A modest proposal in The Economist for taxing multinationals

The Economist magazine has an interesting piece online entitled Tax Havens: a modest proposal.

It looks at the problems with international corporate taxation, accepts that the system is broken beyond repair, briefly discusses (then dismisses) unitary taxation and other approaches as a way of tackling the problems. To summarise the proposal:

"There is another way forward, and it is one that could work even if adopted by less than all countries and in varying forms that reflect individual countries’ needs. It would require the countries that embraced it to abandon the “territorial” and “deferral” systems that have become popular and instead adopt a worldwide “full-inclusion” system."

This is an interesting piece, and you have to read the original to see how the author spells it out: it does a pretty good job of explaining the concepts in clear English. Although TJN is and remains a strong supporter of unitary taxation and its two core components (combined reporting and profit apportionment) we also think that all options need to be aired and discussed.  TJN's Sol Picciotto has commented on it:

"I would classify this as a Unitary approach, though without formula apportionment. Ideas like this are welcome because they at least show that taxation of TNCs on a unitary basis on their worldwide profits is desirable and can be implemented quickly."

Picciotto also notes that essentially this is the same as a proposal made in more detail by Ed Kleinbard a couple of years ago in the second of his articles about `stateless income’(see here.)  It has the advantage that it could be adopted unilaterally, though probably only really by the US and a few other states that are the `home’ countries of large numbers TNCs.

The proposal also has several other flaws. First, as the proposer here accepts, companies could relocate their home country (though the US has some measures to try to block such corporate `inversions’).

A better proposal for moving towards a unitary approach, which is easier for different states to adopt and lays the basis for a cooperative system, is one proposed in 2008 by Reuven Avi-Yonah, Kimberly Clausing and Michael Durst, see here.  This proposal, which provides for BOTH assessment on worldwide profits AND apportionment by formula, involves a 2-stage apportionment (i) by activities based on operating expenses, and then (ii) apportionment of the `residual’ by sales according to destination.

Any such moves towards a unitary approach would need some changes to international tax rules. The main merit of them is that you don’t need a worldwide agreement to do it. So the author of this one is incorrect to suggest otherwise: as we have pointed out in our document Unitary Taxation: Our Responses to The Critics. (Original here.)