Friday, February 1, 2013
The IRS and the OECD have struggled for some years to deal with the problem of income shifting and tax avoidance, to little avail. This makes the international tax regime a ripe target for reformers. Some type of one-off reform that lowers rates and eliminates deferral is theoretically achievable. The payoff would be taxation of the vast hoard of liquid assets estimated to be held in foreign accounts by US-based multinationals, estimated by the Pulitzer Prize-winning journalist David Cay Johnston at $3.4tn.
With reports of low domestic taxes paid by large profitable corporations such as Starbucks in the UK, the time may also be ripe for an international agreement to curb tax shifting. The US has recently implemented a law called the Extractive Industries Transparency Initiative that requires companies to disclose their payments to governments from oil, gas and mining assets. Allison Christians of McGill University argues that the expansion of such information reporting to the transfer pricing of all multinationals is the first step towards capturing the revenue now lost to the shifting of business costs to high-tax jurisdictions and revenues to low-tax jurisdictions.
There is growing evidence that corporations are sensitive to the public outcry when they are caught avoiding taxation excessively. Starbucks, for example, recently agreed to pay more taxes in the UK than legally required to quell the controversy over its virtually nonexistent tax bill. The same shaming technique may have broader application to multinationals generally.
As Justice Louis Brandeis of the US Supreme Court once put it, “publicity is justly recommended as the remedy for social and industrial diseases”.