Several feasible near-term reforms can substantially narrow the scope for global tax avoidance by closing information loopholes.

Several feasible near-term reforms can substantially narrow the scope for global tax avoidance by closing information loopholes.

Thomas Pogge and Krishen Mehta (2016)

 

Global tax fairness: essays on global tax avoidance by multinational enterprises

 

The book volume of Global Tax Fairness indicates that several feasible near-term reforms can help substantially narrow the scope for global tax avoidance by closing information gaps and loopholes. Legal tax avoidance by multinational corporations violates the equity principle because the adverse effects fall especially hard on the lower social echelon of the world population. Multinational enterprises can legally minimize their taxes through creative or preferential accounting practices. In recent times, a new survey by Global Financial Integrity gauges that corporate tax abuse accounts for 80% of all illicit financial outflows across the world. These capital flows outweigh total foreign direct investment and economic development assistance in non-OECD countries. Although this tax abuse cannot necessarily equate evasion, this widespread contravention of both the spirit and letter of tax law calls for radical reforms in cross-border corporate taxation.

These global corporate tax reforms pursue at least 2 complementary goals. First, a fresh small set of feasible near-term reforms can substantially narrow the scope for illicit tax avoidance by closing information gaps in the international tax system. Second, these reforms introduce proposals for more ambitious long-term solutions that facilitate coordination on both the design and enforcement of global corporate taxation. For example, a new global tax institution helps correct the choice between transfer pricing treatment and formulary apportionment as an essential method of allocating the profits of each multinational enterprise across countries. These main discussions strike a delicate balance between whetting the appetite for corrective actions and acknowledging the complex details of global tax policy design that can often prevent simple solutions.

Moreover, these global corporate tax reforms would maintain substantial levels of corporate income taxation with less cross-border tax avoidance. Legal income tax avoidance often violates fairness because its negative ripple effects fall especially hard on the lower social echelon of non-OECD countries by substantially reducing the fiscal capacity of governments in these countries. In this positive sense, global corporate tax reforms can help reduce economic inequality worldwide.

Multinational enterprises should pay taxes in the specific jurisdictions where these corporations earn net income. This basic tax principle is the first maxim of taxation by Adam Smith in the classic synthesis The Wealth of Nations. This maxim bolsters the gradual development of inclusive institutions for better global tax fairness. With classic corporate income taxation, global tax reforms claim an intellectually logical and coherent moral rationale that complements the arguments from social justice. It is important for some global tax institution to support the normative foundations of better international tax fairness.

 

International cooperation can help close information gaps and loopholes.

Global corporate income tax proponents advocate for a fresh small set of feasible near-term reforms that meaningfully address information gaps between the actual and target taxation of multinational enterprises. These reforms target the pervasive asymmetries of information in the international tax system between tax authorities and multinational corporations. Some multinational tech titans (such as Facebook, Apple, Microsoft, Google, Amazon, Nvidia, Tesla, Baidu, Alibaba, and Tencent etc) are subject to these global tax reforms.

A simple but powerful and reasonable heuristic rule of thumb forces multinational enterprises to report the geographic breakdown of their major economic operations in a holistic and consistent way. However, multinational enterprises now report only a small subset of their economic activities and therefore often omit their economic activities in tax havens. Most shareholders and many other stakeholders such as upstream suppliers, employees, customers, and regulators retain less information to hold top management accountable for their strategic actions and decisions. For this reason, it is often difficult for corporate outsiders to appraise the fundamental health of multinational enterprises. Also, some taxable income can be hidden from tax authorities. The lack of country-by-country tax reports suggests that some parts of multinational corporate activities can entirely disappear from regulatory scrutiny. By making all of multinational corporate economic activities visible and transparent, country-by-country tax reports serve to close information gaps between the actual and target taxation of multinational enterprises.

Shareholders of multinational enterprises should advocate for country-by-country tax reports because this comprehensive disclosure helps strategically cut costs by reducing principal-agent problems despite higher tax liabilities in the medium term. Building on the U.S. Foreign Account Tax Compliance Act (FATCA) legislation as of 2010, automatic information exchange has become practically relevant across many OECD economies. Country-by-country tax reports can be a major part of the OECD tax regulation for multinational enterprises. Several countries have put into place jurisdictional rules and regulations to require country-by-country tax reports of multinational enterprises.

In an ideal sense, self-interest would cause rich countries to want to subsidize the gradual implementation of country-by-country tax reports in non-OECD countries. This type of cross-subsidization is likely to be piecemeal. Skeptics of these reforms argue that the international tax system often fails a test of fairness due to a lack of coordination on the design of tax regulation (not because of a lack of cooperation). In an alternative view, country-by-country tax reports may inadvertently undermine the lofty goal of sustaining substantial taxation of multinational corporations in the global economy. It is key for governments to ensure that multinational enterprises play by the rules. However, this desirable outcome cannot remove the incentives for countries to change these rules and regulations in order to compete on taxation. A stable equilibrium international tax system should remove the information gaps, loopholes, and incentives for governments to undercut one another.

 

International coordination can contribute to better global tax policy design.

Some tax economists call for a World Tax Authority (WTA) to promote country-by-country tax law harmonization. Nowadays the world needs a tax counterpart to the World Trade Organization (WTO). The WTA would provide a wide array of services for national tax authorities. At the bare minimum, the WTA would support tax data collection and information provision in most OECD countries. The WTA would help monitor country-specific adherence to bilateral or even multilateral tax agreements. Moreover, the WTA would serve as a new platform for tax dispute resolution.

