The Amazing Mr. Murphy

Looking at the front page of his blog today.

We have a description of unitary taxation:

Imagine a Swedish company with 25,000 employees in Sweden, 25,000 employees in France, and five tanned accountants throwing paper aeroplanes in a sweaty booking office in the Cayman Islands.

Hmmm.

Now, enter Unitary Tax!

Unitary tax involves taxing multinational corporations according to the real economic substance of where they actually do business.

Where is their workforce based? Where are their assets actually held? In which country do they really make their sales?

Under unitary taxation, France and Sweden would get to tax (almost) half of the corporation’s overall profits at their own tax rates, and only tiny weeny amounts of its profits would be allocated to Cayman to be taxed at its zero percent rate.

OK, that is indeed unitary taxation.

Couple of posts down we have country by country reporting.

It’s often said that tax havens are a part of life and there’s nothing we can do about them. That’s not true, as a new series on the Tax Justice Network’s Tackle Tax Havens web site shows.

Take as an example, one of my favourite topics, which is the fact we simply can’t find out what multinational corporations do in any particular country in which they trade. As Tackle Tax Havens puts it, suppose a U.S. multinational corporation mines natural resources in Africa and sells them in the United States and Europe and it sets up a complex array of subsidiary companies, each with a different name, in tax havens across the world to do this.

In that case that corporation could shift billions in profits to those tax haven subsidiaries, avoiding tax in countries with stronger tax regimes in the process.

When it publishes its annual report, the multinational rolls up all the information from each country – trading, profits, tax payments and so on – into one big lump.

No-one – governments, the public, even investors and shareholders – knows what happened where in that case.

With this piece of accounting trickery, a huge black hole has been created in corporate accounts that the use of tax havens makes doubly impenetrable because no accounts can ever be obtained from those places.

Then enter Country by Country Reporting!

Under country by country reporting, the multinationals would have to break their information down by country of operation – including in each tax haven – so that citizens and authorities can see what the corporations are doing in their countries.

With this single accounting measure, countries, rich and poor, will be able to call multinational companies to account at last.

Countries could tax the companies properly. They could fund the schools, roads and hospitals their citizens need, without having to beg for aid.

That makes country by country reporting a blast of transparency that could change the world.

And indeed, that is country by country reporting.

But the bit that our Amazing My. Murphy has missed. But we shouldn\’t be too hard on him, he is after all a retired accountant from Wandsworth, one more used to aiding luvvies claim for their greasepaint than advising governments or major corporations. The bit he has missed.

If you have unitary taxation you do not need country by country reporting. You do not need to know where the profits are made. Because you\’re not going to tax the profits where they are made. Instead, you\’re going to allocate the profits by formula. In which case you don\’t give a damn where they are made: you just look at the headline number in the accounts and apply your formula.

And yes, the tax authorities already do know where your staff and sales are. Because you\’re already collecting tax from them (PAYE and VAT respectively) in those jurisdictions.

Ritchie is now proposing a taxation method that makes entirely irrelevant everything he has been campaigning for for the past decade. Ain\’t that cute?

28 thoughts on “The Amazing Mr. Murphy”

  1. I’m not sure why you have so much difficulty in understanding that taxation and accounting transparency are two different things.

  2. So what happens if the company outsources all the work done by Swedish & French workers, and just keeps the tanned accountants on the payroll?

  3. Under country by country reporting, the multinationals would have to break their information down by country of operation

    Countries could tax the companies properly.

    He seems to be suggesting that countries would benefit because they would know what taxes are being paid by a company in *their* country. Surely they know this already, by looking at the tax return form and associated payments?

    I suspect what he means is that he wants countries to be able to see what taxes are being paid in *other* countries. This will inevitably result in a shit-fight whereby each country wants 100% of the available tax.

    Something similar happened in the ’60s or ’70s when the Arab oil producers figured out that the US was receiving enormous tax receipts from American oil companies operating overseas, whilst they were not getting much by comparison. They shifted the contractual terms such that the US companies paid fees to the Arab governments, which were then written off as costs against their US tax bills. The result was the companies paid much the same outlays, but the proceeds were captured at source rather than the US government.

    This will end in a mad scramble for perceived “available tax revenues” and countries will be changing their laws with considerable frequency as they attempt to capture as much as possible at the expense of foreign governments.

  4. Tim Newman (#4), that can happen anyway.

    I don’t think country by country reporting gives governments any more information than they have already. Tax departments already have extensive information powers, and if companies aren’t giving them accurate information they’re hardly likely to put it in their accounts.

    What country by country reporting does is gives Richard Murphy much more information, so that he can sell lots of reports about how evil tax havens are.

  5. I don’t think country by country reporting gives governments any more information than they have already.

    I dunno, I don’t think it would be easy to figure out what taxes are paid to the governments of Angola or Nigeria by major oil companies, for example. You could take a punt by looking at the production figures, but you’d have to know the details of the production agreements to calculate it with any accuracy. But the Angolans will know what is being paid in Angola, and the Nigerians will know what is being paid in Nigeria (at least, the governments will). Only the Nigerians won’t know what’s being paid in Angola, which is probably a good thing.

  6. What if the cost of those employees in France is twice the cost of those in Sweden due to France’s crazily high social charges ? Maybe Sweden should get more of the taxes to compensate?

