On June 2 a group called ICRICT, (the Independent Commission for the Reform of International Corporate Taxation) gathered in Trento, Italy, to release a declaration urging major changes in how governments around the world tax multinational corporations. You can find its declaration here.
In reading these documents, it occurred to me that ICRICT might have chosen Trento as its launch venue because it is literally thousands of miles away from K Street. The substance of the declaration is not exactly what corporate America, or its tax lobbyists, wants to hear.
ICRICT argues that current multilateral efforts to reform the corporate tax (read: the OECD base erosion and profit-shifting project) are “clearly insufficient” and will only serve to propagate the status quo -- which is to say our overly permissive tax regimes that facilitate stateless income aren’t going away anytime soon.
Further, ICRICT observes that this inadequacy arises from institutions promoting international tax cooperation (read: the OECD) not being “inclusive enough” -- which is to say that multinationals hold too great an influence over how their activities and profits will be taxed.
The list of ICRICT commissioners includes Nobel Prize-winning economist Joseph Stiglitz and former United Nations Undersecretary General José Antonio Ocampo. Notably missing is any representative of the business community. The omission, I suspect, is purposeful. The ICRICT declaration is precisely the type of policy report one gets by putting smart people around a table for a few of days and instructing them to fix the global tax system without regard to what business wants.
Radicalism Meets Cynicism
ICRICT’s recommendations for global tax harmonization are well intended and premised on much sound reasoning, but they also strike me as being aspirational and unrealistic.
As the declaration’s authors see it, nothing in the BEPS project will bring meaningful change. Likewise for country-by-country reporting. Ditto for tax haven blacklists and codes of conduct, and diverted profits taxes. That’s all window dressing that masks the real issue. And the root of the problem, according to ICRICT, lies in the unchallenged acceptance of separate entity accounting. The group contends that the best hope for legitimate change is to tax multinational groups as a single unitary business. Only then can transfer pricing based on the arm’s-length standard be assigned to the dustbin of history and replaced with formulary apportionment.
The declaration makes this point rather forcefully:
“[Nations] must reject the artifice that a corporation’s subsidiaries and branches are separate entities entitled to separate treatment under tax law, and instead recognize that multinational corporations act as single firms conducting business activities across international borders.”
I don’t dispute its reasoning. Multinationals themselves often don’t respect the phony contracts and sham lending agreements between their wholly owned affiliates. Separate entity accounting, however flawed, is how the world operates. I can’t see how that will change.
Formulary apportionment sounds eminently rational in an ideal world. But I don’t know how we’d get every government in the global economy to agree on the pesky details of determining the formula. I suspect we’d merely trade one set of compliance and enforcement headaches for a different set of headaches.
The declaration is full of other bright ideas, such as this one:
“All [nations] should proactively disclose to the public tax incentives, tax preferences, and income exclusions provided to multinational corporations.”
Good luck with that. I can appreciate the value in having a well-informed citizenry. But I can’t see the same politicians who approve all these incentives, preferences, and exclusions – many of them resting on dubious merits -- wanting such matters publicly scrutinized. The powers that be will fight that tooth and nail. Sorry, that’s just how it is.
There’s more. The declaration takes a dim view of the global tax treaty network. Those treaties -- at least the ones based on the OECD model -- enshrine the narrowly construed permanent establishment concept. That practice allows multinationals to extract many profits from source countries while paying them little in the way of tax. ICRICT wants the PE concept to be as broad as possible.
The declaration also encourages governments to “avoid restrictions on tax withholding.” ICRICT likes the idea of source countries imposing withholding taxes on outbound income flows. Those withholding taxes are perhaps the best means for a developing nation to tax the economic activity taking place inside its own borders, especially among the extractive industries. No argument there. But again the declaration runs counter to conventional thinking. Ask most tax attorneys and they’ll tell you that reducing (or eliminating) withholding taxes otherwise imposed by the source country is the whole point of entering into a tax treaty.
Ultimately, the ICRICT declaration is a sensible, but radical manifesto. It suffers from its own idealism in viewing corporate taxation as a revenue tool for social change to help societies in need. How quaint. Perhaps I’ve grown cynical from having spent too many years inside the Beltway. I’m inclined to view the corporate tax as a bag of commercial subsidies with a small levy attached. If you’re willing to suspend your disbelief that impossible things can happen, ICRICT’s declaration is definitely worth reading.