Multinational corporations, stateless income and tax havens - ACCA

24 Pages·2014·0.53 MB·English

Multinational corporations, stateless income
and tax havens
About ACCA
This report provides evidence to
show that the corporate income
tax system is not ‘broken’ and that
the corporate income tax base is
not being eroded.

ACCA (the Association of Chartered Certified
Accountants) is the global body for professional It offers a critique of the stateless
accountants. We aim to offer business-relevant, first-
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© The Association of Chartered Certified Accountants
M24arch 2014
Multinational corporations, stateless
income and tax havens
Sinclair Davidson
School of Economics, Finance and Marketing, RMIT University
The Council of the Association of Chartered Certified Accountants consider this study to be a worthwhile contribution to
discussion but do not necessarily share the views expressed, which are those of the author alone. No responsibility for loss
occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by the
author or publisher.
ABOUT THE AUTHOR
Sinclair Davidson is professor in the School of Economics, Finance and Marketing at RMIT University in Melbourne Australia,
and a senior fellow at the Institute of Public Affairs. Sinclair has published in academic journals such as the European Journal of
Political Economy, Review of Political Economy, Journal of Economic Behavior and Organization, and the Cato Journal. Sinclair is
also a regular contributor to Australian public debate. His opinion pieces have been published in The Age, The Australian,
Australian Financial Review, Sydney Morning Herald, and Wall Street Journal Asia.
‘The decline in corporate-tax collection in recent decades has contributed to
budget deficits. It has also aggravated income inequality: a company’s
shareholders ultimately pay its taxes, and with a smaller tax bill, shareholders, who
tend to be much more affluent than the average American, see their wealth
increase. It’s clearly a broken system.’
MICHELLE HANLON, AN ACCOUNTING PROFESSOR, MIT
‘Corporate taxes burst into the spotlight last week, with the release of a Senate
committee report on Apple’s tactics to reduce its tax payments. More quietly, but
perhaps more significantly, the House Ways and Means Committee has begun
work on a potential overhaul of the tax code. Edward D. Kleinbard, a tax expert
and former Democratic Congressional aide, said he had been impressed so far by
the seriousness of the committee’s work.’
DAVID LEONHARDT, ‘WHO WILL CRACK THE CODE?’, THE NEW YORK TIMES, 25 MAY 2013.
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Contents
1. Introduction 5
2. The fiscal challenge 7
3. Corporate income tax and fiscal illusion 9
4. A critique of the stateless income doctrine 11
5. Stateless income and tax rents 13
6. Tax havens and multinational corporations 14
7. Is the corporate tax base being eroded? 17
8. Conclusion 19
References 20
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1. Introduction
It is commonly argued that the fundamental assumptions underlying secrecy laws or any of the so-called
corporate income tax system is corporate income tax rules, which abusive practices that the OECD has
‘broken’. Twenty-five years of tax originated when economic activity had associated with the use of tax havens in
competition have seen corporate ‘an unambiguous physical location’ and reducing corporate tax liability. These
income tax rates reduced. The revenue so could be taxed in that location corporations are fully compliant with
actually collected by corporate income (Australian Treasury 2013). Those the tax law in the jurisdictions in which
tax, however, has not declined as much. assumptions of taxation have not been they operate.
The latest theoretical argument changed since the advent of the digital
suggesting that the corporate income economy – the physical location of SO WHY THE FUSS?
tax base is likely to be eroded is the economic activity is simply not to the
‘stateless income doctrine’. This report liking of the UK or US governments. Most advanced economies have large
is a critique of that doctrine. First, the Much of the activity that Apple, Google fiscal deficits and little prospect of
doctrine ignores the value of and Starbucks undertake is not sourced returning their budgets to surplus. It is
intellectual property. Second, it is not within the UK or US and hence is not quite clear that excessive expenditure is
clear that the doctrine relates to the taxable in those jurisdictions. the basis for these fiscal deficits. One
erosion of the corporate income tax possible solution to the fiscal
base. Certainly there is no evidence to Recently, the Wall Street Journal (2013) challenges that these economies face is
support the view that the corporate explained what was going on: to increase taxes. Increasing corporate
income tax base is being eroded. At tax is a politically desirable policy given
best, the concern about the tax base is ‘The Apple units are based in Ireland, the fiscal illusion that surrounds this
not so much that it is being eroded, but so US law does not consider them to be form of taxation. First, there is a
rather that multinational corporations US corporations subject to US widespread perception that large
do not pay tax in every host economy. corporate tax. But since they are corporations pay very little corporate
managed and controlled by Apple in income tax. Indeed the ‘scandals’ that
Public outrage over the ‘low’ amounts the US, Irish law doesn’t consider them surround Apple, Google, and Starbucks
of corporate income tax paid by Irish companies and thus they are also would appear to confirm that view.