  7. @Serf

    “So what happens if the company outsources all the work done by Swedish & French workers, and just keeps the tanned accountants on the payroll?”

    France/Sweden get to tax the outsourced provider, I suppose. And, logically, they would report more profit in France/Sweden than MegaGlobalEvilCorp currently do. Multinationals would have the outsourcing option as a potential avoidance tactic where tax saved exceeded profit subcontracted… but, in theory, there would be some gain to a treasury somewhere.

  8. Just because you have 25k employees in one country and 25k employees in another country doesn’t mean they’re creating the same amount of value for the company.

  9. Tim (#8), the parent company’s tax authority certainly knows how much tax the company is paying in other countries, because the company will be declaring (and proving) it as part of its double tax relief claim.

    And the amount of tax paid in the parent country is usually shown in the accounts.

    The only change, as you say, would be different subsidiaries’ countries knowing how much each has managed to grab, but that doesn’t sound like a legitimate information need.

  10. Tim (#8), the parent company’s tax authority certainly knows how much tax the company is paying in other countries, because the company will be declaring (and proving) it as part of its double tax relief claim.

    That make sense, but I’m not sure to what extent it applies. For instance, would BP be declaring its profits from Angola in the UK, and therefore be looking to offset Angolan taxes against its British tax bill? I’d be more inclined to believe its Angolan subsidiary is somehow ring-fenced. But I really don’t know, I’m not far enough up the greasy pole to be party to this sort of knowledge.

  11. #9 @Tim Newman

    The Angolan profit would be ring-fenced into Angola and also licence by licence to separate out individual fields. The profit sent back to the UK would usually be subject to a double taxation treaty, and UK corporation tax would only be payable to the extent that it would be higher than the tax already paid. Given that marginal tax rates around the world on oil production are usually in the 50-90% range it means little UK CT is paid on profit made aorund the world but the host governments get their cut.

    Incidentally, Angola is an interesting example as it is (as with a number of other oil-producing countries) expressly legally forbidden for any oil company to reveal the terms of its contracts with the government, partly to prevent transparency about the government’s total income and partly to stop the oil companies examining each other’s terms and using them to bid the government down on the next contract.

  12. FA @13. I always assumed that a major reason was so that the electorate in these countries didnt know how much the thieves in charge were stealing.

  13. “I’m not sure why you have so much difficulty in understanding that taxation and accounting transparency are two different things.”

    As usual Arnald, you don’t know what you’re talking about. If you’d ever bothered reading the financial statements of any large multinational (I know it’s difficult to do from behind the counter at Burger King), you’d see that they provide quite a bit of financial information on a regional basis… because they are required to do so by the accounting principles presently in force. For investors and other users of financial statements (excepting incompetent and intellectually dishonest retired CAs from Wandsworth – or where ever), financial information presented on a regional basis (region being determined by the multinational’s business operations) is more than enough information for decision making.

    The idea that investors (and retired jerk-off CAs) are better served by being presented detailed information on what could be hundreds of nations goes against both common sense and most of studies of just how much information an average user can process, absorb and then use.

  14. Oh, dear. It’s a pity that my initial comment has disappeared. I seem to recall it saying something like:

    If Arnald drags his head up from his worship of Ritchie to insist, again, that taxation is not reporting (well, err, yes), can I re-iterate Ritchie’s point that you quote:

    With this single accounting measure, countries, rich and poor, will be able to call multinational companies to account at last.

    Countries could tax the companies properly.

    His idol, who can clearly never be wrong, emphatically links the reporting measures and subsequent calculation and extraction of tax. It is more important than the “social responsibility” chapter of the annual report.

    It would have looked much cleverer if it had stayed at #1 as Arnald did indeed pop up and make his wholly irrelevant (at least as far as Ritchie is concerned) point.

  15. thanks to dennis the Peasant for pointing out the major reaon why any thinking person should oppose countr-by-country reporting. In the UK, a major company’s annual report is already about 50 pages long. If they are quoted on Wall Street, they have to produce an annual 20f statement that will easily run to about 250 pages. Now, given that, say, BT operates in 200 countries, then that would imply filings of over a thousand pages in length every year for major international groups.

    In my view, tht is too much data to be of any use to anyone.

  16. John,

    Ta, spotted that. Hence the link in #20. Glad my memory was reasonable though. It must be the DTs rather than Parkinson’s 🙂

    then whatever the Limey equivalent of a Burger King is

    1. He’s a frog not a limey. Duchy of Normandy not United Kingdom. No matter that they let Le Tissier play wendy-ball for the nancy southerners.

    2. Would you believe it is “Burger King”?

  17. diogenes @23, that’s the whole – lots of recorded information. That’s the end result that is wanted. They want all the information because they think it’s useful. And they also think that because it’s recorded it can be used as evidence when they decide to attack the business. Little do they realise that such information is never used and just makes it easier to hide data amongst the haystack of information.

  18. Would Unitary taxation not screw us here in the UK big style? After all if global profits are to be distributed on where the people are, then thats going to favour the labour intensive but low profitability countries, and the countries with high skills/intellectual property are going to lose out big time.

    Take Dyson: the high value design and IP stuff is here in the UK, and the volume manufacturing abroad (Malaysia). So all the profits that Dyson make will be distributed more towards the Malaysians, to the detriment of the UK Treasury.

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