How to force Apple and other multinationals to pay their fair share
by David Atkins
I've often written of the need for stronger international regulation to counteract multinational corporate influence. The burgeoning outrage surrounding the tax practices of companies like Apple and Google that use legal accounting gimmicks to avoid taxes in developed nations by pretending they operate elsewhere or don't do business in those countries serves as a perfect example. If there were international law regulating what constitutes "doing business" in a country, as well as regulations controlling the abuse of offshore tax shelters, it would go a long way toward solving the fiscal situations of many nation-states in a cooperative rather than competitive way.
Traditional protectionist approaches don't work because it's simply too easy for corporations to shelter their profits and headquarters in low-tax countries. The European Union is facing this difficulty as the low-tax havens of Ireland and Luxembourg undercut any nationalistic approach to solving the problem:
At a time when unemployment in the European Union is at record levels, nations eager for jobs remain hesitant to alienate multinational companies by raising their taxes. Instead, countries such as Spain, Greece, and Hungary have imposed hefty sales tax increases, a hit borne most severely by poor people.
“I am skeptical whether the different countries have the political courage to take on the corporate tax avoidance game,” said Sven Giegold, a member of the EU parliament from Germany’s Green Party. “You need consensus of the participating partners, and I do not see the leadership to force through a global model.”
In December, the European Commission, the governing body of the EU, declared war on tax evasion and avoidance, which it said costs the EU 1 trillion euros a year. It encouraged its members to create “blacklists” of tax havens.
Still, the commission instructed them to single out only non-EU countries as havens -- even though member-nations such as Luxembourg, the Netherlands, and Ireland encourage multinational companies to legally dodge billions of dollars in taxes around the world...
Similarly, the Organization for Economic Cooperation and Development, an influential publicly funded think tank on international tax policy, used to cite potentially harmful tax behavior by member states, including Luxembourg, the Netherlands, Ireland, Belgium and others. It stopped issuing those reports in 2006 because of “a lack of political interest” from member nations, said Pascal Saint Amans, director of the OECD’s Center for Tax Policy and Administration.
“The Europeans say one thing and do another,” said H. David Rosenbloom, the head of the international tax program at New York University’s law school and an attorney at Caplin & Drysdale in Washington. “The EU can’t do anything as long as it’s got Luxembourg and the Netherlands and Ireland” within the union....
“What is clearly needed, however, is greater coordination in taxation, to prevent one national regime from undermining another, and to address loopholes and mismatches. That is precisely what the Commission is proposing,” she said.
It's very important to read that two or three times. European countries are raising sales taxes and slashing corporate taxes not because they have villainous, corrupt leaders, but because it's too easy for multinational corporations to play countries off one another by shifting badly needed jobs away from higher tax countries. America has a similar problem with state-by-state corporate taxes: after all, there's a reason that every credit card company seems to be headquartered in Delaware, and it isn't the nice weather.
Trying to force each nation-state to enact some sort of corporate tax reform is not only politically unrealistic, it's also a fool's errand. All it takes is a few nation-states taking advantage of every one else to spoil everything.
But in the absence of a badly needed stronger international regulatory model, there is a possible short term solution that may work:
Perhaps the best compromise of that sort has been served up by University of California economist Alan Auerbach, who argues that policymakers need to get outside the worldwide versus territorial debate. His proposal relies on what he calls “the destination principle”: taxing companies where their products are used. Under this scheme, foreign sales wouldn’t be taxed by the US government, but more than that, all cross-border transactions—including foreign expenses—would no longer affect tax payments.
That means that companies get something they want—their legitimate foreign sales earnings would only be taxed by the foreign country. But they’d also lose the ability to move US profits overseas through the kinds of artificial transactions Apple is accused of. Combined with domestic changes to reduce the tax preference given to debt financing and simplified expensing, Auerbach says these reforms would not only make for a clearer system, but also one that makes it more lucrative for companies to invest in the US.
There may be complications involved in that model of which I'm not yet aware (manufacturing in a developing country but only paying taxes in developed countries with consumer bases might create its own host of problems), but it seems to be at least the basis of an elegant solution that is fairer to both corporations and nation-states in a globalized world. But, of course, implementing it effectively would require simultaneous cooperation from the nation-states with the largest consumer bases, which in turn would likely require at least international trade compacts and treaties. Not an easy thing to do, obviously.
But few nations are going to be able to solve this problem on their own, even with theoretically progressive politicians in charge.
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