Polity: Taxing multinationals via sales

Written By: - Date published: 11:35 am, July 22nd, 2014 - 30 comments
Categories: Economy, tax, us politics - Tags:

polity_square_for_lynnReposted from Polity.

An interesting idea out of the US for how to fairly tax multinationals around the world:

First, have them declare a worldwide profit, netting off worldwide sales and worldwide qualifying expenses1

Second, find out where they made their sales.

Third, apportion the profit to various jurisdictions based on whatever portion of the sales took place in that country.

So if Facebook made $10 billion worldwide, and made 30% of its sales in the USA, then the US government would collect tax from Facebook on the basis of a $3 billion nominally-USUS profit.

I’m sure there are issues to iron out, and you’ll need good multilateral government cooperation to make it work. But this kind of international cooperation sounds a lot fairer to me than an international race-to-the-bottom on corporate tax rates.

 

  1. I am presuming using national rules in the country where the expense was paid to figure out what is a “qualifying expense.” This could be an area where the system gets gamed, so governments would need to plan carefully.

30 comments on “Polity: Taxing multinationals via sales ”

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  1. infused 1
    22 July 2014 at 12:15 pm

    Good luck with that. Not because I don’t think it’s a bad idea, but because govt’s will protect their countries businesses. Won’t happen.

    But at the same time, if a company is selling stuff overseas, ie amazon, they pay tax wherever they are based. They are not based here, so you can’t really bitch about it. Countries just need to fix up their tax avoidance laws.

    • Molly 1.1
      22 July 2014 at 12:31 pm

      “at the same time, if a company is selling stuff overseas, ie amazon, they pay tax wherever they are based. “

      Not true at all. For example, Apple has created a Dutch company that owns the intellectual property for ipads. The ipads sold in the US, pay an intellectual property expense to the Dutch company – which then benefits from low intellectual property taxes.

      That is a simple real world example of just one of the many ways that multi-nationals avoid tax in the country from which the income is generated.

      (This example came from the documentary: The Tax-Free tour)

      • infused 1.1.1
        22 July 2014 at 1:22 pm

        Yep, so see my comment “Countries just need to fix up their tax avoidance laws.”

    • Lanthanide 1.2
      22 July 2014 at 2:52 pm

      “Countries just need to fix up their tax avoidance laws.”

      That’s what this proposal is…

  2. RedBaronCV 2
    22 July 2014 at 12:26 pm

    Up to a point we could do this unilaterally. If the company is listed on the stock exchanges we will know what the worlwide sales/profits are. Overseas owned companies here have to file local accounts locally. Simple calculation and the local tax is the greater of this calculation or the one the company comes up with. If we felt really nasty we could do a USA and tax any overseas company operating here on their worldwide stock exchange declared income or use that as the default assessment.

    Good place to start would be the US companies – as far as I know we don’t have a double tax agreement with the USA(given the fiscal imperialism they practice – tax on worlwide profits) so companies couldn’t hide behind that.

  3. RedBaronCV 3
    22 July 2014 at 12:27 pm

    Up to a point we could do this unilaterally. If the company is listed on the stock exchanges we will know what the worlwide sales/profits are. Overseas owned companies here have to file local accounts locally. Simple calculation and the local tax is the greater of this calculation or the one the company comes up with. If we felt really nasty we could do a USA and tax any overseas company operating here on their worldwide stock exchange declared income or use that as the default assessment.

    Good place to start would be the US companies – as far as I know we don’t have a double tax agreement with the USA(given the fiscal imperialism they practice – tax on worldwide profits) so companies couldn’t hide behind that.

  4. infused 4
    22 July 2014 at 1:48 pm

    Could just drop the corp tax rate here to that of Ireland, or lower. Why not attract all the big business here. It would probably make up the shortfall in tax easily.

    • One Anonymous Bloke 4.1
      22 July 2014 at 1:58 pm

      Why not? Ethics and competence, mostly. Not everyone is so stupid they can’t recognise a race to the bottom.

      • infused 4.1.1
        22 July 2014 at 2:40 pm

        That was scarc. But anyway… The whole world started a race to the bottom decades ago.

        • Draco T Bastard 4.1.1.1
          22 July 2014 at 5:51 pm

          Yeah, we know – everyone jumped on the delusional neo-liberal bandwagon. You know, the policies that National and Act utilise to enrich the already rich at everyone else’s expense.

    • McFlock 4.2
      22 July 2014 at 2:15 pm

      Copy the PIIGS?
      Great idea /sarc

    • satty 4.3
      22 July 2014 at 10:11 pm

      I didn’t know New Zealand is now part of the EU.
      That was/is the main reason for global companies to be in Ireland: Access to the EU, but lower tax rates than most other EU countries. Also close to the EU market;
      sort of between Central Europe and US in case of shipping products.

      None of this applies to NZ. The only thing NZ attracts are dodgy trusts, which hardly helps the economy creating large number of long term, skilled jobs.

    • KJT 4.4
      22 July 2014 at 11:11 pm

      As Ireland found out, it is the exact equivalent of a business charging half the usual rate to attract customers, and then going out of business because they cannot meet their costs.

  5. Ennui 5
    22 July 2014 at 3:18 pm

    The idea sounds good until you realise that you will never get international agreement….the corporations are just too embedded into the political landscape.

