Stopping tax avoidance without causing “flight”
Emer Traynor, a spokesperson for Algirdas Semeta, the European Commissioner for taxation, customs, statistics, audit and anti-fraud, said that because the loopholes corporations exploit are found in bilateral tax treaties and other international arrangements, “national measures alone are not going to work.” For this reason, she described an approach rooted in international cooperation as “crucial” to ending corporate tax avoidance. Brynildsen agreed. “If you look at tax avoidance…it’s a cross-border problem, so you definitely need cross-border solutions, and in order to get those you need different governments to contribute,” she said.
congressional supporters of lower corporate taxes refuse to answer
Over the course of two business days, Remapping Debate repeatedly reached out for comment, via phone and email, to the communications staffers of five Republican members of the United States Congress who have spoken out in support of cutting the corporate tax rate on the rationale that doing so would help make U.S. multinationals more competitive; of moving the U.S. to a territorial tax system; or both.
None of them responded to our inquiries.
The members we reached out to are: Rep. Dave Camp (R-Mich.), Rep. David Schweikert (R-Ariz.), Sen. Tim Scott (R-S.C.), Rep. Jim Sensenbrenner (R-Wis.), and Rep. Pete Sessions (R-Texas).
The questions they did not answer are below:
1. Broadly, do you believe the U.S. should embrace international cooperation as a method for thwarting corporate tax avoidance? Why or why not?
2. If no: Isn’t it true that multinational corporations sometimes avoid taxes by exploiting the loopholes in existing treaties and other international agreements? Isn’t international cooperation therefore necessary in order to most effectively combat tax avoidance?
3. There have been proposals for requiring country-by-country reporting on profits made by multinational corporations in order to make transparent how much corporations are paying in taxes to each country in which they do business. Would you support the United States’ participation in such an agreement? Why or why not?
4. Would you support the United States’ participation in a system of “formulary apportionment” in which the overall profit of a corporate entity (including the parent company and all subsidiaries) would be assessed on a worldwide basis and allocated according to real activities? Why or why not?
5. Don’t the proposals mentioned above, along with many other potential international agreements, show that international cooperation can help level the playing field and encourage an international race to the top rather than a race to the bottom? And if so, shouldn’t the U.S. be encouraging and participating in such agreements?
6. Do you support ending the deferral of foreign source income as a means of combating tax avoidance? Why or why not?
7. If no: isn’t it true that deferral creates an incentive for profit shifting to tax havens by allowing multinational corporations to indefinitely avoid paying U.S. taxes on offshore profits, even if those profits are simply made to appear as though they were generated in a low-tax country? If so, why would the U.S. not want to end that incentive?
There are a number of measures the international community could take in order to combat tax avoidance. The most dramatic of these would be the adoption of a unitary tax system — otherwise known as a “formulary apportionment” system. James S. Henry, the chair of the Global Alliance for Tax Justice, the campaigning body of the Tax Justice Network, described formulary apportionment as a system in which taxation is “actually based on real activity.” The overall corporate profit of an entity (including the parent company and all subsidiaries) would be assessed on a worldwide basis and allocated according to real activities, he said. This would be calculated using a consistent, agreed-upon formula based on the profits earned and the employees present in each country in which the corporation did business in a given year. “That’s the more-or-less longer term agenda” of those who advocate for a unified international tax regime, Henry said.
According to Traynor, the European Union is currently considering a proposal to adopt a “single corporate tax base for multinational companies within Europe” in which taxes would be calculated via formulary apportionment. Adopting this measure would require the unanimous consent of all EU member states, however. Acknowledging the obvious, she said, “It’s not going to be the easiest proposal to get agreement on.” She did, however, note that a smaller subset of countries may agree to adopt the system on their own, as happened when eleven member states agreed to adopt a unified financial transaction tax earlier this year. Steve Wamhoff said a system of formulary apportionment in the European Union would also assist the United States. “If that leads to a situation where a corporation essentially cannot use Ireland to avoid taxes as much,” he said, ”that would probably help the U.S., too.”
OECD “action plan”
On July 20th, the Organisation for Economic Co-operation and Development (OECD) will present an action plan to the G20 leaders on combatting international tax avoidance. Remapping Debate spoke with Pascal Saint-Amans, the director of the Centre for Tax Policy and Administration at the OECD. He would not disclose the content of the plan because it “is not yet fully adopted,” but suggested that the plan would not recommend a formulary apportionment system. “Unification and formulary apportionment, whatever merit [they] would have…they are just not possible in the current environment,” he said. “Moving to global formulary apportionment mechanics would require consent of more than 200 tax jurisdictions on objective criteria that they would decide to implement,” which he believes is impossible in the near future.
Saint-Amans indicated that the OECD’s action plan would include less dramatic measures designed to work within the existing system of international taxation to make an impact on tax avoidance as quickly as possible rather than to create a new system. “We are fixing the plane while flying,” he said. “We can campaign and say we need to do everything and change it all otherwise you do nothing, [but] my concern is that we implement something, not that we talk about theoretical solutions for another decade.”
What might such measures look like? Nicole Tichon of Tax Justice Network USA suggested a system of country-by-country reporting on profits made by multinational corporations. “Having that level of transparency would benefit every country,” she said. “It would put every country on equal footing in terms of their ability to combat the problem.”