Focus: The World Needs To Revamp International Tax Cooperation

Abstract

FOCUS | TAX AND TRADE UNION RIGHTS 19 25/1 | International Union Rights | The international system of taxing companies, which was designed in the early twentieth century by the developed world, has become obsolete in our current globalised world. These days, almost half of world trade takes place between parent companies and subsidiaries of multinational companies and the service sector represents the lion share of global GDP. But the system of international corporate taxes still follows rules that were set a century ago. Since 2015, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) has promoting major changes of these rules. Established by a broad coalition of civil society and consisting of members from all continents and diverse backgrounds, the Commission aims to foster the corporate tax reform debate at the international level, and to promote institutions appropriate for this cause. Contrary to the high levels of international integration we have reached, the international corporate tax system is based on the separate entity principle, according to which every firm that is part of a multinational group, whether it be parent company or subsidiary, is treated as an independent legal entity when it comes to paying taxes. This generates important problems in accounting and taxation, given that the price at which a business transaction between two companies from the same group is valued, known as the transfer price, may be very different from the value of a business transaction between non-related companies, a fully competitive price known as the arm’s length price. In theory, the transfer prices should be similar to the arm’s length prices. However, it is difficult, or even impossible, to guarantee this fact. Moreover, the importance of this problem has increased due to the growing proportion of intangible assets companies have, including their intellectual property – patents, royalties, brand names, registered trademarks –, their management system and their business networks. When transactions within the same group involve these intangible assets, the principle of the arm’s length price does not work, since these transactions are not comparable to others on the market. This structure creates huge opportunities for tax abuses. To this we need to add the loans between parent companies and subsidiaries and the way they distribute the fixed costs of the administration of the multinational group. The more complex the network of companies tied to the same group is, the easier it is, therefore, to avoid paying taxes. On top of that, it is difficult for tax authorities, even the most efficient ones, to call such transactions and transfers into question. What this implies is that the present focus on separate legal entities and its system of transfer pricing is inconsistent with an economy that is globalised and knowledge-based. The abusive tax practices of many multinationals have arisen indignation in the public eye and led various governments and parliaments to investigate many of the most emblematic corporations in the world. The inquiries are bringing to light the aggressive tax engineering employed by the large multinationals, as well as the tax competition countries enter into to attract investment. Even more, in many cases the tax benefits multinationals take advantage of ‘tax holidays’, customs-free zones, investment agreements, or the acceptance of complex corporate ownership structures. All of these practices stem from lobbying by corporations, and from competition between governments to attract investments. The symbols of tax competition are the classic tax haven, offering low or zero tax rates, and the extensive networks of special economic zones with generous exemptions from direct taxation as well as various other tax advantages. The benefits are accompanied by secrecy to protect owners and prevent financial and regulatory authorities from other countries from checking these companies’ balance sheets. The irony of all this is that these offshore centres only exist because they are tolerated by the major developed countries or even created by them. The leaking of the ‘Panama Papers’, the ‘Bahama Leaks’ and, most recently, the ‘Paradise Papers’ have revealed the global scope of these networks, which are enabled and supported by a chain of banks, accounting firms and legal advisers. When tax secrecy is combined with special exemptions, this may attract and facilitates money laundering and a...