The FT supports massive corporate tax reform

December 22nd, 2010

The Financial Times is running an editorial today entitled a taxing world which is mostly very good.

First, though, after a brief exploration of the UK Uncut phenomenon (“the group has a point”) there is something we’d disagree with. The FT says this:

Tax avoidance is legal and legitimate. Unlike tax evasion, it is not obviously immoral to exploit the tax code to pay the least that is legally required.

It is up to government to plug the leaks, the FT said. No. For starters, as we constantly argue, what is legal is not necessarily what is legitimate – slavery was legal once. And also remember the “golden rule” – who has the gold, makes the rules. Corporations punch loopholes into the tax code so that they can get out of paying tax. Other corporations then enter those holes. We have to hold these corporations’ feet to the fire, as well as keeping government on its toes.

So far, so familiar. But then the FT gets onto something interesting. It first notes that the European Commission on Wednesday closes a commission looking at whether to go for country-by-country reporting – a concept pioneered by TJN’s Senior Adviser Richard Murphy originally for the extractive industries, and now for all sectors. The FT seems supportive: publication is of this data is unlikely to prove too burdensome, it reckons (as does the World Bank, among many others). So far so good. But now get this.

Civil society groups think such reporting will unveil tax avoidance undermining developing countries’ tax revenues. In fact, the greater impact may be to expose the scandalous tax treatment of multinationals in the rich world.

Well, we think that the first point is probably the big one. But it’s related to the second. And what exactly do they mean by “scandalous tax treatment?”

Multinational corporate taxation is largely a voluntary gesture these days, the FT notes, because of multinationals’ ability to shift profits around the world’s tax havens so that they realise their costs in the high-tax nations, and their profits where taxes are lowest. This harms governments at both ends of the cross-border investment: if, say, a U.S. corporation invests in Burkina Faso, then this so-called transfer pricing manipulation stiffs both Uncle Sam and the Burkinabé government. This is one of the relatively rare agendas where citizens of rich and poor countries can fight in a shared common cause.

And then the FT says that the EU will soon propose what is known by the horrible name of formulary apportionment, by which states divide up multinationals’ tax base according a formula based on real economic activity. Under such a system, if you have a one-man booking office in Luxembourg, then only a miniscule part of your income will be “apportioned” there under the formula to take advantage of Luxembourg’s zero tax exemptions. The rest would get taxed at proper rates, where the real stuff happens.

The prize is worth the effort – even if some states go ahead on their own.

This is exactly, exactly, as we have been arguing. It would have a massive impact. A large part of the tax haven business – not to mention the political cover that multinational corporations provide for their continued existence – would disappear. We think the editoral writer should now, as a precautionary measure, don a hard hat.

At a meeting on December 8th in Brussels, TJN’s John Christensen outlined this proposal to an assembled grouping from non-governmental and official bodies, and one participant raised his hand up to complain, along the lines of:

we have only just started getting up to speed on all the other stuff you have been pushing. Now we have to get our heads around this one!

Well, we are sorry if it’s a lot to take on board. It’s a lot for us too. But this problem is complicated – there’s no getting around it – and we have to push forwards. This agenda is a big one.

Interestingly, at that same meeting Christensen had a long conversation with an FT editorial writer – about exactly, exactly this. Coincidence? We like to think not.

Written by Tax Justice Network

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