BUSINESS

It's Time To End The Legal Fiction Of International Corporate Taxes, Nobel Prize Winner Says

06/02/2015 04:26 pm ET | Updated Jun 03, 2015
marcnorman

For decades, multinational companies have turned to complex corporate structures that allow them to use disjointed national tax policies and rates to avoid high taxes. Dozens of corporate entities were created to hold assets -- including revenue, property, cash, patents and manufacturing plants -- wherever they would incur the lowest tax bill.

Now, a group of policy experts, government officials and economists, including Nobel Prize winner Joseph Stiglitz, has a new set of reform proposals aimed at fixing the situation. The core of the proposals from the Independent Commission for the Reform of International Corporate Taxation is a radical shift in how corporations are legally treated for tax purposes: Since the companies act like a single entity, they should be taxed that way. Taxing multinational companies as single firms is the best way to deal with the corporate strategies that exploit tax havens, the group said Tuesday.

Bloomberg calculated that of the $2 trillion in money being held offshore by U.S. companies in 2014, $795.2 billion was held by the top 15 U.S. companies. Those companies can set up entities in countries with lower tax rates, book revenues there, and then simply not move the money back to the U.S., effectively deferring paying U.S. taxes for years on their profits. To maximize the benefits, the boring but necessary work of tax accounting became a key "profit center" at some companies.

Ireland was once a popular destination for these sorts of arrangements, although recently its government has begun to crack down on the country's status as a tax haven. A key problem the group identifies is that any country that raises its tax rate alone will immediately be at a disadvantage, but that cooperative action to end tax haven abuse will take time. As a temporary solution, if an ambitious one, the group says there should be a global minimum corporate tax.

While government actions on tax rates are helpful, they miss the root cause of international corporate tax avoidance, the commission pointed out.

"The primary enabler of international corporate tax abuse is the separate entity principle -- a legal fiction that enables the flow of vast amounts of taxable income away from the underlying business operations," the group said in a statement.

José Antonio Ocampo, the group's chairman who was formerly United Nations undersecretary general and Colombia's finance minister, said: “This debate centers on equity: equity between good taxpayers and bad taxpayers, equity between capital and labor, equity between the rich and those living in poverty, as well as equity between countries, including between developed and developing countries. International corporate tax reforms should be considered from a global public interest perspective rather than national or corporate advantage.”

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