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Podcast | How should we tax multinational corporations?

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Taxing multinational corporations more fairly is often presented in the media as a no-brainer - an open goal for government to increase tax revenue and cut down on tax avoiding behaviour.

But what seems like a simple policy is in fact incredibly complicated, requiring the navigation of complex international laws and fundamental questions over types of property and where intangible assets exist.

In this episode, Paul speaks to Helen Miller, IFS Deputy Director and tax expert, and Dan Neidle, a tax lawyer specialising in corporate taxation, to get a sense of how successful international efforts to tax multinationals are.

Zooming In: discussion questions >>>

Transcript >>>

Zooming In: discussion questions

Every week, we share a set of questions designed for A Level economics students to discuss, written by teacher Will Haines.

    1. What is the difference between tax evasion and tax avoidance?

    2. What are the problems with the way we currently tax multinational corporations?

    3. Pillar Two of the new OECD rules will set a global minimum tax rate of 15%. At what rate do you think it should it be set and why?

 

Transcript

Paul Johnson

Hello, I’m Paul Johnson and once again welcome to this episode of The IFS Zooms In. I’m really pleased to be joined by Helen Miller who’s our IFS deputy director and head of tax here at the IFS, and also our guest today Dan Neidle, a specialist in corporate tax at Clifford Chance. Please don’t turn off at this point because we’re going to be talking about something really important and actually of considerable public interest which is how we should tax multinational companies. You’ll note that very often people in the public debate will say we can pay for this, that, or the other by getting billions more from multinational companies. And to some extent what we’ll be talking about is how we tax them and to what extent there is more money lying around.

We currently get around 7% of our tax revenues from corporation tax, that actually makes it the fourth most important tax, after income tax, National Insurance and VAT. And of that revenue from corporation tax, a large part of it, a very large part of it actually comes from just a small number of companies who are making really quite big profits. There’s obviously often quite a lot of public concern about taxing the big multinationals, including the big tech giants who’s names you’ll be familiar with, and concern they aren’t paying what they should be paying.

Now obviously a big issue here is what they should be paying. So, for the past decade, a decade is not that long in tax law, the OECD have been working to build a cross country consensus on how to change international tax rules, so as to get something more close to what people might think of as a fair distribution of tax payments. And as we speak, countries are working on implementing two new changes that would actually alter both how much they pay, that’s how much the largest companies pay and where its paid, in other words to which countries tax authorities.

And today we’re going to try the important, but not entirely straight forward, task of explaining what’s actually going on. I’m going to start with Helen here, just give us the most basic explanation of how it is that we tax multinationals at the moment and what problems that causes?

Helen Miller

Something that worth saying up front, you know, corporation tax gets quite complicated quite quickly, but very high level I think there’s two broad things worth knowing. The first is that corporation tax is a tax on profits. So, companies get some revenue, they can deduct their costs - where exactly what they deduct is determined by the government - you get a measure of profits and its profits that are taxed, so we’re taxing profits and not sales. And in a domestic context there are companies - it’s all in one country, those are fairly straightforward. But for a multinational, meaning a company that’s operating in more than one country, they have to decide not only how to define profits, but also where those profits should be taxed. I think it’s worth saying up front that there’s no single right answer to the question of where abouts in the world profits should be taxed. There are different ways you could do it and different pros and cons of different methods. But broadly the international consensus that we have, that countries have sort of signed up for, is that we will try to tax multinationals profits in the location where the underlying activity was created, where the value added happened.  

So, maybe to give you an example to try to make that a bit more concrete. Imagine a UK company, say a scotch whiskey producer that sells all their yummy scotch whiskey in another county, say China, but the same company in two different countries. Then even though the revenue is all happening in China, it won’t be taxed there, some of it is basically allocated back to the UK, so the UK government can tax them a bit. And you have to work out how much should be in the UK and how much should be in China, and that’s already pretty tricky. But that broad idea of allocating profits to different countries gets much, much more complicated when companies are, you know, not operating in two countries but maybe thirty or forty and have lots of different products and have more complicated products. And in particular it’s got harder over time because now a lot more of profit is associated not with stuff you can drop on your foot, not the tangible assets, but with intangible assets. So, with brands or intellectual properties - so think of patents. And the problem with that is those things are much harder to value, so what is a patent worth versus the underlying good, and it’s easier for companies to move them. So, whereas it might be hard for a company to move its whole factory to a low tax country, its actually quite easy to move the paper intellectual property to a low tax country, so that’s just made it harder over time.

