Dilemma on global corporation tax
On corporate taxation, national governments are trapped in a race to the bottom. As technology becomes more important to all sectors of the economy the factors that create economic value — intellectual property, software, computing power — become more mobile. Hoping to retain and attract jobs and investment, each country adjusts tax policy to attract these intangible (or at any rate mobile) assets. But the situation is unstable: there always seems to be another country ready to undercut whoever is offering companies the sweetest deal.
The result is an erosion of tax rates on multinational companies at a time revenue-strapped governments are committed to austerity and/or running historic deficits.
The situation is not sustainable in the long run. Countries and international organisations, most prominently the Organisation for Economic Co-operation and Development, have taken action on areas such as transfer pricing and royalty payments. But tougher national enforcement and deeper international coordination can only go so far because they do not change one of the root causes. This is the fact that most tax systems focus on where a product comes from, not where the customer is.
An “origin-based” system made more sense in a world trade system based mostly on goods. But what is the origin of, say, an advertisement that runs next to a Google search or a Facebook news feed? For companies that create value from intellectual property the favoured answer usually turns out to be: wherever the tax regime is friendliest.
The crudest form of “destination-based” taxation is a revenue tax, which countries are experimenting with. This is a bad idea. Profit, not sales, is the proper target for corporation tax. A better option to consider is to tax profits, but according to where companies generate their revenues.
A transition from origin- to destination-based systems could be difficult, but it has a better chance at leading to a just and stable global tax regime than what we have now. London, March 12