Advertisement

Shifting MNE taxation from national to global profits: A radical reform long overdue

  • Sara L. McGaugheyEmail author
  • Pascalis Raimondos
COUNTERPOINT
  • 89 Downloads

Abstract

The current “Separate Accounting” taxation of corporations gives governments the right to tax the national incomes of firms operating within their borders. However, multinational and increasingly digital business models beg the question: what is national taxable income? We argue that a radical rethink of the corporate taxation – moving away from a separate taxation of national corporate income to a taxation of global corporate income allocated via “Formula Apportionment” – is long overdue. Global corporate income as a basis for taxation is supported both by recent theoretical developments and corroborating empirical evidence, with the EU and emerging economies including China already considering its adoption. Nor is it new. As we relate, formula apportionment of global corporate income was used a century ago before commercial and political interests promoted separate accounting, thereby providing both precedent and experience to inform its re-adoption.

Keywords

formula apportionment unitary taxation and global profits income shifting separate accounting digital economy history in international business 

Résumé

L’imposition actuelle des sociétés selon la “comptabilité séparée” donne aux gouvernements le droit d’imposer les revenus nationaux des entreprises opérant sur leur territoire. Cependant, les modèles d’affaires multinationaux et de plus en plus numériques soulèvent la question suivante: qu’est-ce qu’un revenu national imposable? Nous soutenons qu’il est grand temps de repenser radicalement l’imposition des sociétés; en passant d’une imposition séparée du revenu national des sociétés à une imposition du revenu mondial des sociétés alloué selon une “formule de répartition”. L’idée d’un revenu mondial des sociétés comme base d’imposition est soutenue à la fois par des développements théoriques récents et par des preuves empiriques qui les corroborent; l’Union européenne et les économies émergentes, dont la Chine, envisagent déjà son adoption. Cela n’est pas nouveau. Comme nous le rappelons, la formule de répartition du revenu mondial des sociétés a été utilisée il y a un siècle, avant que les intérêts commerciaux et politiques n’encouragent la comptabilité séparée, fournissant ainsi à la fois un précédent et de l’expérience pour guider sa réadoption.

Resumen

La actual tributación de “Contabilidad Separada” de las empresas da a los gobiernos el derecho a gravar los ingresos nacionales de las empresas que operan dentro de sus fronteras. Sin embargo, los modelos de negocios multinacionales e incrementalmente digitales piden la pregunta: ¿qué es un ingreso nacional gravable? Argumentamos que una reconsideración radical de la tributación corporativa – que se aleja de una tributación separada de los ingresos corporativos nacionales hacia una tributación global de los ingresos asignados mediante una “Distribución de Fórmula” – hace mucho que está pendiente. El ingreso corporativo global como base para la tributación es apoyado tanto por los desarrollos teóricos recientes como con la evidencia empírica comprobada, con la UE y las economías emergentes incluyendo a China que ya están considerando su adopción. Tampoco es nuevo. Como contamos, la distribución de fórmula del ingreso corporativo global fue usado un siglo atrás antes de que los intereses comerciales y políticos promovieran una contabilidad separada, proporcionando de esta manera tanto el precedente como la experiencia para informar su re-adopción.

Resumo

A atual tributação “Contabilidade Separada” das corporações dá aos governos o direito de tributar as rendas nacionais de empresas que operam dentro de suas fronteiras. No entanto, os modelos de negócios multinacionais e cada vez mais digitais colocam a questão: o que é renda tributável nacional? Argumentamos que um radical repensar da tributação corporativa - afastando-se de uma separada tributação da renda nacional das empresas para uma tributação da renda corporativa global alocada via “Rateio de Fórmula” - está muito atrasado. Renda corporativa global como base para tributação é sustentada tanto por desenvolvimentos teóricos recentes quanto por evidências empíricas, com a EU e economias emergentes incluindo China já considerando sua adoção. Tampouco é novo. Conforme nos relacionamos, o rateio de fórmula da renda corporativa global foi usado no século passado, antes de interesses comerciais e políticos promoverem contabilidade separada, fornecendo, assim, precedente e experiência para informar sua readoção.

