Sales-based system could address corporate tax avoidance
Washington. The Coalition for a Prosperous America (CPA) is urging the Organization for Economic Cooperation and Development (OECD) to support a move to sales factor apportionment (SFA) as part of its comprehensive review of international corporate tax systems. CPA submitted public comments to the OECD last week. The group’s chief economist, Jeff Ferry, will attend OECD public consultations this Thursday and Friday.
The OECD consultation comes after sharp international disagreement over the present rules for calculating national corporate taxes. Various countries have criticized US-based tech giants for exploiting tax rules that allow them to pay little or no corporate tax. Earlier this year, France enacted a so-called “digital services tax” of 3 percent on large Internet-based businesses. This led to an angry response from President Trump, including a threat to put tariffs on French wine. Many other OECD members, including the UK, Italy, and Spain, have expressed similar dissatisfaction with the low tax rates paid by global technology companies.
The OECD has now accelerated its review of corporate taxation, and has published recommendations that could become the basis for broader international compromise. These recommendations include a provision for taxing the profits of certain large multinationals on profits deemed to be above a “normal” level, based on sales in each national market. The OECD has also included a provision to tax multinationals that carry on “distribution” activities (mainly e-commerce) in a national market without having an office there. Both of these proposals represent substantial modifications from the so-called “arm’s length principle” which has governed corporate taxation for more than half a century. Some technology companies have used the arm’s length standard to shift billions of dollars of profit to tax havens.
CPA believes that replacing the current US corporate tax system with a new approach based on sales factor apportionment would be simpler, fairer, and could eliminate the shifting of billions of dollars in profits to tax havens.
“SFA would base each corporation’s tax on the value of its sales in each national market,” said CPA board member Bill Parks. “The arm’s length principle is obsolete because it is impossible to objectively assess a fair value on the use of intellectual property transferred between two subsidiaries of one company. SFA would let the US government tax corporations on the business they actually do in our market. Doing so would eliminate profit shifting overnight.”
CPA will be one of very few organizations representing domestic US producers to attend the OECD meeting. The majority of the more than 300 public comments received by the OECD so far have come from trade associations and multinationals in the banking, finance, pharmaceutical, and technology industries.
“The present tax system obliges domestic businesses like CPA members to pay the full 21 percent tax rate, while multinationals are paying far lower tax rates and often no tax at all,” said Michael Stumo, CEO of the CPA. “Instead of the complex, piecemeal reforms the OECD has proposed, the OECD would do far better to junk that system and replace it with a fair and equitable system based on SFA.”
In October 2019, CPA authors Bill Parks, Jeff Ferry, and Arpan Dahal published an article in Tax Notes demonstrating that adoption of SFA would be beneficial for individual countries. Using the example of the French digital services tax, the article estimated that the French government would likely collect 2.4 times more tax revenue using SFA than its present 3 percent DST tax. The same principle applies if SFA replaced the present corporate US tax system. The federal government would collect more revenue since profit shifting would be eliminated.
“The OECD has taken an important step forward by acknowledging that the arm’s length principle cannot apply to today’s 21st century digital economy,” said Ferry. “But its proposed reforms are limited to a small number of multinationals, and they are complex and based on subjective calculations of excess profit above some normal level—which is sure to be disputed, and will vary from nation to nation. It would be simpler and fairer to move to SFA corporate taxation.”