The recent upsurge of opinion – from governments, tax authorities and campaigners – against the apparent ease with which multinational corporations can organise their global tax affairs to minimise their tax bills is one of the driving forces behind the relative success of the OECD BEPS initiative. Sure, different countries, different tax authorities and even different corporations are interpreting the results in different ways but make no mistake, the OECD's efforts to stamp out base erosion and profit shifting (tax avoidance by any other name) will have a massive impact whose effects will be felt for many years to come.
But is that going far enough?
We’re beginning to hear calls for the development of a global tax policy for the taxation of corporate profits. While we recognise the strength of the economic case behind these calls, we also know that national jurisdictions will want to have at least some control over their tax policy.
Those in favour of a policy-driven international system argue that it would be vastly preferable to the current hotchpotch of different tax bases, different tax treaties and legislation which is as much a reflection of political expedient as it is of a conscious overarching design.
One possibility which is being discussed is 'unitary taxation'. This is a method of allocating profits earned (or losses incurred) by a corporation or corporate group to a particular tax jurisdiction in which the corporation or group has a taxable presence. It goes further than the arm's length standard (retained under the BEPS project) by using formulary apportionment to attribute the corporation's total worldwide profit (or loss) to each jurisdiction, based on factors such as the proportion of sales, assets or payroll in that jurisdiction.
Does history have anything to tell us about the likelihood that such calls will be successful?
I’ve only been able to find two examples. The first, California’s attempts to introduce what is called a 'unitary' system of taxation in the 1980s, were met with huge opposition from other states in America, from other governments and from corporations trading across state and national boundaries. After a period of expansion, US states retreated from operating worldwide unitary taxation.
The second example is a work in progress in Brussels. Since March 2011 the EU has for some considerable time been looking at the possibility of introducing a common consolidated corporate tax base (CCCTB). The intention was to create a single set of rules governing the way EU corporations calculate their EU taxes. CCCTB was also to provide the ability to consolidate EU taxes although corporate tax rates in the EU would not be changed by the CCCTB as EU countries would continue to have their own corporate tax rates.
By 2015 it had not been possible to secure the necessary level of agreement between sovereign nations so the project was suspended. However, we expect a revised version of CCCTB to be proposed in 2016. This will differ from the original version in that it will be mandatory (not voluntary) but the consolidation aspects will be deferred.
To put it another way, history suggests that in the absence of a World Tax Office there’s little or no chance of developing and implementing a cohesive taxation for the global taxation of business. And so long as there are independent sovereign nations, there’s almost no prospect of agreement to form a World Tax Office which somehow sits alongside but above the interests of the nations themselves.
For all the importance of the OECD BEPs initiative, single-country approaches to the taxation of multinational profits – whether using the arm’s-length principle to price cross-border transactions, or through considered attacks on tax havens and artificial structures – it looks as though a single global approach to taxing companies is a long way off.
If you would like any more information on this issue please get in touch with George Bull or your usual RSM contact.