Country by country reporting is being held up as the solution to so many international tax woes. But could someone please tell me quite how it does so?
Tax should be paid where the economic substance of the activity takes place. That\’s the mantra isn\’t it?
It\’s just that I\’m not really sure what that means.
Take for example this little international business I know about. I\’ve changed the country names, the product name and the margins but the substance of the following is true.
OK, first purchase in Tajikistan some low grade europium oxide. Purchase at $1,000 per kg.
Ship it to Warsaw where it is upgraded to high grade europium oxide. This costs $1,000 per kg raising the value to $2,000 per kg.
Then ship it to Canada where it sells for $3,000 per kg.
Now, yes, I can see that the whole process creates value of $2,000 per kg. But what I find very difficult to understand is how we\’re going to allocate that over the different places.
For there\’s a fourth location involved as well. Tunisia. Where resides the information about how to put this all together. The intellectual rights if you wish.
Just about no one other than the man in Tunis knows how to do this. They don\’t know where to get the low grade oxide. They don\’t know where to get it refined. They don\’t know who in Canada is willing to pay for it.
Quite literally (put it this way, the Canadian factory hasn\’t asked for a competitive bid for europium oxide for a decade, let alone received any unasked for approaches) no one else knows how to put this process together.
OK, so where is the economic substance of this series of transactions? I can see that the original purchase gets taxed in Tajikistan. I\’m not sure at all about the $1,000 on the upgrade in Warsaw. For that wouldn\’t happen at all without the involvement of Tunis, so surely some of that value should be allocated there?
And the next $1,000. That\’s not value added in Canada, is it? Or Warsaw? So does it get taxed in Tunis? The place that created this rise in value?
Or does it go entirely the other way around? $1,000 in Tajikistan, $1,000 in Warsaw and $1,000 in Canada? But then what of the value added by Tunis? Where, given the proprietary nature of the knowledge involved in all of this, arguably the real economic substance is taking place.
Note that that there is nothing taking place "offshore". No special structures, no hiding anything. It\’s just that I cannot see any hard and fast rules about where the value is added, where the economic substance resides.
So I\’m not sure what benefit there is to country by country reporting.
OK, so this might be a strange example but it\’s one that I know of, a real world example.
Where should this be taxed? What hard and fast rules can we use to decide amongst Tajikistan, Warsaw, Canada and Tunis?