Solutions

The international tax system is rigged in favour of multinational enterprises, at the expense of smaller companies and other taxpayers.

Various international initiatives have tried to address the problems: most notably the OECD's Base Erosion and Profit Shifting (BEPS) programme, which has tried to stem the $500-600 billion in annual leakage to corporate tax avoidance.  However, BEPS is widely regarded to have failed: sticking plaster on an international tax system that was set up around a century ago, and is no longer fit for the modern age.

An entire new philosophy of international tax is required.

If we are looking for solutions to the problem that multinationals are often paying little or no tax, while small businesses and the rest of us pay large amounts of tax, then we can adopt two main approaches.

One, the shorter-term approach, is to try and stem the losses under the existing framework. Our CTHI provides a road map for tackling the leakage, in the many areas in which it occurs. Each of the 20 indicators provides practical policies to improve taxation of corporations in the source countries (that is where their activities take place, as opposed to where the headquarter is registered).

The other, longer-term approach is to reconsider the fundamental philosophical underpinnings of the international tax system, and push for radical change.

A couple of radical alternatives to the current system have been put forward. One of the most prominent is called the Destination-Based Cash Flow Tax. This is a tremendously dangerous proposal.

The other main candidate for radical reform involves moving away from the current fiction that multinationals are merely loose collections of separate entities trading with each other at “arm’s length prices,” and countries then taxing the profits that the multinational records in their jurisdiction.  That has led to multinationals shifting their profits into tax havens, where the effective tax rate is very low or zero. 

The radical alternative, which sometimes gets called "Unitary Tax," treats each multinational as a single global entity. Its global profits are then allocated out to the countries where it does business, in proportion to the amount of genuine economic activity that is carried out in each place. That country can then tax its share of global profits at whatever rate it likes. Those profits would be allocated according to a formula, which may be based (for example) on that corporation’s sales and employees in each place. 

Under this system, it wouldn’t matter if a corporation runs a one-person booking office in Luxembourg: under this formula, only a miniscule portion of its global profits would be allocated to Luxembourg, so it wouldn't matter if its tax rate was 0.2 percent.

This alternative, if applied widely, would effectively cut corporate tax havens out of the international tax system. Partial versions of this system are already in operation in some places - many individual U.S. states use a version of this for calculating state taxes, for instance.

Such a system contains many pitfalls and complexities and problems too, of course — and many political obstacles to implementation, given the vested interests that benefit from the current unworkable system.

Further reading

The Tax Justice Network Briefing The greatest opportunity for reallocating taxing rights in a generation: now or never for the OECD – April 2019

The Tax Justice Network Response to the OECD's consultation on BEPS and digitalisation - March 2019

The BEPS Monitoring Group - a TJN-backed group led by Sol Picciotto

Roadmap to Improve Rules for Taxing Multinationals - Independent Commission for the Reform of International Corporate Taxation (ICRICT)

Developing Countries and Corporate Tax - Ten Ways Forward - Krishen Mehta (some of the more straightforward solutions to particular problems under the existing system.)

Why a minimum effective tax rate is urgently needed, April 2019 - Francis Weyzig.