As fiscal coordination is likely to raise concerns about sovereignty, incrementalism would ensure that member countries become comfortable with the important role of the WTA. If fiscal coordination needs a focal point, the WTA can serve as a key reasonable forum for cross-border tax regulation. Some economists further argue that all rich countries must tax the global profits of the domestically-headquartered multinational enterprises at the same corporate income tax rate with some foreign tax credits. The core argument suggests that this alternative tax system eliminates the incentives for multinational enterprises to shift their net profits across countries. The main question concerns whether a multilateral approach is realistic in practice. The classic solution to global tax coordination is iterative play as the folk theorem can work its magic to make fiscal coordination a rational outcome. The WTA would function as a venue for such iterative play in the tax coordination game.

Some economists promote an International Convention on Financial Transparency to deal with tax havens or secrecy jurisdictions. The main thesis would be a pledge for governments not to introduce new legal structures that are particularly likely to undermine the democratic rule of law in other states. Specifically, some tax havens that build regulatory architectures in support of corporate tax avoidance might skirt the home-country tax laws and regulations. Other economists and tax law scholars propose a cost-driven tax on resource extraction companies, a Tobin tax on capital transactions, or even a global tax on anonymous wealth.

States often need to assign both the tax credits and liabilities of each multinational enterprise to the countries in which the enterprise runs its core business operations. Formulary apportionment treats each multinational enterprise as a solo entity, but allocates net profits across jurisdictions on the basis of specific tax rules. This main approach reflects how most U.S. states assess their own corporate income taxes, and the European Union has been working on its own internal version. An objection to formulary apportionment suggests that this apportionment often leads to harmful tax competition across states. In this negative light, inefficient state tax competition might inadvertently cause a race to the bottom for many multinational enterprises. When push comes to shove, the law of unknown consequences counsels caution. Hence, some economists and tax law scholars argue that formulary apportionment cannot serve as the baseline template for international taxation.

 

Several economists clarify the normative basis for cross-border corporate income taxation.

On the basis of social justice, many governments can achieve massive reductions in current socioeconomic deficits by allowing poor countries to collect reasonable taxes from multinational enterprises such as Sino-U.S. tech titans Facebook, Apple, Microsoft, Google, Amazon, Nvidia, Tesla (FAMGANT), as well as Baidu, Alibaba, and Tencent (BAT). In a world where so few have so much and so many have little, it is a good moral rationale for many poor countries to levy-and-enforce substantial taxation on multinational enterprises from rich countries. With global egalitarianism, this global taxation on multinational enterprises equates capital transfers from rich countries to poor countries. In this positive light, such global taxation helps reduce economic inequality worldwide.

In light of global tax justice, it is often constructive for states to reconsider how and whether multinational enterprises should pay income and wealth taxes in order to honor their moral obligation to produce fair international tax results in accordance with genuine economic activities and core business operations. No or low taxation per se is not a cause of concern, but no or low taxation on multinational enterprises reflects detrimental corporate practices that artificially segregate taxable wealth or income from the respective economic activities. For this reason, some economists and tax law scholars argue that applying a core method of formulary apportionment is the only effective way for states to deliver reasonable tax rules and regulations. These cross-border rules and regulations can help ensure global tax fairness. The net ripple effect diverts the world tax base partly from high-tax OECD countries to poor countries. The long-term effect of country-by-country tax reports discourages shifting corporate income and wealth from high-tax OECD countries to zero-tax or low-tax jurisdictions or tax havens.

In essence, better global tax justice helps connect taxable income and wealth to the origin of economic value creation. In most countries, wealthier high-net-worth people and corporations have traditionally borne a greater share of the tax burden than the middle class or the less fortunate population. Everybody pays taxes, but the richer people and corporations have borne a little more responsibility for global taxation. Our core belief reflects that both the richer people and corporations who have benefited most from our way of life can afford to give back a little bit more in the form of both income and wealth taxes.

With the diversity of normative beliefs in our modern society, radical reformers can have the best likelihood of success if they point to a reasonable suite of arguments rather than one. State tax competition may inadvertently lead to an inevitable race to the bottom. If governments use fiscal tax revenue in a prudent manner, state tax competition may be one of the few social levers of influence over big multinational enterprises. State tax competition can only be productive when governments seek to connect both corporate wealth and income taxes to the cross-border sources of economic value creation.

The book volume of Global Tax Fairness indicates that several feasible near-term reforms can help substantially narrow the scope for global tax avoidance by closing information gaps and loopholes. Legal tax avoidance by multinational corporations violates the equity principle because the adverse effects fall especially hard on the lower social echelon of the world population. Multinational enterprises can legally minimize their taxes through creative or preferential accounting practices. In recent times, a new survey by Global Financial Integrity gauges that corporate tax abuse accounts for 80% of all illicit financial outflows across the world. These capital flows outweigh total foreign direct investment and economic development assistance in non-OECD countries. Although this tax abuse cannot necessarily equate evasion, this widespread contravention of both the spirit and letter of tax law calls for radical reforms in cross-border corporate taxation.

These global corporate tax reforms pursue at least 2 complementary goals. First, a fresh small set of feasible near-term reforms can substantially narrow the scope for illicit tax avoidance by closing information gaps in the international tax system. Second, these reforms introduce proposals for more ambitious long-term solutions that facilitate coordination on both the design and enforcement of global corporate taxation. For example, a new global tax institution helps correct the choice between transfer pricing treatment and formulary apportionment as an essential method of allocating the profits of each multinational enterprise across countries. These main discussions strike a delicate balance between whetting the appetite for corrective actions and acknowledging the complex details of global tax policy design that can often prevent simple solutions.

 

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