Also, companies have become more digital, so more of what companies do is happening online and is less tied to a physical presence. So, trying to attach tax on profits to a country is just harder when companies themselves are less attached to countries. Basically, we have this mechanism where we try to tax profits where activity happens, it was always hard to do, it’s been getting harder.

And very broadly the two problems you have is that firms have an incentive to move their real activity and their paper profits to countries to get lower tax payments, and governments have an incentive to compete to attract that activity. So, I think you know in big picture, when we see a lot of the problems that we’re going to come on to discuss, I think we should think of it less as companies just being naughty and more of us having a system that really isn’t very well set up for taxing the kinds of companies that we’re trying to tax now-a-days.

Paul Johnson

Dan, how do you see it? Is that, I mean that’s Helen speaking from the point of view of an economist, as a tax lawyer is that how you see the big picture issues?

Dan Neidle

I think that’s right. But if we step back to when the international tax rulings were set up and codified about a hundred years ago, the basic question was, you have a British company and it sells something to France: who gets to tax the profits for the company? And the essential conclusion was that in that simple case, it should be the UK that taxes it and not France. And that is not an intuitively obvious or inevitable conclusion. Some people would say that if you make a million pounds of profits by selling stuff to people in France, then France should get to tax that. But that’s not where we’ve ended up, in that fundamental case of stuff being sold from one country to another, it’s the companies home jurisdiction that has the taxing rights. And some of the problems that we have now are as a result of that fundamental decision as to who gets to tax. So that’s the first problem.

The second problem is the one that Helen mentioned at the end. There’s a divide between stuff that happens because companies are being naughty, and stuff that happens because of the way the system works. So, there’s no doubt that in particular the ‘90s and the 2000s, the rise of intellectual property as a valuable thing and the rise of digitalisation and the ease of conducting your business in lots of different countries, created an amazing opportunity for companies that wanted to, to deliberately arrange their affairs to minimise the amount of tax. And we can step back and say, maybe that was a bit naughty. Various changes have been made in the last ten or fifteen years which make that increasingly hard, so naughtiness is I think now a less important factor. And the fundamental factor that drives what lot of people still think of as unfairness in the way tax works, comes back to that initial decision that we tax on the basis of where the home of a company is, not on the basis of where the sales are. As long as we continue to do that, a lot of people will look at the way tax works and say its unfair. People will look at Apple making billions of dollars in profit selling computers into the UK, so why isn’t the UK taxing that, why does the UK get to tax none of these sales? And I could say well technically the UK shouldn’t tax these sales, because Apple is a US company, and all of its intellectual property was developed in the US. And that’s a completely satisfying answer for me as a tax technician, but for many people that is not an intellectually or intuitively satisfying answer at all.

Paul Johnson

I think that fundamental difference between I think people’s expectation that they see in your example Apple making a pile of money in the UK, but actually it not a UK company, it’s based in the US, it builds its things in China, it developed its intellectual property in the US, and so under corporate tax rules as they currently work, there’s not much case to tax in the UK. Can I ask this issue, you talked about avoidance and companies being naughty, as you put it, and I am told by I mean pretty much all the sort of tax lawyers and tax accountants that I speak to, that there’s a lot less naughtiness around than there used to be. I mean can you put any colour on that? I mean can you persuade the listeners that there really is less naughtiness around, or indeed could you tell us that there still is quite a lot of it?

Dan Neidle

Putting figures on this kind of stuff is really hard. The estimate for the cost to the UK of this kind of international tax avoidance, during when it was an easier thing to do - there were less tax avoidance rules, vary wildly. I’ve seen one estimate that there was as loss to UK corporation tax equal to half UK corporation tax revenue, so if you time it with that, thirty billion, which I think most people find extraordinary a little hard to believe. But more of the estimates were in the sort of low billion-pound level. There are some estimates that suggest the UK was a NET beneficiary of tax naughtiness, because people would shift profits into the UK more than they shift profits out of the UK. So, we don’t have the time to go through how those numbers were put together and how valuable we think they are. Let’s just say there was a large amount of naughtiness in the old days, and there still is probably a reasonable amount of naughtiness now.

