Corporation tax as a problem of MNC organisational circuits: The case for unitary taxation

Abstract

The tax practices of multinational corporations have become a matter of significant public and political concern. The underlying issues are rooted in the capacity of MNCs to construct organizational circuits that enable taxes to be minimised in (ambiguously) legal ways. This is tax avoidance. Organizational circuits are one example of what Seabrooke and Wigan refer to as global wealth chains. The capacity to avoid tax arises because of the way MNCs are treated as a series of separate entities, subject to the arm's length principle. Unitary taxation based on formula apportionment provides a potential solution to the problems. This paper provides an overview of how tax avoidance is achieved, the problems that arise from this, and the benefits of unitary taxation as an alternative, and places this in the context of current policy trends. The purpose of the paper is to improve awareness amongst a politically literate academic readership of key issues for the main alternative to the current problematic situation.

The Emerging International Taxation Problems

“…This section reviews some of the literature to see what has been done and what lies ahead. Morgan (2016) investigated the root of international taxation problems, arguing profits ought to be reported as to the place where they are created. Presently, MNCs derive profits from many places around the world, which can confuse the origin of their profits.…”

Brexit and Global Wealth Chains

“…This involves establishing a common tax base or harmonising corporate tax rules across all European jurisdictions and allocating corporate group profits to each member state according to a formula including, for instance sales, labour force and capital. This has the potential to greatly reduce the space corporations have enjoyed to shift profits to low or no tax jurisdictions and losses to high tax jurisdictions via transfer pricing or intra-firm financing (Morgan, 2016;Seabrooke and Wigan, 2016). In so far as this form of tax reporting provides a gauge of what might be a reasonable allocation of profits to Britain by a multinational operating in Europe, such allocations will become open to dispute, and disproportional or diverted profits in Britain may lead member states and the Commission to seek redress through blacklisting on the basis of contravention of OECD norms, particularly those promulgated under the BEPS initiative.…”

Piketty and the Growth Dilemma Revisited in the Context of Ecological Economics

“…This applies to both the past and the future. So, Jackson and Victor may construct a model to establish that progressive taxation can be a means to reduce inequality over time, but there remains a great deal of work to do that is not easily modeled regarding how to design systems that address the norms of equity and problems of both tax avoidance and evasion, all of which may confound a model (Morgan, 2016b). Likewise, Piketty's work has come under significant criticism regarding the viability of the institutional basis of his global wealth tax.…”