Tax campaigners insisted on Tuesday that the OECD’s review of the international tax system should not rule out the option of unitary taxation, while leading tax professionals warned that such a regime would create significant practical difficulties.
Formulary apportionment is a ‘daft’ idea, says Bill Dodwell.
Ernst & Young found that formulas ‘compete, to drive business from one state to another’.
Christian Aid witness expresses reservations but insists unitary taxation should be explored.
Tax campaigners insisted on Tuesday that the OECD’s review of the international tax system should not rule out the option of unitary taxation, while leading tax professionals warned that such a regime would create significant practical difficulties. Alex Prats, principal economic justice adviser at Christian Aid, told peers that he recognised that unitary taxation might be detrimental to developing countries, and the Private Eye journalist Richard Brooks said a system of formulary apportionment could create ‘a whole new set of problems’.
Tax professionals and campaigners were giving evidence to the House of Lords Economic Affairs Committee’s Inquiry exploring ‘whether a new approach is needed to taxing corporations in the modern global economy’. Lord MacGregor asked four leading tax advisers for their solution to the problem of tax avoidance by some large multinationals, which had attracted ‘enormous public and media interest’.
Bill Dodwell, head of tax policy at Deloitte, said there was a need to look at the system of allocating profits of digital business, but pointed out that much of the profit associated with products delivered digitally was already taxed. Ultimately, there could be ‘some form of allocation of profits from sales-based activity, according to where the users of the service are actually based’.
Chris Sanger, global head of tax policy at Ernst & Young, said it was right to revisit tax rules designed long ago. ‘But we do have to accept that this is like a tug-of-war. If you give more taxing rights to one country, you’re going to be taking them away from another.’ Richard Collier, tax partner at PwC, said his firm would support a re-assessment of the framework of international taxing rights.
Adam Broke, tax specialist at Mercer & Hole, said the current controversy highlighted a ‘mismatch between the old concept of permanent establishment and the new use of [website] servers deemed to be a permanent establishment’. As a consequence of this, Broke said, there was a mismatch between ‘what common sense would tell you the allocation should be and what is actually happening’.
Lord Hollick asked the witnesses what they thought of the EC’s proposal for ‘radical reform based on a formula for apportionment [of profits]’. Dodwell said the idea was ‘daft’. Any country that signed up would be losing control of its tax system, he argued, to ‘unelected officials’. There would be ‘massive’ practical difficulties in working out the tax base.
Dodwell added: ‘Most of the formulas proposed don’t really satisfactorily deal with the economic drivers of business. They completely miss out any allocation for intangible assets, which are fundamental to today’s developing businesses.’ Such a formula was likely to drive revenue out of the UK, he suggested.
Sanger said Ernst & Young had studied the development of formulary apportionment as applied by US states. ‘Each state is able to choose between elements of the formula. We’ve seen the development of formulas that compete, to drive business from one state to another. You actually see a shift in tax competition, not over the reality but much more about formulas.’
Dodwell said high tax states needed to adapt their formulas to avoid ‘driving away’ employment. ‘Being one of the factors, employment was tending to move out of a high tax state purely to reduce the allocation of profit there.’
In the second evidence session, peers heard from Prats and Brooks; Richard Murphy, director of Tax Research; and Mike Lewis, tax justice policy adviser at ActionAid. Murphy said the arm’s length principle was ‘fundamentally flawed’. He advocated a move ‘over time’ towards unitary taxation.
Prats said there was ‘a lot of evidence’ that developing countries were finding it difficult to find comparable prices and enforce the arm’s length principle. The OECD should undertake ‘serious analysis’ of the potential impact of a move towards unitary taxation, he said.
Brooks said the existing arm’s length principle could be applied ‘practically and usefully’ to conventional business situations. The system could work quite well, he said. ‘The problem [arises] when a multinational carves its business up and puts certain profitable parts, for example intangible assets, patents, trademarks and financial capital, in a low tax area. Only in the most egregious circumstances do the existing rules allow [tax authorities] to strike that out. Of course, well advised multinationals don’t go near those circumstances. In effect, they are allowed to allocate profits pretty much at will, according to intangible assets and financial capital. And you end up with some truly, truly bizarre results.’
But Brooks said he was sceptical about formulary apportionment. ‘There are pitfalls. You are going to create a whole new set of problems.’ Prats acknowledged that unitary taxation might have pitfalls and problems. ‘Depending on how it’s done, it might be actually quite detrimental to the interests of developing countries,’ he said. But it should be explored, given that ‘the current system is creating so much trouble’.
Murphy is one of a team of researchers at the Brighton-based International Centre for Tax and Development (ICTD), funded by the UK’s Department for International Development and the Norwegian Agency for Development Cooperation, engaged in a 12-month programme of research into unitary taxation. Dodwell and Sanger are members of Tax Journal’s editorial board.
