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Closing Offshore Tax Loopholes with Unitary Taxation

David Callahan

Over the past decade or two, top transnational corporations -- including Apple, GE, and Google -- have figured out how to sidestep national tax collection systems, depriving governments of billions of dollars in revenues. 

This problem is yet one more example of how national governments have proven no match for global challenges that transcend borders. As Benjamin Barber has pointed out time and again, a 17th-century system of sovereign states is ill-suited to the realities of international interdependence. There are few better examples of this than how transnational corporations have exploited gaps in national tax regimes to dodge their taxes. Companies like Apple have become adept at shifting profits to subsidiaries that are based in tax-free havens like Bermuda. 

Of course, efforts are made at global governance and this week the G-20 put forth a plan to curb corporate tax avoidance. The plan, developed by the OECD, with details here, calls -- among other things -- for imposing a stronger set of principles that would define where a company has a presence and earns revenues, and thus what taxes it should pay. 

Unfortunately, according to experts at the Tax Justice Network, the plan is unlikely to work because it accepts the current system -- whereby corporate subsidiaries each pay taxes where they are located -- and essentially just tries to patch up the holes in this system. But as the experts from TJN note:

The fundamental flaw in the current system is that it tries to tax transnational corporations (TNCs) as if they were loose collections of separate entities operating independently in each country. This is a system built on a fiction: the OECD knows as well as anyone that these firms are not bunches of separate entities - but unified firms under central direction. 

Also, the OECD plan is not binding and there is every reason to believe that corporate lobbyists will try to stop it from ever being implemented widely enough to make a difference. 

The TJN argues that the only real solution here is a global tax system that is as unified as the corporations it seeks to tax. They advocate for "unitary taxation" system. Such a system would compel companies to transparently reveal exactly how much business they do in each country so those governments could then tax this activity at whatever their national rate is. 

In other words, to take a famous example, Starbucks would not be able to sell millions of cups of coffee in the U.K. and then turn around and say it didn't actually make a dime in that country because its UK subsidiary had to pay exorbinant rates for the coffee beans it used to another Starbucks sudisidiary, conveniently located in a tax haven.

To be sure, there are plenty of complicated details involved with a unitary tax, but the graphic below illustrates the basic idea. 

Unitary Tax






What's disappointing about the G-20 announcement is that it represents a missed chance to start truly tackling global tax avoidance.

Most tax experts, even some at the OECD, recognise the clear superiority of the unitary approach. Their main objection has been that such an approach would require a degree of political cooperation which would not be politically feasible. However, a gradual transition towards such a system is both possible and necessary. . . . 

The Tax Justice Network outlines a series a steps for such a transition, starting by forcing global companies to be transparent about their economic activity in both countries. 

The truth is that none the solutions to tax avoidance are politically easy. What TJN proposes will be hard to enact; so too will the G-20 plan. But one thing is clear: If governments are going to go to war with corporations over taxes, the aim should be a new global system that can actually work.