Unitary taxation and country by country reporting

Excuse me, but is it me being dim here or what?

Europe could also lead on curbing transfer pricing abuse. Current international tax rules treat multinationals as if they were a collection of unrelated entities, with each part taxed by the jurisdiction where it is resident. This OECD-led system makes no sense, because multinationals are integrated global operations.

A better alternative, Unitary Taxation, would involve taxing multinationals based on what they do in the real world, rather than on the artificial offshore constructions its tax advisers can cook up. Under unitary taxation a multinational is considered as a whole, and its profits are allocated to different jurisdictions under a formula based on wages, turnover or capital value in each place. Jurisdictions can set whatever tax rate they want, but if a company runs a one-person booking office out of Bermuda, say, then only a tiny portion of its profits will be allocated there and subjected to its zero-tax rate. Some U.S. states already operate this system successfully; a European project called the Common Consolidated Corporate Tax Base (CCCTB) currently being considered would be a step towards this system. It must be driven forward in the face of howls of protests from tax havens, multinational corporations and the powerful accountancy and law firms that support them.

Europe should also lead on rules for corporate reporting. Multinationals are currently not required to break down their profits and other important data by country, but can instead report them by region or even for the world as a whole. Neither the citizens of the countries where they operate, nor their tax authorities, can unpick this published data to find out what these corporations are really doing on their territories.  A new proposal for so-called Country by Country reporting, under which results would be broken down for each jurisdiction, is starting to get a worldwide civil society coalition behind it. Europe can lead the world in pushing this forwards.

Aren\’t these two proposals entirely contradictory?

We must tax multi-nationals as if they are one organism, spread over different jurisdictions, but we must tax corporations as if they are, under country by country reporting, separate organisations in different jurisdictions all dealing with each other at arms length transaction prices?

16 thoughts on “Unitary taxation and country by country reporting”

  1. I think he’s trying to say that he wants multi nationals to report their affairs in great detail on a country by country basis, and then he and his chums can come up with some wishful formula for taxing them as a whole and allocating the money where they think it should go.

    A sort of continuation of his concept that tax is a moral duty as opposed to a legal one and only he and his chums are morally fit to do the deciding.

  2. What about global multinationals being taxed globally and the UN decides how to spend the tax revenues should be spent?

    Much simpler and better scheme than Richie’s and far more moral. Rather than arguing about where tax liable activities occurred, work out where tax spending is most needed.

    What could possibly go wrong?

  3. Yep, he’s holding two totally opposing views at the same time.

    Of his two ideas, CBC reporting is the slightly less mad. That at least recognises that countries like to organise their own tax affairs, free from the interference of other countries. CBC reporting, in theory if not in practice, may allow self-appointed busybodies to work out which particular countries companies are using to shift their profits towards.

    The other idea, formulary apportionment, is completely idealistic. There’s simply no chance that countries will give up their right to tax economic activity on their turf on their terms. It also risks allowing companies to use all sorts of clever accounting gimmicks to get the ‘right’ apportionment that lowers their overall tax bills.

    Anyway, who’s to say that that Bermudan office isn’t genuine? Other than Ritchie, that is?

  4. It is only contraditory if you think that he thinks companies should only be taxed once for doing the same thing. Lefties of Murphy’s type generally just want to tax and tax until there is no money left.

  5. Murphy may find it hard to distinguish arse from elbow, and CbC reporting just ain’t gonna happen, but don’t bet against CCTB happening in Europe eventually. It’s one of those EU proposals going through that familiar sequence: “it’ll never happen”; “they’ll do it over there but we’ll be exempt”; “it’s here!”.

  6. Hang about here.

    In a lot of countries, there are different tax rates in different towns or states (USA and Germany, that I know of), and a lot of businesses have operations in different towns or states.

    The tax office splits up the profits between different areas according to some formula (i.e. where employees are or where shops are) and then the appropriate fraction is taxed at each rate. So this is not a new or unworkable idea.

    Transfer pricing is a bit of a nightmare (OK, we accountants take the p*ss, but HMRC and so on take the p*ss as well). Splitting up profits this way and taxing everything once (albeit at different rates) ain’t the worst idea in the world.

    Of course a multinational would rather pay corp tax in UK at 28% than in China at 33% (I think) or USA at 40%, but you lose less than be being taxed at 40% not 28% than you do if both countries want to tax the same profits and you end up paying 68%.

    Of course, with Land Value Tax you don’t get this problem, because all land is by definition in one country or another. If you have one guy at a desk in the Bahamas, then you pay a few hundred quid over there and that is the end of that.

  7. What Ritchie’s never quite grasped (amongst a host of other things) is that CBC reporting still won’t provide the sort of information he’s looking for. The reason? The financial statements of publicly held companies are NOT tax basis financial statements. They are presented based on GAAP (or it’s equivalent), and there’s no easy or reliable way of getting from GAAP basis to tax basis without a ton of the sort of information that is not required to be made public by said publicly held companies.

  8. I think you lot are asking a bit much of Murphy to be competent when it comes to matters concerning tax accounting. I mean, he’s never shown any aptitude for it so far, so why expect him to start now?

  9. They are presented based on GAAP (or it’s equivalent), and there’s no easy or reliable way of getting from GAAP basis to tax basis without a ton of the sort of information that is not required to be made public by said publicly held companies.

    You’re right, of course. On the other hand, changing the law so that companies that operate in the UK are obliged to publicly disclose the tax accounts they submit to HMRC would be easy, (as far as I can see) not particularly onerous, and helpful for people on all sides of the debate.

    If Murphy and Christiansen were less daft, perhaps that’s something they’d lobby for.

  10. Oh really. Unitary taxation is a proposal for taxation. Country by country reporting is a proposal for transparency. The two are entirely complementary. It is really easy to understand, at least if you have a very basic grasp about the subject. Country by country would obviously work with both unitary taxation and arm’s length, in fact. Just have a little think about it, and you will get it. And for those commenters who think unitary is idealistic, well a number of places such as California already use it very successfully.

    Get up to speed on tax.

  11. Nick-

    Get up to speed with reality. Look at the state of California’s economy, and just how many companies (and jobs) have fled that state, and tell everything is shits and giggles.

    And by the way, if you were up to speed, you’d have grasped the idea that if you have unitary taxation, there would be no need for CBC.


  12. Dennis. California’s problems are to do with factors other than taxes (although their difficulties in raising taxes may well be part of it). Unitary taxation is “successful” there, whatever you think of the tax rates, in the sense that it is a system that works smoothly and far more simply than the alternatives. And if you had unitary taxation, you would have CbC reporting anyway. They go together, you see.

  13. Pingback: FCAblog » Ritchie’s belt and braces approach to Amazon’s tax affairs

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