It’s my opinion that the Americans are making a big mistake here with their insistence upon taxing companies more. Corporation tax is a bad tax therefore we should welcome that people can dodge it – it reduces the ability of others to impose high bad taxes.
However, let us leave basic economic logic aside and instead consider just this particular point. By raising the tax that must be paid by American companies on profits made anywhere in the world they’ve just killed off the need for country by country reporting.
On Monday, Treasury Secretary Janet L. Yellen threw her support behind an international effort to create a global minimum tax that would apply to multinational corporations, regardless of where they locate their headquarters. Such a global tax, she said, could help prevent a “race to the bottom” in which countries cut their tax rates in order to entice companies to move headquarters and profits across borders.
“Together, we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations,” she said. The effort is aimed at “making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.”
At the same time, Democrats in Congress released their own proposal to add teeth to the de facto minimum tax that the United States already imposes on income earned abroad — one that would apply to American multinational companies regardless of what the rest of the world does. The proposal could raise as much as $1 trillion over the next 15 years from large companies by requiring that they pay higher taxes on profits they earn overseas, according to analyses of similar plans.
So, the basic problem as seen by those who complain about corporate tax dodging. That a company can get away without paying tax anywhere. But that’s only true if it is possible to get tax unpaid profits into the country where the investors are. And pretty much all tax systems don’t let you pay a dividend – getting the money into the hands of the investors – until you have paid that corporate income tax somewhere.
The one big hole in the system was that if you were an American company then you could park the profits offshore and not pay tax. Sure, you couldn’t use it to pay a dividend but still, profits really could remain tax free. Other tax systems not so much – CFC rules in the UK for example.
Thus the complaints about where taxes were made and their shifting. But if all profits are going to be taxed then exactly where they are being made doesn’t matter so much. Mostly on the grounds that if the company has to pay anyway then it’s not going to make the efforts to shift them around. After all, of the effort doesn’t save money then why bother with the effort?
Which brings us to this:
Second, that then hints at the second issue. What is going to be compared with what here? It needs to be based on economic substance and so must be related to accounting profit. But what profit? The group is a starting point but tax is not paid on a group basis, but by country. And what is known is that profit is shifted between countries. So the figure has to be group profit apportioned to country. Unsurprisingly country-by-country reporting can achieve this goal, but not using the OECD’s data, which used aggregated and not consolidated accounting information by country, which means it can be gamed far too easily. The GRI version would provide a better result, but I declare an interest as I was on the committee that advised on it.
But we don’t need country by country reporting any more. Shifting profits doesn’t expunge the tax bill so peeps won’t shift profits. So we don’t need all the extra effort to see what is being shifted, do we?