Some political questions for Unitary Taxation

It sometimes feels like, when discussing unitary taxation [pdf], one is expected to self-identify as either a UT advocate, interested in how it could be made a reality, or a sceptic, determined to defend the status quo. I’m neither. As a political scientist, I want to understand (among other things) how our international tax instruments came about, how they affect what individual countries do, and how different actors influence national and international policymaking. These are empirical questions that I think are relevant to the UT debate.

Unitary tax is certainly a case in point for each of these questions. If it really is a better system than transfer pricing, then a political economist would want to explain the persistence of the latter. It seems clear enough that developing countries, when they decide to get serious about taxing multinational companies, head almost automatically down the transfer pricing route. Yet the people making these decisions are often, in my experience, very sharp, with a healthy scepticism of the international tax institutions from which transfer pricing standards have emerged. So have they considered other options? Are their decisions based on legal or economic preference, political calculation, or the hegemonic power of the OECD guidelines? I’d like to know.

There is a tremendous body of legal literature arguing that unitary taxation would be a more effective way to administer corporation tax than transfer pricing. I find this more convincing than the argument for the status quo, as made for example in the OECD guidelines. This seems to boil down a political impossibility theorem: to prevent double taxation there would need to be global agreement on a formula, but this would be impossible, so we should stick to the status quo.

What I find odd about it is that the same surely applies to transfer pricing, and yet there has never been a global agreement on those standards: just an agreement between OECD countries. Everyone should do what the OECD countries do, it seems, not because of its technical merits, but because it would be too difficult to do anything else.

I’ve argued elsewhere that moves in some of the BRICS countries are specifically undermining any notion that there’s an international consensus on the arm’s length principle. What India and China are doing is not, like Brazil, just based on the idea that they have found a better way to approximate the arm’s length price: they seem to argue instead that they are entitled to a larger-than-arm’s length share of taxing rights, because that’s what they consider fair.

If there has been a breakdown in the transfer pricing consensus, and one that leads to double taxation, that substantially lowers the bar for UT: it no longer needs a tight global consensus in order to match transfer pricing. Furthermore, if a debate is opening up over the fair distribution of taxing rights, that’s comfortable territory for unitary taxation, where the debate is articulated clearly over the choice of formula.

In making a judgement about which international tax system is best, we need to ask ‘best in what way?’ I think we can look at it through the classic three-way lens of tax policy valuation:

  • Equity: does it produce a fair (we might say ‘progressive’) result?
  • Efficiency: does it minimise the role of tax factors in shaping economic decisions?
  • Administrability: can it be administered and enforced effectively without imposing too large a burden on taxpayers and revenue authorities?

Looking at one of Sol Picciotto’s recent papers, it seems that his main argument in favour of unitary taxation is an administrability one: under UT there would be less avoidance and evasion than under transfer pricing. (He also touches on the impact of tax planning on economic efficiency, and we could discuss how it affects equity as well). Efficiency is interesting, but I am certainly not able to do the kind of economic modelling that we’d need to predict behaviour change under UT.

But what if we start from equity? There is the question of equity between taxpayers, and in particular how the tax treatment of multinationals compares to domestic firms – a matter of vertical equity. But I am interested in ‘inter-nation equity’. How would (or indeed could) unitary taxation affect the distribution of taxing rights between countries, and in particular between developed and developing countries? Sol’s paper ends on this point:

Some might also wish to see even more ambitious projects for global taxes, which might be used for international redistribution to assist development. Those, however, are topics for another occasion.

To me, this is a political question. Considering how different formulae would change the distribution of taxing rights is the starting point, but you can’t end there: you have to ask what a politically viable settlement would look like. If global consensus is needed, is it possible to imagine one in which developing countries have a bigger share of taxing rights than under transfer pricing? If global consensus is not needed, how are developing countries likely to act? One hypothesis might be that larger, more powerful economies would adopt formulae that maximise their tax revenues, just as they are doing with their transfer pricing standards, while the choice of formula could become a matter of tax competition for smaller countries.

Of course it may not be a zero sum game. If avoidance and evasion are reduced under UT, the overall cake to be divided up would be bigger. In that case, it may just be a question of working out how to divide up the spoils.

My view is that these questions can’t be asked through only thinking about unitary taxation in the hypothetical. Key to determining if unitary taxation produces a more equitable outcome is developing a model of how countries behave in international tax. To do this, we need to study how countries act under the current international tax system – both unilaterally and in international negotiations. Coincidentally, that is what I am trying to do!

PS: on the technical side, I’m also watching the International Centre for Tax and Development’s unitary tax workstream and the unitary taxation project on Andrew Jackson’s blog with interest

 

Unitary taxation, Barclays and Africa

I just read the Tax Justice Network briefing which is explained in Richard Murphy’s blog title “Barclays and HSBC make the case for unitary tax in the UK – because we’d have collected £2.6 billion more in 4 years.” Now I haven’t checked out the UK figures at all, but the inclusion of Barclays piqued my interest, because by some measures it has a bigger operation in Africa than it does in the UK.

Unitary taxation makes me nervous, because while the idea is to draw the tax base away from tax havens and towards economic substance, I worry that under most formulae – certainly those acceptable to the G20 – it may also suck the tax base away from developing countries.

The segmental analysis in Barclay’s accounts means that it’s possible to conduct a hypothetical case study to help answer this: would Africa be better or worse off under a simple unitary tax formula as compared to the current system?

I’ve quickly cobbled together a spreadsheet to do that for the last three years. I reproduced the TJN figures to make sure it’s comparable. I couldn’t find a tax figure for Africa, but that’s fine, the best comparison is anyway the tax base, that is, the pre-tax profits. So I applied the same two-factor formula as the TJN report proposes, which divides up the group profits on the basis of staff numbers and turnover. TJN wanted to use fixed assets as a third factor well, but couldn’t find any data. I’ve had a go at it, by using the number of distribution points (branches and sales centres), although this doesn’t change the overall distribution very much.

The result is interesting. When the group as a whole is profitable, Africa does better from this simple unitary approach than it does from the status quo. But because the African operations are not subject to the same shocks as other parts of the business have been, in 2012 Africa is much more profitable than the group overall, and so it does a lot worse under the unitary approach that takes the overall group profits as its starting point. The net effect of the unitary approach over three years is still positive, though: the African tax base is £2.9bn-£3.3bn as compared to £2.0bn under the status quo.

Link to Google spreadsheet

There are of course caveats. The staffing and profit figures I used are for the Africa segment, which doesn’t quite include all the African operations (though the turnover figure does). According to the ActionAid tax haven tracker, Barclays has six subsidiaries in the tax haven of Mauritius, which might distort the Africa figures.

Most importantly, though, Barclays is a big service provider in Africa. It has a lot of sales, a lot of staff, and a lot of branches in Africa. So it’s not a typical case study. I don’t think Africa would do so well out of unitary taxation of a company that was primarily extracting minerals or growing agricultural commodities for export.