Sun, Feb 17, 2019 - Page 7 News List

Getting tax payments from freewheeling multinationals

Giant corporations claim to be socially responsible, but globalization has enabled them to bilk governments out of the tax revenue communities need to function

By Joseph E. Stiglitz

Over the past few years, globalization has come under renewed attack. Some of the criticisms might be misplaced, but one is dead on: Globalization has enabled large multinationals, such as Apple, Google and Starbucks, to avoid paying tax.

Apple has become the poster child for corporate tax avoidance, with its legal claim that a few hundred people working in Ireland were the real source of its profits, and then striking a deal with that country’s government that resulted in it paying taxes amounting to .005 percent of its profit.

Apple, Google, Starbucks and companies like them all claim to be socially responsible, but the first element of social responsibility should be paying one’s fair share of tax. If everyone avoided and evaded taxes like these companies, society could not function, much less make the public investments that led to the Internet, on which Apple and Google depend.

For years, multinational corporations have encouraged a race to the bottom, telling each country that it must lower its taxes below that of its competitors.

US President Donald Trump’s 2017 tax cut culminated that race. A year later, the results are obvious: The sugar high that it brought to the US economy is quickly fading, leaving behind a mountain of debt.

Spurred on by the threat that the digital economy would deprive governments of the revenue to fund function — as well as distorting the economy away from traditional ways of selling — the international community is at long last recognizing that something is wrong.

However, the flaws in the framework of multinational taxation — based on so-called transfer pricing — have long been known.

Transfer pricing relies on the well-accepted principle that taxes should reflect where an economic activity occurs, but it is less clear how that is determined.

In a globalized economy, products move repeatedly across borders, typically in an unfinished state: a shirt without buttons, a car without a transmission and a wafer without a chip. The transfer price system assumes that values for each stage of production can be estimated and that therefore the value added within a country can be assessed.

However, this is impossible.

The growing role of intellectual property and intangibles makes matters even worse, because ownership claims can easily be moved around the world. That is why the US long ago abandoned using the transfer price system within the US, in favor of a formula that attributes companies’ total profits to each state in proportion to the share of sales, employment and capital there. Such a system must be adopted at the global level.

However, how that is actually done makes a great deal of difference. If the formula is based largely on final sales, which occur disproportionately in developed countries, developing countries would be deprived of needed revenues, which would be increasingly missed as fiscal constraints diminish aid flows.

Final sales might be appropriate for taxation of digital transactions, but not for manufacturing or other sectors, in which it is vital to include employment as well.

Some worry that including employment might exacerbate tax competition, as governments seek to encourage multinationals to create jobs in their jurisdictions.

The appropriate response to this concern is to impose a global minimum corporate-income tax. The US and the EU could — and should — do this on their own. If they did, others would follow, preventing a race in which only the multinationals win.

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