multibillion dollar corporations such as not subject to the 12.5% Irish corporate Secondly, it is not clear where the
Apple, Google, and Starbucks has tax. This isn’t alchemy; it’s economic incidence of the corporate
galvanised the UK and US governments accountancy… income tax falls.
into action. T he British prime minister,
David Cameron, has suggested that tax ‘None of this required a Senate The past 25 years or so have seen
planning has become too aggressive. “investigation” to discover because substantial tax competition between
The US Senate has a sub-committee Apple is constantly inspected by the IRS nations – this has resulted in a decline in
investigating the amount of tax that and other tax authorities. These tax corporate income tax rates. The
multinational corporations pay. collectors are well aware of Apple’s question is whether this has resulted in
corporate structure, which has large declines in the revenue that has
The difficulty facing both the UK and US remained essentially the same since been raised by this tax. Surprisingly,
tax authorities is that there is little 1980. An Apple executive said Tuesday there is little evidence to support the
evidence of any wrongdoing by any of that the company’s annual US tax return notion that tax competition has
the three corporations that are regularly adds up to a stack of paperwork more reduced actual corporate income tax
singled out for abuse. It is true that than two feet high. revenues. Nonetheless, that is the
these corporations do not pay as much popular conception and the OECD and
tax in the UK or the US as those ‘We wonder what the Irish think of the various European politicians have
governments would like them to pay, spectacle of an American Senator advocated tax rate harmonisation
but they pay as much tax as is required expressing outrage that an American among nations.
by the laws that those governments company doesn’t pay enough Irish
have passed. taxes.’ The latest theoretical argument to
support the notion of tax rate
The argument that we hear is that the It is important to note that these harmonisation is the so-called ‘stateless
‘digital economy’ has challenged the activities do not make use of bank income doctrine’ developed by
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Professor Edward Kleinbard of the An implicit assumption of the stateless ‘stateless’ is small and the returns on a
University of Southern California. Under income doctrine is that multinational harmonised global tax system would
this theory, multinational corporations corporations maximise their value to also be small. There is no evidence to
are able to generate income that is society only when they pay tax. Of support the hypothesis that the UK or
apparently untaxed. The ‘double Irish course, this is not the case. the US corporate income tax base is
Dutch sandwich’ tax strategy is a Multinational corporations provide being eroded.
mechanism for generating such income. investment, create jobs, facilitate
This doctrine ignores, or at least innovation transfers, provide goods and The next section will show that
seriously undervalues, assets such as services, and also pay tax. As it is, ‘advanced economies’ face a fiscal
intellectual property and trademarks. corporations do not pay only corporate challenge. This creates the context for a
Consider, for example, the consumption income tax; they also pay payroll taxes, tax grab. Following that is an
of a coffee from Starbucks. The local rates, and a host of other charges explanation of the concept of fiscal
consumer is not simply consuming a and levies. The corporate income tax is illusion, and why corporate income tax
coffee – an inexpensive, easily only one among many other taxes. To is the ideal candidate for increasing the
manufactured, homogeneous product. judge the merit of a multinational tax burden as a partial means of
Rather consumers are consuming an corporation only by the corporate resolving the fiscal challenge that
experience where the coffee is only one income tax it pays is to ignore the real high-income economies face. There
component of a branded product. economic value of these organisations. follows a critique of the stateless
Drinking a Starbucks coffee is either a income doctrine and discussion of the
form of conspicuous consumption or a The argument is that the corporate interaction between tax havens and
reduction in information and search income tax base is being eroded by multinational corporations. Finally, this
costs for consumers in a strange city aggressive tax planning by multinational report presents evidence that the
who wish to consume a product of corporations – yet the evidence to corporate income tax base is not being
known quality. The brand itself is the support this argument is lacking. It is eroded.
