turnover, and these retail businesses cited have been acting as tax collectors for the UK government through 20% VAT in any case.

  14. interested

    I was trying to avoid being as hyperbolically moronic as John B. I am glad that you picked up the fact that he is talking out of the arsehole that his socialist beliefs sewed up at birth.

  15. ..I once was asked to do such an attribution exercise…The whole concept is a joke. It is entirely subjective.

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