Starbucks tax solutions: the FT is ahead of the game

Update: Michael Devereux of the Oxford Centre For Business Taxation, a sparring partner of ours, supports formulary apportionment too. We have slightly amended the text to reflect his letter.

As the latest Starbucks tax scandal in the UK shows, the accepted global methods for taxing multinational corporations is broken, defunct, dead, not much better than useless (etc etc.) There has been a lot of (justified) noise about Starbucks' ability to take the benefits from the UK without paying their share of the costs. But now, (again, thanks to Sol Picciotto) we see the FT coming in with the broad outlines of a solution. It is a workable system already used by many U.S. states for state taxes, known by the name of formulary apportionment.

The FT spells out in simple terms what it entails:

"Public anger might equally be directed at the tax system itself, especially the way it treats multinationals. Current practice has turned tax into a largely voluntary gesture for such businesses. It is all too easy to shuffle income off to low-tax jurisdictions through intra-group debt financing and the transfer pricing of intangibles such as intellectual property.

Rather than relying on the taxman and the public to police the fuzzy boundary between legitimate tax avoidance and illegal evasion, a more rational method of linking the tax multinationals pay to real economic activity must be found. The EU has been considering the adoption of a system of “formulary apportionment” by which multinationals’ tax bases would be divvied up according to where they do business. This agenda, which needs a group of states to join forces, should be keenly pursued."

Indeed.

In very simple terms, the alternative to the dominant global system, protected jealously by the OECD, involves taxing multinational corporations not according to the artificial legal structure into which the corporation's accountants contort it, but instead according to the real economic substance of where it does business. So (to oversimplify quite a lot) if Starbucks sells one fifteenth of its coffee in the UK, then you simply say 'the UK has the right to tax a fifteenth of those global profits, at whatever rate it likes.' And if it sells one millionth of its coffee in a tax haven, then that tax haven gets allocated one millionth of its profits, to tax at whatever rate it likes. And if the haven's tax rate is zero percent, then who cares?

We have blogged before how businesses have supported the general principle of formulary apportionment, at least in the context of Europe's horribly named Common Consolidated Corporate Tax Base (CCCTB). Now, in a follow-up letter to the FT's latest editorial, Michael Devereux of the Oxford Centre Against For Business Taxation supports the FT's line too. When TJN, businesses, the FT and Devereux support the principle, it seems fair to say that it's time for people to sit up and take notice. Particularly when there is so much agreement as to how broken the OECD's dominant system is.

All this would bring another benefit. If the multinationals no longer had an incentive to use tax havens - which they wouldn't under a truly workable system of this kind - then tax havens would lose a whole lot of the political cover that has been keeping them in business for all these years. And they would be far easier to tackle.

When you get down to the nitty gritty, formulary apportionment isn't simple, and it isn't the only alternative approach to the current system, but it is fantastic option to pursue. If you want to understand quite how insane the system is, try this or this.