Why is there less? So, there was some specific statutes that people would use to avoid tax. One that you could do is that you’d have a payment made from the UK, which would be deductible from the profits of a UK company, maybe you’d be making a royalty payment, or an interest payment or some kind of payment out of the UK and it would be a very large payment. And that payment would go to a US company, or maybe a tax haven subsidiary of the US company. But because of the weird and wonderful ways US tax rules work, that payment wouldn’t exist for a US tax perspective. And a series of rules were introduced called anti-hybrid rules, that stop that kind of thing very effectively. So that world of naughtiness has, I would say, gone.

What other naughtiness is there? Another kind of naughtiness would be to load up your company with debt so you have a pile of interest being paid to not banks, but affiliates of you, probably in tax havens maybe again in the US, and those interest payments would erode the profits of the company making them. And rules are introduced to limit, you know the deduction you could get from interest. But like I said, there’s rules to stop you making large royalty payments to people in tax havens, there’s a withholding tax rules of offshore royalty payments, a whole bunch of stuff. It’s a bit like that fairground game whack-a-mole, where a little robotic mole pops up, you hit it with a mallet it goes down, another pops up and for years the government was essentially playing a game of whack-a-mole with avoidance strategists. But over time, the number of moles decreased as the number of options to tax planners has reduced. I think it’s fair to say that now there are not many out there.

But, and this is a big but, there are still opportunities to reduce your tax as an international group, or as others would say avoid tax, by choosing the country that you’re based in. By setting up holding companies in countries which have lower taxes than others. And that’s where these two new initiatives that I mentioned earlier come in. The policy makers are no longer satisfied with stopping avoidance strategies and they’re now looking at doing something much more ambitious; which is to limit the ability that international groups have to pick jurisdictions which have lower taxes to overall reduce the tax of the group.

Paul Johnson

Let’s come onto that, the OECD things next. Before we do, something that’s always interested and puzzled me, what is the role of tax havens in all of this? I mean the Caymans and the Channel Island’s and so on still have an awful lot of brass plates and stuff going on and Geoffrey Cox goes over occasionally to make a lot of money there in these places. I mean what role do they play?

Dan Neidle

So, tax havens, I think throughout history they’ve been there for three reasons, you could almost call them the good, the bad and the ugly. So, what’s the ugly? The ugly is criminal activity to either evade tax or put your corrupt gains from receiving bribes as a government official, or to hide money from your husband or wife you’re about to divorce. Bad, illegal reasons and they’ve taken advantage of the fact that if you stick your money in a tax haven, it is then hard for the UK tax authorities or the US anti-sanctions authorities or prosecutors or you husband or wife to find where that money is. So that’s the ugly role of tax havens.

Now, over the last particular fifteen years, there have been rules introduced which essentially require tax havens to open up at least to tax and other authorities worldwide and most of the tax havens have fallen into line. So that ugly use of tax havens is now hard to do in places like the Cayman Islands and Jersey, but you may well be able to do it in somewhere that doesn’t sign up to all these international rules. Somewhere like, let’s pick on the Marshal Islands. And if you want to evade tax, the IFS could maybe strongly recommend you don’t go to the Cayman Islands, but you might have better luck going to somewhere that hasn’t signed up to international agreements. So that’s the ugly.

Paul Johnson

I’m sure the IFS wouldn’t get involved in such things.

Dan Neidle

The IFS doesn’t do that. Urm, the second the bad reason, is where you’re doing tax avoidance, and tax havens let you do that. So, what would be an obvious way to do that? So I’m a UK company, I have a bunch of cash, and if I keep that in my UK bank account, I’m going to pay tax on that cash, I don’t want to do that, so I know what am I going to do, I’m going to set up a subsidiary in the Cayman Islands. I’m going to throw this cash into that Cayman Islands subsidiary, it’s a tax haven so there’s no tax there, so suddenly I’ve escaped tax on that money. Now that an incredibly obvious ploy and the UK and most other countries have rules against you doing exactly that. But still with enough tax nerds, enough time and money, particularly in the past, you could find ways to avoid tax, as in do something that isn’t illegal, not criminal, but it’s taken advantage of loopholes or tricks in the tax code using a tax haven. That’s the bad use of tax havens. And that’s more the kind of thing that we’re talking about today, where you have an international group which use tax havens as a way to reduce its overall tax. So that’s the bad.

