I have reservations about Unitary Taxation, so I’d like to build a model of how it works so I can test it for weaknesses, and compare any weaknesses which come up to the arm’s length principle to see whether UT is a better system.
At this stage I’m looking more at the mechanics of how it will work, rather than any ideological questions of whether the results are better – though I think some of those will come up along the way.
To do this I’m working mostly from Sol Picciotto’s paper “Towards Unitary Taxation of Transnational Corporations”, as this seems to be the most detailed exposition and is used as an example by Richard Murphy, Prem Sikka, the Tax Justice Network, and others.
It’s a fairly long paper, so I’ve attempted to summarise it below to give me some parameters for the system. In my next post, which at the moment looks like it’s going to be rather longer than this one, I’ll list out some questions of detail which have arisen. But if anyone thinks I’m misunderstanding anything so far, please do shout before I get too far along and make a fool of myself.
A UT system can be implemented unilaterally. We don’t need agreement between states as to how it will work, we just need a reasonable amount of co-ordination with some mutual agreement procedures.
A big advantage of UT for governments is that they can’t offer tax incentives to companies to invest in their country. Or rather: it removes the temptation to offer incentives, which is good because doing so is not generally to their advantage. They can therefore compete on tax rate, but nothing else.
In the absence of differences in tax rates between countries in which a given TNC has economic activity, universal adoption of UT would leave no scope for avoidance. I’m not sure how this squares with the suggestion that countries may compete on tax rates, but that is perhaps the sort of philosophical question I’m not looking at just yet.
The basic tax return for a business is a report consisting of:
– The business’s consolidated accounts, with all internal transactions eliminated
– Inputs and outputs of the UT formula
A UT Business is all legal entities under common control (using a 50%test , but with (unspecified) anti-avoidance rules) which operate in the same or related business. There is a presumption (rebuttable?) that businesses are related if there are a significant number of transfers between them, or share common resources/services.
A TNC will have one or more UT Businesses within it.
For the Report we need to look at the whole Business, not just the element which falls within the countries using UT.
I’m not an accountant, so I shall wave my hands and assume that these can be prepared as required.
The formula has three inputs:
“Assets” includes all fixed tangible property. This includes leased assets, to avoid sale-and-leaseback avoidance. It excludes inventory (and so by extension all other circulating capital?). It excludes intangibles, because it’s hard to tell where they are and they can move about easily – we look through the intangibles to the assets and staff that create them, and anyway we are more interested in how the IP is used than how it is created.
“Labour” is a combination of payroll costs and headcount; it is the place of work that counts, not the residence of the employer. They are weighted 50:50. We include all persons working for the firm, including employees of subcontractors providing labour services – I assume this means staffing agencies rather than all sub-contractors.
“Sales” is the amounts received from selling anything outside the Business, grouped by the residence of the customer rather than the supplier. There is a reference to the Business needing to have an establishment in the country of the customer, so it can be said that it is doing business there, but this is a much broader term than your normal Article 5 PE under current rules. The paper is silent about sales to a customer in a country in which you have no establishment.
The three factors need to be weighted in the formula, and there is no conclusion about how this should be done. It is noted that equal weighting has been usual (though the paper doesn’t specify for whom it is usual). US states have been tending to go towards 25:25:50, lately (Assets:Labour:Sales). The EU, on the other hand, has been suggesting 45:45:10.
It is noted that different sectors will have different needs: in particular transport and extractive industries are cited as requiring some careful thought.
The formula itself is not explicitly stated. I assume that we do the obvious: simply say “Country A has X% of this factor”, take the weighted average of the three percentages, and apply the resulting percentage to the profit of the UT Business in question. Then we tot up the profits of all Businesses of the TNC in that country, multiply by the headline tax rate, and away we go.