摘要

目前公司的“单独会计”税收使政府有权对在其境内经营的公司的国家收入征税。然而, 跨国公司和越来越多的数字商业模式提出了一个问题:国家应税收入是多少?我们认为, 对公司税收的彻底重新思考 – 从对国家公司收入的单独征税转变为通过“公式分摊”分配的全球公司收入税 – 已经姗姗来迟。作为税收基础的全球公司收入得到了最近的理论发展和确凿的实证证据的支持, 欧盟和包括中国在内的新兴经济体已经考虑采用它。它也不是新的。就我们而言, 全球公司收入的公式分摊在商业和政治利益促进单独会计之前的一个世纪前被使用, 从而提供了先例和经验, 告示其被重新采用。

Notes

ACKNOWLEDGEMENTS

We greatly appreciate the helpful comments and guidance of Alain Verbeke (JIBS Editor-in-Chief), Gary Biddle (JIBS Area Editor), and an anonymous reviewer. The assistance of Griffith University librarians with some difficult to locate historical records is also gratefully acknowledged.

REFERENCES

  1. Anand, B., & Sansing, R. 2000. The weighting game: Formula apportionment as an instrument of public policy. National Tax Journal, 53(2): 183–199.CrossRefGoogle Scholar
  2. Auerbach, A.J., Devereux, M.P., Keen, M., & Vella, J. 2017a. Destination-based cash flow taxation. Saïd Business School WP 17/01.Google Scholar
  3. Auerbach, A.J., Devereux, M.P., Keen, M., & Vella, J. 2017b. International tax planning under the destination-based cash flow tax. National Tax Journal, 70(4): 783–802.CrossRefGoogle Scholar
  4. Carroll, M.B. 1932. Taxation of Foreign and National Enterprises: Studies of the tax systems and the methods of allocation of the profits of multinational enterprises operating in more than one country General survey of the allocation methods employed in France, Germany, Spain, the United Kingdom and the United States of America, Vol. 1. Study conducted by a subcommittee of the Fiscal Committee, under the direction of M.B. Carroll, League of Nations, Geneva. Document no: C.73.M.38.1932.II.A.Google Scholar
  5. Carroll, M.B. 1933. Taxation of foreign and national enterprises: Methods of allocating taxable income, Vol. 4. Study conducted by a subcommittee of the Fiscal Committee, under the direction of M.B. Carroll, League of Nations, Geneva. Document no: C.425(b).N.217(b).1933.II.A.Google Scholar
  6. Chaisse J. 2016. International investment law and taxation: From co-existence to cooperation. E15 Task Force on Investment Policy, Strengthening the Global Trade and Investment System for Sustainable Development, International Centre for Trade and Sustainable Development (ICTSD) and World Economic Forum, Geneva, Switzerland.Google Scholar
  7. Chetty, R., & Saez, E. 2006. The effects of the 2003 dividend tax cut on corporate behavior: Interpreting the evidence. American Economic Review, 96(2): 124–129.CrossRefGoogle Scholar
  8. Clausing, K.A. 2016. The U.S. state experience under formulary apportionment: Are there lessons for international reform? National Tax Journal, 69(2): 353–386.CrossRefGoogle Scholar
  9. Coviello, N., Kano, L., & Liesch, P.W. 2017. Adapting the Uppsala model to the modern world: Macro-context and microfoundations. Journal of International Business Studies, 48, 1151–1164.CrossRefGoogle Scholar
  10. Dourado, A.P. 2018. Digital taxation opens the Pandora box: The OECD interim report and the European Commission proposals. Intertax, 46(6–7): 565–572.Google Scholar
  11. Eichner, T., & Runkel, M. 2008. Why the European Union should adopt formula apportionment with a sales factor. Scandinavian Journal of Economics, 110(3): 567–589.CrossRefGoogle Scholar
  12. Eichner, T., & Runkel, M. 2011. Corporate income taxation of multinationals in a general equilibrium market. Journal of Public Economics, 95(7/8): 723–733.CrossRefGoogle Scholar
  13. European Commission. 2016. Common Consolidated Corporate Tax Base. https://ec.europa.eu/taxation_customs/business/company-tax/common-consolidated-corporate-tax-base-ccctb_en. Accessed September 5, 2018.
  14. European Commission. 2017. State aid: Commission refers Ireland to Court for failure to recover illegal tax benefits from Apple worth up to €13 billion. Press release, 4 October. http://europa.eu/rapid/press-release_IP-17-3702_en.htm. Accessed September 5, 2018.
