The International Tax System is ‘Repulsive And Inequitable.’ Here’s A Way To Fix It.

by Ben Walsh – August 20, 2015

The Huffington Post

The way we tax multinational corporations is “repulsive, inequitable and inefficient,” according to Nobel Prize-winning economist and Columbia University professor Joseph Stiglitz. While big companies and their capital are global, he points out, tax systems are national. Global companies, he says, have “free rein to move their money around to the low-cost jurisdictions.”

But the way to fix this problem is not through piecemeal, small-scale adjustments like making Caribbean tax havens less attractive, according to a recent proposal from a group of economists, policy experts and government officials. Rather, the Independent Commission for the Reform of International Corporate Taxation, of which Stiglitz is a member, recommends a total structural overhaul: Tax multinational corporations as single entities at a single rate globally, regardless of where they’re officially headquartered. Revenues would then be distributed to individual countries based on factors like sales, employment and resource extraction.

If you had to argue on principle in favor of the current system, referred to as “transfer pricing,” over treating global companies as one entity and taxing them at one rate, “you’d be laughed out of court,” Stiglitz says.

Major companies with headquarters in the U.S. are holding $1.95 trillion in assets offshore, “parking earnings in low-tax countries until Congress gives them a reason not to,” as Bloomberg recently reported.

The system has also lead to a boom in tax inversions, in which companies incorporate outside the U.S., recently through a wave of mergers and acquisitions that allowed them to shuffle intellectual property to new, low- or no-tax addresses. GE infamously paid zero U.S. taxes on its $14.2 billion in global profits in 2010 by employing a phalanx of tax lawyers who lobbied for tax breaks and worked to devise ways to keep profits offshore. The company instead claimed a tax benefit of $3.2 billion.

And Starbucks paid just $13.5 million in taxes in the United Kingdom between 1998 and 2012, even though its stores brought in more than $4.8 billion in revenue over that period.

Strip away the behavior of individual companies or the voguish rise of a single accounting contortion, and the trend is clear: In the mid-1950s, corporate taxes made up around 30 percent of total revenue collected by the U.S. government; in 2014, it was only about 11 percent. 

In the context of that massive decline, the commission’s proposal seems like a proportionate reaction. But if it still sounds outlandish, consider how similar it is to what the U.S. already does with state taxes on corporate profits. States use formulas to determine how much of a company’s U.S. profits are due to activities that take place within their borders, and apply their tax rates accordingly. The European Commission said in June that it will support a similar idea within the European Union, though the proposal still needs to get approval from member states, a significant hurdle.

Currently, multinational corporations create complex legal structures with technically separate business entities in the different countries where they operate. These entities are subject to wildly different tax laws depending on where they do business. For instance, Starbucks used a special arrangement with the Netherlands to claim a tax loss on its U.K. stores, which allowed the company to avoid paying taxes on operations that it told investors were profitable. (Starbucks ended that arrangement in 2014 after public outcry.)

But the idea that these entities are somehow independent from their corporate parents is a “legal fiction” that enables tax avoidance and evasion, the Independent Commission said in a June release.

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