    There are lots of easy things to do however:
    1. We already know what each companies sales are because they have to submit GST returns. The IRD consequently knows the sales are and what the costs because they see the GST offset, plus the PAYE etc. Which means they know what the profit should be and tax it.
    2. If any international money transfers were disallowed except as remittance of taxed profit then the multinationals would not be able to do the spurious movement of funds such as “management fees” etc and all monies would become taxable.
    3. Executive remuneration / shareholder remuneration….just tighten up exemptions and make them all at a high rate with capital gains on shares etc.

    Personally I think that there is an even easier way to tax companies: that is to take away the GST offset….make all transactions GST payable as it is today BUT take away the offset. For example today a company sells $10 on which the GST is $1.50 ($11.50 total), but their costs are say $8.62 which includes $1.12 GST, so they only pay the difference (a mere 38 cents). If we took away the ability to claim costs then we would get about 4 times the revenue.

    • infused 5.1
      22 July 2014 at 4:21 pm

      GST offset? How many businesses have you run? That would kill off most. Fool.

      • Ennui 5.1.1
        23 July 2014 at 10:12 am

        Lets stand your question on its head Infused, how many companies have you run? What would kill in my proposals are the rates, it would not pay to kill the goose who produces the golden egg. (For the record I own and run several, all doing well).

    • Lanthanide 5.2
      22 July 2014 at 6:01 pm

      All that would do is ensure big vertically integrated companies existed so that they could process goods from start to finish without having to buy anything from another company or sell it.

      The entire point of GST is that the end user pays it, not the intervening companies.

      If you want to streamline it, allow companies to sell things to each other without charging GST in the first place, so they then don’t have to do the paperwork dance to claim the money back from the government.

      Would save small companies a lot of time, put a lot of accountants out of work and make IRD’s job easier to. This would come at the (not inconsiderable) risk of people rorting GST, which at the moment is one of the hardest taxes to avoid because of the way it is implemented.

      • KJT 5.2.1
        22 July 2014 at 11:07 pm

        Or we could remove GST.

        Apart from GST being horribly regressive.

        It is one of the reasons, along with the exchange rates and RBA for NZ companies losing sales offshore.

        • greywarbler 5.2.1.1
          23 July 2014 at 11:06 am

          kjt 11.07
          GST being part of nz companies losing sales offshore? I thought GST only applied to us here.

          Is it that problem of people personally importing stuff through on-line etc. which because of no GST on it, is cheaper often than a similar thing here that you are referring to?

          • KJT 5.2.1.1.1
            23 July 2014 at 4:25 pm

            The problem is that it only applies to sales in New Zealand.

            Anything you buy offshore online up to a few hundred dollars is exempt.

            The latest NZ firm to fall over because of non taxed (GST) imports is Postie Plus.

            Millers, and other stores even encourage you to buy direct from their Australian/Asian post centre, as the goods are then tax free.

            Any NZ business has to charge an extra 12.5% as well as adding their interest costs, which are several % higher than offshore competitors, and then there is the exchange rate.

      • Ennui 5.2.2
        23 July 2014 at 10:17 am

        Lanth, yes it would probably drive toward vertical integration, good point.

        On the idea that GST is designed to make the end user pay I agree: surely what we are trying to achieve is to make the companies pay fair tax on profits? Not the end user, so why not just get rid of GST and have a higher company rate with no easy exemptions?

        On putting accountants out of work, good, the whole admin of GST represents non productive work and could be regarded as inflationary.

    • mikesh 5.3
      23 July 2014 at 11:58 am

      “Personally I think that there is an even easier way to tax companies: that is to take away the GST offset….make all transactions GST payable as it is today BUT take away the offset. For example today a company sells $10 on which the GST is $1.50 ($11.50 total), but their costs are say $8.62 which includes $1.12 GST, so they only pay the difference (a mere 38 cents). If we took away the ability to claim costs then we would get about 4 times the revenue.”

      The whole point of gst is that it is recoverable by all payers except the final consumer.

  6. saarbo 6
    22 July 2014 at 3:42 pm

    Google ad words are invoiced directly out of Singapore and charged onto your business credit card. No gst at all.

  7. infused 7
    22 July 2014 at 4:30 pm

    And now you have crypto currency…

  8. Draco T Bastard 8
    22 July 2014 at 5:48 pm

    I’m sure there are issues to iron out, and you’ll need good multilateral government cooperation to make it work.

    Don’t need international cooperation to make it work but it would make it work better. Just make it so that expenses external to the local economy aren’t tax deductible,i.e, income in the local economy is taxed fully by the local government.

    When a local business contracts another local business and deducts that as an expense that other local business will then pay tax on that income. The government still receives the taxes (although, as far as I can make out, it will be somewhat decreased) from that business. When that other business is over seas though the government won’t get any taxes from that income meaning that the government is losing tax revenue. This needs to be stopped.

    • john 8.1
      23 July 2014 at 12:48 am

      That wouldn’t work.

      Looking at it from the other side, Fonterra would be paying a fortune in tax in China, but not be allowed to claim for the actual expense of producing the milk in the first place here in NZ.

      And the suggestion at the top would be impossible to work as well. NZ would collect zero tax from our exporters. But would have to attempts to get tax from the millions of companies around all points of the globe who sold products in NZ.

  9. The Real Matthew 9
    23 July 2014 at 1:51 pm

    This mirrors the thoughts I have on how to deal with this complex issue.

    No doubt some countries will win and others will lose, that isn’t the point. The point is what is the fairest way to tax multinationals.

    This leads onto more interesting ponderings.

    The next issue is then how do you countries from implementing new taxes that are subversive to the intention of the regime?

    Then you start to realise that our nations based tax system does not work in a global economy and then the debate really begins!