  15. European Commission. 2018. Commission staff working document impact assessment. Accompanying the document Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence and Proposal for a Council Directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services. 21 March. SWD(2018) 81 final/2.Google Scholar
  16. European Commission. 2019. Commission launches debate on a gradual transition to more efficient and democratic decision-making in EU tax policy. Press Release, 15 January. http://europa.eu/rapid/press-release_IP-19-225_en.htm?es_p=8378983. Accessed January 18, 2019.
  17. European Parliament. 2018a. Briefing on EU legislation in progress: CCCTB, 14 June. http://www.europarl.europa.eu/RegData/etudes/BRIE/2017/599395/EPRS_BRI(2017)599395_EN.pdf. Accessed September 5, 2018.
  18. European Parliament, 2018b. P8_TA(2018)0087: European Parliament legislative resolution of 15 March 2018 on the proposal for a Council directive on a Common Consolidated Corporate Tax Base (CCCTB), (COM(2016)0683 – C8-0471/2016 – 2016/0336(CNS)). Accessed January 21, 2019.Google Scholar
  19. Fahey, J.H. 1921. The international chamber of commerce. The Annals of the American Academy of Political and Social Science, 94(1): 126–130.CrossRefGoogle Scholar
  20. Foran, N., & Gray, D. 1988. The evolution of the unitary tax apportionment method. The Accounting Historians Journal, 15(1): 65–87.CrossRefGoogle Scholar
  21. Foss, N.J., Mudambi, R., & Murtinu, S. 2018. Taxing the multinational enterprise: On the forced redesign of global value chains and other inefficiencies. Journal of International Business Studies.  https://doi.org/10.1057/s41267-018-0159-3.Google Scholar
  22. Genschel, P., & Rixen, T. 2015. Settling and unsettling the transnational legal order of international taxation. In T. Halliday & G. Shaffer (Eds.), Transnational legal orders: 154–186. New York: Cambridge University Press.CrossRefGoogle Scholar
  23. Goolsbee, A., & Maydew, E.L. 2000. Coveting thy neighbor’s manufacturing: The dilemma of state income apportionment. Journal of Public Economics, 75(1): 125–143.CrossRefGoogle Scholar
  24. Gordon, R.H. 1992. Can capital income taxes survive in open economies? Journal of Finance, 47(3): 1159–1180.CrossRefGoogle Scholar
  25. Gordon, R.H., & MacKie-Mason, J. 1994. Tax distortions to the choice of organizational form. Journal of Public Economics, 55(2): 279–306.CrossRefGoogle Scholar
  26. Gordon, R.H., & Wilson, J.D. 1986. An examination of multijurisdictional corporate income taxation under formula apportionment. Econometrica, 54(6): 1357–1373.CrossRefGoogle Scholar
  27. Gordon, R.H., & Wilson, J.D. 1989. Measuring the efficiency cost of taxing risky capital income. American Economic Review, 79(3): 427–439.Google Scholar
  28. Gresik, T. 2001. The taxing task of taxing transnationals. Journal of Economic Literature, 39(3): 800–838.CrossRefGoogle Scholar
  29. Gresik, T. 2010. Separate accounting vs. formula apportionment: A private information perspective. European Economic Review, 54(1): 133–149.CrossRefGoogle Scholar
  30. Gresik, T. 2016. Allowing firms to choose between separate accounting and formula apportionment taxation. Journal of Public Economics, 138, 32–42.CrossRefGoogle Scholar
  31. Gutiérrez, G., & Philippon, T. 2018. How EU markets became more competitive than US markets: A study of institutional drift. NBER Working Paper No. 24700.Google Scholar
  32. Heckemeyer, J., & Overesch, M. 2017. Multinationals’ profit response to tax differentials: Effect size and shifting channels. Canadian Journal of Economics, 50, 965–994.CrossRefGoogle Scholar
  33. International Chamber of Commerce (ICC). 2017. ICC comments on the OECD request for input on work regarding the tax challenges of the digitalised economy. https://iccwbo.org/publication/icc-comments-oecd-request-input-work-regarding-tax-challenges-digitalised-economy/. Accessed January 29, 2019.
