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Corporate tax
WASHINGTON, DC
The global system for taxing multinationals is broken. What might replace it?
For years governments have grumbled, simmered and raged as multinational companies have shifted profits out of tax collectors' grasp and into low-tax havens. The oecd, a club of mostly rich countries, estimated in 2015 that avoidance robs public coffers of $ioobn-24obn, or 4-10% of global corporation-tax revenues a year. Now the fiscal fallout from covid-19 is adding urgency to governments' efforts to claw some money back-most notably in America, where President Joe Biden plans to raise taxes on corporate profits, including foreign income.
Mr Biden's proposals will grind their way through Congress. Finance ministers from the G7 group of countries are likely to discuss global tax reform when they meet in London on June 4th-5th. And later in the summer 139 countries will discuss changing the system for taxing multinational companies. The confluence of a political shift in America and a global push to raise more tax revenue to pay for the pandemic means a degree of optimism is in the air. The proposals under discussion may initially raise only a modest amount of revenue, but they still represent a big break with the past.
The foundations of the global corporate-tax system were laid a century ago. It recognises that overlapping taxes on the same slice of profits can curb trade and growth. As a result, taxing rights are allocated first to wherever profits are produced (the "source") and then to wherever the parent company is headquartered (or "resident"). A multinational based in America but with an affiliate in Ireland, for example, typically pays taxes in both places. Where the company makes its sales is irrelevant. Payments between an individual firm's various legal affiliates are recorded using the "arm's-length" principle, supposedly on terms equivalent to those found on the open market.
These principles, now baked into thousands of bilateral tax treaties, have had two unintended consequences. First, they have encouraged governments to compete for investment and revenue by offering tantalisingly low tax rates (see chart 1 on next page). In 1985 the global average statutory corporation-tax rate was 49%;...