Willie Sutton’s famous but apocryphal explanation for why he robbed banks — “because that’s where the money is” — is also why the US is doomed to failure in its latest antic against the rules-based international economic order.
Washington has called for a halt to talks about reforming the system for taxing multinational corporations. It has also threatened to retaliate against European countries that introduce their own unilateral levies on the turnover of (mostly American) global digital companies. But with government budgets everywhere bleeding money, US objections to other countries casting their tax nets over the world’s Googles and Facebooks should fall on deaf ears.
The existing system for avoiding double taxation of cross-border corporate activity was designed for a world that no longer exists. Bilateral tax treaties from half a century ago allocate taxable profits to the country of a company’s legal residence. But the ease with which residence can be moved to the lowest-taxed jurisdictions, especially after the rise of the internet economy, means that the old tax treaties’ purpose of no double taxation has too often delivered opportunities of double non-taxation.
The use of these opportunities has exploded in the past few decades. More than one-third of all foreign direct investment is “phantom” investment, designed to minimise tax liabilities, according to research by the IMF and the University of Copenhagen. It reflects corporate structures designed to take advantage of tax and legal differences rather than to manage actual productive activity.
The economist Gabriel Zucman and his collaborators have estimated that the US and the major European economies collect 14-28 per cent less in corporate tax revenue than they would with the same rates if there were no such profit-shifting by multinational corporations. After the blow to public sector finances from the coronavirus pandemic, these are leaks governments can no longer afford to leave unplugged.
Why, then, is the US balking? Do not take for granted that it is. Donald Trump rages against European governments daring to touch a tax base the president sees as exclusively for the US to tax (or decline to tax). But, sotto voce, this is one area where the US has actually engaged in constructive multilateralism. Even now, the US Treasury is at pains to say it is not leaving the negotiating table altogether.
The tax spat may just as well be a pretext for threatening tariffs on European trading partners — as Mr Trump has already done against France, and as a swath of new US investigations prepares the ground against others — which is just the sort of aggressiveness he wants to flaunt in his 2020 re-election campaign.
If the US does pull out of talks altogether, it will be shooting itself in the foot. The multilateral process it may or may not be torpedoing promises a much better outcome for Washington, and for the world, than the unilateral European measures that started it, since it targets profit-shifting more broadly than purely digital activities. While new “taxing rights” proposed in the multilateral discussions will expose digital corporations further to Europe’s taxmen, the US’s own Internal Revenue Service will have more access to the profits of, say, French luxury goods exporters. The proposed new system may not alter the division of the tax base between major economies much at all.
Why, then, does reform matter? Because it will allow governments to decide their corporate tax rate with less fear that profits will simply be shifted into tax havens.
The existing system has long been unjustifiable, and only inertia and corporate lobbying have protected it for this long. Reform is good for public finances, fairness, and even productivity as it would level the playing field between multinational and local business. This is why even unilateral measures should be broadened to take in all multinational activity, not just digital services.
This is true for the US too. But “it’s a fool looks for logic in the chambers of the human heart”, as the Coen brothers had George Clooney say — especially if that heart is Mr Trump’s.
European governments should not waste time thinking about how they can entice the egotist in the White House back into the talks. They should instead treat multinational tax reform the way they have the Iran nuclear deal: too important to be scuppered by US sabotage — or indeed by the EU’s own corporate tax havens.
Until either EU-level or global reform is a reality, individual countries should double down on unilateral measures. In this case, history shows unilateral action is the best way to keep the multilateral show on the road.
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