value and, unsurprisingly, a royalty one thing to point out that multinational
payment for the use of that brand is corporations do not pay tax in some A conclusion sums up the evidence
paid to the owner of the brand. Again jurisdictions but that says nothing about presented.
unsurprisingly, the owner of that brand the actual corporate income tax base.
locates the brand in the legal To the extent that corporate income tax
jurisdiction where its value is revenues have fallen in recent years, this
maximised. is more likely to be a result of poor
economic conditions than aggressive
There is no such thing as ‘stateless tax planning.
income’, rather there is income that the
governments of the UK and the US do This report provides evidence to show
not tax because under their own legal that the corporate income tax system is
systems that income is not sourced in not ‘broken’ as some suggest. So-called
their economy. When these ‘stateless income’ is a return on
governments complain about stateless intellectual property and the idea that
income, the question rather should be, there is such a thing depends on its
‘Why do the owners of intellectual proponents’ disregard of intellectual
property not locate their property in property. The amount of actual income
your economy?’. that could be described as being
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2. The fiscal challenge
The so-called ‘advanced economies’ of Figure 2.1: The fiscal challenge faced by advanced economies
the world face a fiscal crisis. Since the
start of the 21st century these 50
economies have, on average, 48
experienced budget deficits where
46
government expenditure has massively
outstripped government revenue. This 44
budgetary behaviour preceded the 42
2008 financial crisis and the IMF
40
forecasts that it will continue until at
least 2018 (Figure 2.1). 38
36
This fiscal challenge becomes even
34
more apparent when we consider the
euro area. While the pattern of deficits 32
is similar to that of the advanced 30
economies overall, the quantum of
emxupcehn hdiigtuhreer a(Fnidg utarex a2t.i2o)n. has been 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
For all the talk of ‘austerity’ the fact
General government revenue General government total expenditure
remains that the IMF does not foresee
that government expenditure will return Source: International Monetary Fund (2013).
to pre-2008 levels by 2018. At the same
time, however, the IMF indicates that
government revenue figures have
Figure 2.2: The fiscal challenge faced by the euro area
already returned to pre-2008 levels.
52
50
48
46
44
42
40
38
36
34
32
30
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8
200 200 200 200 200 200 200 200 200 200 201 201 201 201 201 201 201 201 201
General government revenue General government total expenditure
Source: International Monetary Fund (2013).
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This very simple analysis suggests that, Democratic societies have a tendency
in general, lax expenditure discipline is to run budget deficits through
the primary driver behind the fiscal excessive expenditure and this was the
challenges that these economies face. case even before the 2008 financial
This is unsurprising. As James crisis. At the same time, however,
Buchanan, the 1986 Nobel Laureate, government cannot be too brazen in its
and Richard Wagner explained in their management of the budget and as such
1977 book Democracy in Deficit: The also engages in a political strategy
Political Legacy of Lord Keynes (1977: known as ‘fiscal illusion’.
105–6):
Fiscal illusion occurs when government
‘Democratic societies will tend to resort attempts to distort citizens’ fiscal
to an excessive use of debt finance consciousness about the nature and
when they have permitted Keynesianism scope of government expenditure or
to revise their fiscal constitutions.…The the burden of taxation. The objective
post-Keynesian record in fiscal policy is here is to obscure the real cost of public
not difficult to understand. The removal goods and services (Buchanan 1967:
of the balanced-budget principle or 125–42). The debate surrounding
constitutional rule generated an corporate tax, multinational
asymmetry in the conduct of budgetary corporations and the role of tax havens
policy in competitive democracy. is particularly prone to issues of fiscal
Deficits will be created, but to a greater illusion.
extent than justified by the Keynesian
principles; surpluses will sometimes
result, but they will result less frequently
than required by the strict Keynesian
prescriptions. ‘
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