By David Morse, Tax Policy Associate Director
“There is not going to be a return to a golden age of tax, this is about change,” declared Will Morris, chair of the Business and Industry Advisory Committee to the OECD’s Committee on Taxation and Fiscal Policy.
At the recent historic OECD public consultation meeting on taxing the digital economy, this significant shift in Multinational Enterprise (MNE) business attitudes surprised many spectators. But what did Morris mean by a “Golden Age of Tax”? A more accurate title would be the “Golden age of Multinational Corporate Taxation” or the “Golden Age of Tax Avoidance.” These more descriptive titles enable a better understanding of who the golden age of taxation helped, who it hurt, and why it should never have been allowed to happen in the first place.
Multinational Corporations, foreign and domestic, have benefitted greatly from the inaction and limited response of the US government on the issue of profit shifting-based tax avoidance. By default, domestic companies that compete with multinational conglomerates face a significant competitive disadvantage. When domestic companies cannot use the same tax loopholes as their multinational competitors, they pay a higher tax rate on every dollar of profit. Such loopholes continue to exist thanks to obsolete accounting practices known as Transfer Pricing. But the recent OECD public consultation shows that this blind devotion is faltering. Previous hearings had shown an absolute defense of the status quo. However, the failures of transfer pricing beg the question: What system should we use to have fair business taxes? The OECD examined multiple models, including: digital tax, “market intangibles,” formulary apportionment, minimum taxes based on GILTI, and/or minimum taxes based on BEAT.
France and some other countries have proposed a digital tax that would tax corporate revenue based on users. The plan would tax revenue of the largest companies based on digital presence and local revenue sales, not profits. This type of plan has multiple detractors and did not gain much sympathy at the OECD event.
Multinational enterprises have seen the writing on the wall, though, and now seem far more pliant than before. Grace Perez-Navarro, Deputy Director, OECD Center for Tax Policy and Administration, recognized the written contributions by multinational enterprises (notably Johnson and Johnson). Perez-Navarro and others realize “The Golden Age of Tax Avoidance” could not survive in its current form, so they have a vested interest in not losing too much in the process.
For years, the Transfer Pricing accounting system has been defended as a necessary tool. It allows a company to set prices when transferring property or services to itself, such as a parent company to a subsidiary company and vice-versa. But abuses within Transfer Pricing cannot be halted by simply strengthening the current policing mechanisms. Even the most conservative plan proposed by the US Treasury recognizes that a better method is needed.
The US Treasury has proposed an alternative which calls for separating specific types of revenue, including revenue that comes from trademarks, brand names, and customer lists. They call these types of revenue “Marketing intangibles.” The idea would be to separate market intangible profits from regular profits, with the market intangibles subjected to a different type of tax split such as “profits based on sales.” This may sound familiar Coalition for a Prosperous America members, since CPA has been advocating for a tax system that taxes profits based on sales. However, the Treasury Department is moving cautiously. There are still transfer pricing allies who won't accept that this transfer pricing mechanism is, by its nature, ripe for abuse. Johnson and Johnson’s proposal, for example, advocates for this method and would prefer a formulary system.
The third option considered during the event is known as formulary apportionment. It bears a close resemblance to Sales Factor Apportionment. But because the OECD Tax group is examining options for countries besides the United States, the opportunity is still being offered to keep taxation options open for developing nations when it comes to capital and labor. However, this option concerns multinational companies who fear having to pay more of the taxes they have been avoiding.
The minimum taxes based on GILTI or BEAT are less cohesive and have initiated stronger disagreement among stakeholders. The TCJA is not popular among OECD stakeholders. Very little is expected from these options due to disagreements on how to implement this version of a tax.
These top three options are likely to combine into some amalgamated approach to find consensus among the countries participating. There is no reason for any country to adopt the OECD principles so, despite the arguments that this is nearly over, no reasonable person should think anything is set in stone.