Toward Unitary Taxation of Transnational Corporations

December 8th, 2012

Today’s international tax rules, which were drawn up nearly a century ago, have not kept pace with the massive changes in the world economy.  

The system is governed by two broad principles. First, it treats transnational corporations (TNCs) as if they were loose collections of separate entities operating in different countries. Because there is only weak co-ordination between tax authorities, however, this ‘separate entity’ approach allows TNCs scope to shift profits around the globe to escape tax.

Second, entities within a multinational trade with each other across borders at prices governed by the so-called Arm’s Length Principle (ALP) – as if they were independent actors trading with each other in the open market.

Yet TNCs enjoy unique global synergies and advantages that come from combining economic activities on a large scale and in different locations. These advantages cannot be attributed to a single location, but to the whole global entity. So treating each affiliate as a separate entity for tax purposes is impractical and does not reflect economic reality; and their internal cross-border trades typically bear no relation to any supposed “arm’s length” trade between independent actors in an open market. It is, as a top U.S. tax expert puts it, “delusional” to think this principle can be applied effectively.

This international tax system is dominated by the Organisation of Economic Cooperation and Development (OECD). The OECD’s Fiscal Committee, consisting of unelected state officials, presides over an increasingly complex set of rules which they are also responsible for applying. Its often arbitrary decisions involve billions of dollars of taxes – yet it is effectively unaccountable.

Read the new report, Towards Unitary Taxation of Transnational Corporations by Sol Picciotto, emeritus professor at Lancaster University, senior adviser with Tax Justice Network and author of International Business Taxation (1992), and Regulating Global Corporate Capitalism (2011), here.

Written by Tax Justice Network

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