Andrew Goodall is a freelance tax writer and journalist: acgoodall@me.com
Tax campaigners insisted on Tuesday that the OECD’s review of the international tax system should not rule out the option of unitary taxation, while leading tax professionals warned that such a regime would create significant practical difficulties.
Formulary apportionment is a ‘daft’ idea, says Bill Dodwell.
Ernst & Young found that formulas ‘compete, to drive business from one state to another’.
Christian Aid witness expresses reservations but insists unitary taxation should be explored.
Tax campaigners insisted on Tuesday that the OECD’s review of the international tax system should not rule out the option of unitary taxation, while leading tax professionals warned that such a regime would create significant practical difficulties. Alex Prats, principal economic justice adviser at Christian Aid, told peers that he recognised that unitary taxation might be detrimental to developing countries, and the Private Eye journalist Richard Brooks said a system of formulary apportionment could create ‘a whole new set of problems’.
Tax professionals and campaigners were giving evidence to the House of Lords Economic Affairs Committee’s Inquiry exploring ‘whether a new approach is needed to taxing corporations in the modern global economy’. Lord MacGregor asked four leading tax advisers for their solution to the problem of tax avoidance by some large multinationals, which had attracted ‘enormous public and media interest’.
Bill Dodwell, head of tax policy at Deloitte, said there was a need to look at the system of allocating profits of digital business, but pointed out that much of the profit associated with products delivered digitally was already taxed. Ultimately, there could be ‘some form of allocation of profits from sales-based activity, according to where the users of the service are actually based’.
Chris Sanger, global head of tax policy at Ernst & Young, said it was right to revisit tax rules designed long ago. ‘But we do have to accept that this is like a tug-of-war. If you give more taxing rights to one country, you’re going to be taking them away from another.’ Richard Collier, tax partner at PwC, said his firm would support a re-assessment of the framework of international taxing rights.
Adam Broke, tax specialist at Mercer & Hole, said the current controversy highlighted a ‘mismatch between the old concept of permanent establishment and the new use of [website] servers deemed to be a permanent establishment’. As a consequence of this, Broke said, there was a mismatch between ‘what common sense would tell you the allocation should be and what is actually happening’.
Lord Hollick asked the witnesses what they thought of the EC’s proposal for ‘radical reform based on a formula for apportionment [of profits]’. Dodwell said the idea was ‘daft’. Any country that signed up would be losing control of its tax system, he argued, to ‘unelected officials’. There would be ‘massive’ practical difficulties in working out the tax base.
Dodwell added: ‘Most of the formulas proposed don’t really satisfactorily deal with the economic drivers of business. They completely miss out any allocation for intangible assets, which are fundamental to today’s developing businesses.’ Such a formula was likely to drive revenue out of the UK, he suggested.
Sanger said Ernst & Young had studied the development of formulary apportionment as applied by US states. ‘Each state is able to choose between elements of the formula. We’ve seen the development of formulas that compete, to drive business from one state to another. You actually see a shift in tax competition, not over the reality but much more about formulas.’
Dodwell said high tax states needed to adapt their formulas to avoid ‘driving away’ employment. ‘Being one of the factors, employment was tending to move out of a high tax state purely to reduce the allocation of profit there.’
In the second evidence session, peers heard from Prats and Brooks; Richard Murphy, director of Tax Research; and Mike Lewis, tax justice policy adviser at ActionAid. Murphy said the arm’s length principle was ‘fundamentally flawed’. He advocated a move ‘over time’ towards unitary taxation.
Prats said there was ‘a lot of evidence’ that developing countries were finding it difficult to find comparable prices and enforce the arm’s length principle. The OECD should undertake ‘serious analysis’ of the potential impact of a move towards unitary taxation, he said.
Brooks said the existing arm’s length principle could be applied ‘practically and usefully’ to conventional business situations. The system could work quite well, he said. ‘The problem [arises] when a multinational carves its business up and puts certain profitable parts, for example intangible assets, patents, trademarks and financial capital, in a low tax area. Only in the most egregious circumstances do the existing rules allow [tax authorities] to strike that out. Of course, well advised multinationals don’t go near those circumstances. In effect, they are allowed to allocate profits pretty much at will, according to intangible assets and financial capital. And you end up with some truly, truly bizarre results.’
But Brooks said he was sceptical about formulary apportionment. ‘There are pitfalls. You are going to create a whole new set of problems.’ Prats acknowledged that unitary taxation might have pitfalls and problems. ‘Depending on how it’s done, it might be actually quite detrimental to the interests of developing countries,’ he said. But it should be explored, given that ‘the current system is creating so much trouble’.
Murphy is one of a team of researchers at the Brighton-based International Centre for Tax and Development (ICTD), funded by the UK’s Department for International Development and the Norwegian Agency for Development Cooperation, engaged in a 12-month programme of research into unitary taxation. Dodwell and Sanger are members of Tax Journal’s editorial board.
Andrew Goodall is a freelance tax writer and journalist: acgoodall@me.com