  34. International Chamber of Commerce (ICC). 2018. 3 ways digitalisation is shaping the future of taxation. 3 July. https://iccwbo.org/media-wall/news-speeches/3-ways-digitalisation-shaping-future-taxation/. Accessed January 21, 2019.
  35. Jogarajan, S. 2011. Prelude to the international tax treaty network: 1815–1914 early tax treaties and the conditions for action. Oxford Journal for Legal Studies, 31(4): 679–707.CrossRefGoogle Scholar
  36. Jones, R.C. 1933. Taxation of foreign and national enterprises: Allocation accounting for the taxable income of industrial enterprises, Vol. 5. League of Nations, Geneva. Document no. C.425(c).M.217(c).1933.II.A.Google Scholar
  37. Jones, G., & Khanna, T. 2006. Bringing history (back) into international business. Journal of International Business Studies, 37(4): 453–468.CrossRefGoogle Scholar
  38. Keen, M., & Konrad, K.A. 2013. The theory of international tax competition and coordination. In A.J. Auerbach, R. Chetty, M. Feldstein, & E. Saez (Eds.), Handbook of public economics (Vol. 5): 257–328. Amsterdam: North-Holland.CrossRefGoogle Scholar
  39. Kelly, D. 2005. The International Chamber of Commerce. New Political Economy, 10(2): 259–271.CrossRefGoogle Scholar
  40. Langbein, S.I. 1986. The unitary method and the myth of arm’s length. Tax Notes, 30(17): 625–681.Google Scholar
  41. Langbein, S.I., & Fuss, M.R. 2018. The OECD/G20-BEPS-project and the value creation paradigm: Economic reality disemboguing into the interpretation of the ‘arm’s length’ standard. The International Lawyer, 51(2): 259–409.Google Scholar
  42. League of Nations. 1923. Report on double taxation. Submitted to the Financial Committee by Professors Bruins, Einaudi, Seligman and Sir Josiah Stamp, Geneva: League of Nations, Document E.F.S.73.F.19; April 5.Google Scholar
  43. League of Nations. 1925a. Double taxation and Tax Evasion. Report and Resolutions submitted by the Technical Experts to the Financial Committee of the League of Nations, Geneva: League of Nations, Document F. 212; February.Google Scholar
  44. League of Nations. 1925b. Double Taxation and tax evasion. Extract of the Report of the Financial Committee to the Council of the League of Nations, Geneva: League of Nations, June 8th.Google Scholar
  45. League of Nations. 1927. Double taxation and tax evasion. Report presented by the Committee of Technical Experts on Double Taxation and Tax Evasion, Geneva: League of Nations, C. 216. M 85. 1927 II.Google Scholar
  46. League of Nations. 1928a. Double taxation and fiscal evasion. Collection of international agreements and internal legal provisions for the prevention of double taxation and fiscal evasion. Document C.345.M.102.1928.II. 1st October, Geneva.Google Scholar
  47. League of Nations. 1928b. Double taxation and tax evasion. Report presented by the General Meeting of Government Experts on Double Taxation and Tax Evasion, 1st October Geneva. Document C.562.M.178.1928.II.Google Scholar
  48. League of Nations. 1928c. Double taxation and fiscal evasion. General Meeting of Government Experts, October 1928. Document C.495.M.147.1928.II; Geneva, 19th September.Google Scholar
  49. League of Nations. 1929. Fiscal Committee: Report to the council on the work of the first session of the committee, Geneva. Document C516.M.175.1929.II.Google Scholar
  50. League of Nations. 1930. Fiscal Committee: Report to the council on the work of the first session of the committee, Geneva. Document C.340.M.140.1930.II.Google Scholar
  51. League of Nations. 1935. Fiscal Committee: Report to the Council on the Fifth Session of the Committee, 12–17 June, Geneva. Document C.252.M.124.1935.II.A.Google Scholar
  52. Liesegang, C. 2016. Measuring sales in the apportionment formula: Origin vs. destination principle. Unpublished Ph.D. Dissertation, TU Berlin. https://depositonce.tu-berlin.de/bitstream/11303/6508/3/liesegang_caterina.pdf. Accessed September 5, 2018.
