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Tuesday, December 3, 2019 / 02:08PM
/ OpEd By Joseph E Stiglitz */ Cfi.co / Header Image Credit: Twitter
Globalisation
has gotten a bad rap in recent years, and often for good reason. But some
critics, not least US President Donald Trump, place the blame in the wrong
place, conjuring up a false image in which Europe, China, and developing
countries have snookered America's trade negotiators into bad deals, leading to
Americans' current woes. It's an absurd claim: after all, it was America - or,
rather, corporate America - that wrote the rules of globalisation in the first
place.
That said,
one particularly toxic aspect of globalisation has not received the attention
it deserves: corporate tax avoidance. Multinationals can all too easily
relocate their headquarters and production to whatever jurisdiction levies the
lowest taxes. And in some cases, they need not even move their business
activities, because they can merely alter how they "book" their income on
paper.
Starbucks, for example, can continue to expand in the United Kingdom while paying
hardly any UK taxes, because it claims that there are minimal profits there.
But if that were true, its ongoing expansion would make no sense. Why increase
your presence when there are no profits to be had? Obviously, there are
profits, but they are being funneled from the UK to lower-tax jurisdictions in
the form of royalties, franchise fees, and other charges.
This kind
of tax avoidance has become an art form at which the cleverest firms,
like Apple, excel. The aggregate costs of such practices are
enormous.
According
to the International Monetary Fund, governments lose at least $500 billion per
year as a result of corporate tax shifting. And Gabriel Zucman of the
University of California, Berkeley, and his colleagues estimate that some 40%
of overseas profits made by US multinationals are transferred to tax havens. In
2018, 60 of the 500 largest companies - including Amazon, Netflix,
and General Motors - paid no US tax, despite reporting joint
profits (on a global basis) of some $80 billion. These trends are having a
devastating impact on national tax revenues and undermining the public's sense
of fairness.
Since the
aftermath of the 2008 financial crisis, when many countries found themselves in
dire financial straits, there has been growing demand to rethink the global
regime for taxing multinationals. One major effort is the OECD's Base Erosion
and Profit Shifting (BEPS) initiative, which has already yielded significant
benefits, curbing some of the worst practices, such as that associated with one
subsidiary lending money to another. But, as the data show, current efforts are
far from adequate.
The fundamental
problem is that BEPS offers only patchwork fixes to a fundamentally flawed and
incorrigible status quo. Under the prevailing "transfer price system," two
subsidiaries of the same multinational can exchange goods and services across
borders, and then value that trade "at arm's length" when reporting income and
profits for tax purposes. The price they come up with is what they claim it
would be if the goods and services were being exchanged in a competitive market.
For obvious
reasons, this system has never worked well.
How does
one value a car without an engine, or a dress shirt without buttons? There are
no arm's-length prices, no competitive markets, to which a firm can refer. And
matters are even more problematic in the expanding services sector: how does
one value a production process without the managerial services provided by
headquarters?
The ability
of multinationals to benefit from the transfer price system has grown, as trade
within companies has increased, as trade in services (rather than goods) has
expanded, as intellectual property has grown in importance, and as firms have
gotten better at exploiting the system. The result: the large-scale shifting of profits across borders,
leading to lower tax revenues.
It is
telling that US firms are not allowed to use transfer pricing to allocate
profits within the US. That would entail pricing goods repeatedly as they cross
and re-cross state borders. Instead, US corporate profits are allocated to different
states on a formulaic basis, according to factors such as employment, sales,
and assets within each state. And, as the Independent Commission for the Reform
of International Corporate Taxation (of which I am a member) shows in its
latest declaration, this approach is the only one that will work at the global
level.
For its
part, the OECD will soon issue a major proposal that could move the current
framework a little in this direction. But, if reports of what it will look like
are correct, it still would not go far enough. If adopted, most of a
corporation's income would still be treated using the transfer price system,
with only a "residual" allocated on a formulaic basis. The rationale for this
division is unclear; the best that can be said is that the OECD is canonising
gradualism.
After all,
the corporate profits reported in almost all jurisdictions already include
deductions for the cost of capital and interest. These are "residuals" - pure
profits - that arise from the joint operations of a multinational's global
activities. For example, under the 2017 US Tax Cuts and Jobs Act, the total
cost of capital goods is deductible in addition to some of the interest, which
allows for total reported profits to be substantially less than true economic profits.
Given the
scale of the problem, it is clear that we need a global minimum tax to end the
current race to the bottom (which benefits no one other than corporations).
There is no evidence that lower taxation globally leads to more investment. (Of
course, if a country lowers its tax relative to others, it might "steal" some
investment; but this beggar-thy-neighbor approach doesn't work globally.) A
global minimum tax rate should be set at a rate comparable to the current
average effective corporate tax, which is around 25%. Otherwise, global
corporate tax rates will converge on the minimum, and what was intended to be a
reform to increase taxation on multinationals will turn out to have just the
opposite effect.
The world
is facing multiple crises - including climate change, inequality, slowing
growth, and decaying infrastructure - none of which can be addressed without
well-resourced governments. Unfortunately, the current proposals for reforming
global taxation simply don't go far enough. Multinationals must be compelled to
do their part.
About the Author
Joseph E Stiglitz, University Professor at Columbia University, is the co-winner of the 2001 Nobel Memorial Prize, former chairman of the President's Council of Economic Advisers, and former Chief Economist of the World Bank. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent.
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