Corporate taxation: are the OECD technocrats serious?
Guest blog by Prof. Sol Picciotto
Pascal St-Amans, head of the OECD’s Centre for Tax Policy and Administration, has been travelling the world reporting on the progress of the OECD’s Base Erosion and Profit Shifting (BEPS) project. This is an OECD initiative responding to justified outrage around the world about the international tax system, which is unfit for the modern age and allows multinational corporations to take the benefits from societies in which they operate, then skip paying their share. The OECD, a club of rich countries which has dominated the design of the international tax system, bears the greatest responsibility for the current mess. Recently U.S. tax expert Lee Sheppard, for instance, described the OECD-designed tax treaty system as `a load of nonsense . . . to make life comfortable for multinationals’.
Last Tuesday 11th June St Amans was in London, giving evidence to the House of Lords Committee on Economic Affairs, which is considering whether a new approach is needed to corporate taxation. Thursday 13th he was in Washington, speaking to the tax-writing committee of the US Congress, the House Ways & Means Committee.
There’s a lot riding on the BEPS project. Politicians are under enormous pressure from their citizens, fed up with facing austerity, while hearing the many media revelations of avoidance of billions of dollars of taxes by the world’s largest and until now most respected companies: Amazon, Google, Ikea, Starbucks, Vodafone. So the G20 leaders ordered the OECD to come up with effective measures. The OECD’s interim response in February looked serious. It promised to think `outside the box’, and seek `holistic and comprehensive solutions’. TJN, along with 57 allies, greeted this with cautious optimism, and we subsequently gave detailed responses to questions sent to us by the OECD.
Now the OECD is working on the report which is supposed to lay out its proposed Action Plan for reform of the international tax system. This was due to be published later this month, but we now understand that it may not be ready until mid-July. Well, Rome was not built in a day, and we can understand if they are finding it hard with a few weeks’ work to agree on how to turn the juggernaut of the OECD consensus on tax onto a new course.
Pascal of course, like his colleagues, is a technocrat. This is not meant pejoratively - they are experts, specialists on the international tax system. They have an important job: to advise governments, and to produce reports which can help ensure that there is a well-informed public sphere for debate and decision-making on complex issues.
But Pascal seems to have stepped outside this role. In his oral evidence to the House of Lords committee, he was asked about Unitary Taxation as a possible approach to taxation of transnational corporations (TNCs). His response was very negative, indeed dismissive. He argued that this `would require that all jurisdictions across the world - and we have 190-plus states, plus jurisdictions which are tax-sovereign - to agree on criteria and trust each other enough to rely on the information on the consolidated accounts which will be held in the headquarters of the group. I just don't see this happening any time soon.’
St Amans knows very well that is mistaken, and for several reasons. Agreement from every jurisdiction in the world is simply not necessary. The more co-operation, the better, of course: but there are several possible full, partial and even unilateral versions of unitary tax, and routes for a transition to such a system. International tax is a process of coordination, not a straight-jacket.
St Amans also knows that many international tax experts strongly believe that the only way effectively to reform the system of TNC taxation is precisely to move towards treating TNCs as what they are, unitary firms – rather than the current system that treats them as loose collections of separate entities all trading with each other as if in a competitive market.
For example, Prof. Ed Kleinbard, who also gave evidence at the same House Committee session as St. Amans, proposed that the US should adopt – on a unilateral basis – a worldwide approach to assessment of TNC profits, with a credit for foreign taxes paid.
Others have made proposals for a transition towards a unitary taxation approach by extending current transfer pricing rules, especially the profit-split method (see my paper Towards Unitary Taxation for an explanation of this, Box 3.) This was put forward five years ago in a paper by Reuven Avi-Yonah, Kim Clausing and Michael Durst, who are also now part of a team of researchers working on the implications of unitary taxation for the International Centre on Tax and Development.
St. Amans should know better, not least because the response to BEPS by TJN and its allies clearly put forward proposals for a transitional strategy. We hope that he and his colleagues are taking it seriously, despite his casual remarks to their Lordships.
What we are now looking for from the OECD is a serious report that lays out the possible options, so that a genuine public debate can take place. It is not the role of technocrats to foreclose that debate. They should accept that the proposals for moving towards a unitary approach for TNC taxation deserve a hearing. We believe, indeed, that many OECD experts – even Pascal – accept that a unitary approach is conceptually the best one. In that case, it is not for them to say what is or is not politically feasible. So why is he opposing it?
Ways can be found to move towards a unitary approach in a gradual and pragmatic way. It clearly cannot be done overnight, but should be put on the table as an option now. Interim measures are also desirable and possible, which can and should be designed to move the system towards a unitary approach. But to dismiss such ideas as politically not feasible would be a breach of the responsibility that technocrats owe to the public.