  53. McLure, C.E. 1980. The state corporate income tax: Lambs in wolves’ clothing. In A.J. Aaron & M.J. Boskin (Eds.), The economics of taxation: 327–336. Washington, DC: The Brookings Institution.Google Scholar
  54. Mintz, J., & Smart, M. 2004. Income shifting, investment, and tax competition: Theory and evidence from provincial taxation in Canada. Journal of Public Economics, 88(6): 1149–1168.CrossRefGoogle Scholar
  55. Mudambi, R., & Puck, J. 2016. A global value chain analysis of the ‘regional strategy’ perspective. Journal of Management Studies, 53(6): 1076–1093.CrossRefGoogle Scholar
  56. Nielsen, S. B., Raimondos-Møller, P., & Schjelderup, G. 2010. Company taxation and tax spillovers: Separate accounting versus formula apportionment. European Economic Review, 54(1): 121–132.CrossRefGoogle Scholar
  57. OECD. 2018a. Consumption tax trends 2018: VAT/GST and excise rates, trends and policy issues. Paris: OECD Publishing.  https://doi.org/10.1787/ctt-2018-en. Accessed January 18, 2019.
  58. OECD. 2018b. Tax challenges arising from digitalisationInterim report 2018: Inclusive framework on BEPS. OECD/G20 Base Erosion and Profit Shifting Project. Paris: OECD Publishing. http://dx.doi.org/10.1787/9789264293083-en. Accessed January 18, 2019.
  59. OECD. 2019. Addressing the tax challenges of the digitalisation of the economyPolicy note. As approved by the Inclusive Framework on BEPS on 23 January 2019. OECD/G20 Base Erosion and Profit Shifting Project. http://www.oecd.org/tax/beps/policy-note-beps-inclusive-framework-addressing-tax-challenges-digitalisation.pdf. Accessed January 30, 2019.
  60. Ramboll Management Consulting & Corit Advisory. 2015. Study on structures of aggressive tax planning and Indicators, Taxation Papers, No 61, DG Taxation and Customs Union, European Commission.Google Scholar
  61. Riedel, N., & Runkel, M. 2007. Company tax reform with a water’s edge. Journal of Public Economics, 91(7/8): 1533–1554.CrossRefGoogle Scholar
  62. Rixen, T. 2008. The political economy of international tax governance. Transformations of the State series. Hampshire and New York: Palgrave Macmillan.CrossRefGoogle Scholar
  63. Runkel, M., & Schjelderup, G. 2011. The choice of apportionment factors under formula apportionment. International Economic Review, 52(3): 913–934.CrossRefGoogle Scholar
  64. Spinosa, L., & Chand, V. 2018. A long-term solution for taxing digitalized business models: Should the permanent establishment definition be modified to resolve the issue or should the focus be on a shared taxing rights mechanism? Intertax, 64(6–7): 476–494.Google Scholar
  65. Tizhong, L., & Wang, X. 2013. ‘China country practices’. In United Nations Department of Economic and Social Affairs, United Nations practical manual on transfer pricing for developing countries: 374–387. New York: United Nations.Google Scholar
  66. Toffler, A. 1970. Future shock. New York: Bantam Books.Google Scholar
  67. UNCTAD. 2017. World investment report 2017: Investment and the digital economy. Geneva: United National Conference on Trade and Development.Google Scholar
  68. United Nations. 1951. International tax agreements. Vol. III, World guide to international tax agreements 1843–1951. New York: United Nations.Google Scholar
  69. Valente, P. 2018. Digital revolution. Tax revolution? Special reports. Tax Notes International, 72(4a): 117–126.Google Scholar
  70. Verbeke, A., & Asmussen, C.G. 2016. Global, local or regional? The locus of MNE strategies. Journal of Management Studies, 53(6): 1051–1075.CrossRefGoogle Scholar
  71. Wilk, K. 1940. International organization and the international chamber of commerce. Political Science Quarterly, 55(2): 231–246.CrossRefGoogle Scholar

Copyright information

© Academy of International Business 2019

Authors and Affiliations

  1. 1.Department of Business Strategy and Innovation, Griffith Business SchoolGriffith UniversityNathanAustralia
  2. 2.School of Economics and FinanceQUTBrisbane CityAustralia

Personalised recommendations