What’s the good use of tax havens? Let’s imagine that I have a pension, I do have a pension, I don’t need to imagine it at all, I have a pension, my pension fund doesn’t pay tax, it’s tax exempt because the government thinks that pension funds are a good thing, that’s clearly not tax avoidance. I have a unit trust, or I stick money in a unit trust, the unit trust doesn’t pay tax because the government reckons unit trusts are good things, but also fundamentally there is a need for funds and things like funds because they serve a variety of important economic purposes. And if we tax those funds then people are being taxed twice. Once at the level of the fund, and once when they receive the money from the fund. So generally, it is accepted that funds should not be subjected to tax. And some kind of funds, like unit trusts, are simply tax exempt. But there are money other types of funds which attract investors from all over the world, and it’s not really possible to have something which is tax exempt under the rules of every country in the world because all the countries have different rules. So, what one will often do is set up a fund in a tax haven, and that’s how you achieve the fund not being taxed. Which is a long way of saying that avoiding double taxation, avoiding multiple taxation is not a sin, and I and many other people would say that that is a legitimate use for a tax haven.

Helen Miller

I think where some of the confusion comes is about definitions about what counts as avoidance. I mean everyone agrees with the kind of ugly stuff, everyone agrees that’s bad, and everyone agrees that maybe there’s cases where you avoid double taxation, that’s okay. But I think people differ on exactly what you call kind of avoidance in the middle. So, for example, if you’re actually moving a factory, completely, to a low tax country, most people think, okay well you’ve responded to the tax system but that was perfectly legitimate. If you’re doing something highly egregious and very artificial and just lots of paper transactions, a lot of people think, okay well that’s not okay, and Dan was right, the things governments have done, including the US, I think has been really important here in changing its tack a little bit towards the behaviour of its own multinationals abroad to clamp down on the more artificial just numbers of a spreadsheet moving around. But clearly there’s quite a bit middle ground here where a company might be actually moving a piece of intellectual property to a tax haven, like moving the rights to use a patent or moving the rights to use a brand or they’re, there is something real about it, something actually has been transferred, but it’s not like a factory, because it was quite easy to move a piece of paper. And there’s that large grey area between is that okay? Is that an okay use of the rules to say well I’ve responded to the tax system, or is that actually in the camp of, well that wasn’t what we intended? And I think the answer to that is, the system is such that they get away with it, its not illegal therefore if you don’t like it, change the system. So I think the large estimates you see around profit shifting, and the large degree of disagreement around what’s okay and what’s not okay, I think comes in these boundaries where there’s real stuff being changed, but because the nature of intangible assets is actually, you can change real stuff without actually changing anything that’s really physical, it’s really paper that’s moving, I think that’s a lot of what’s happening.

Dan Neidle

Or here’s another example, holding companies, so if you’re a US multinational looking to expand into Europe, you’re going to want a headquarters in Europe to coordinate what you’re doing. So, you’ll set up a holding company in Europe and then all your European businesses, in twenty or however many jurisdictions will be under that holding company. Where do you put that holding company? So, you could put the holding company in Italy, and then you would have a pile of tax, because the Italians have tax system, has a particularly unfavourable treatment of holding companies, so surprise, surprise, nobody puts their holding company in Italy. Or you could put it in Ireland, and Ireland has a pretty good treatment of holding companies, guess where holding companies end up, they end up in Ireland or Luxembourg or at least pre-Brexit quite often in the UK. Is that tax avoidance? If you’ve got a choice as to where your holding company is, where your head quarters is? And it’s not just a paper choice, part of its paper, where would your subsidiaries be held, but part of it is where will your European CEO be, it is the fact that choice is influenced by tax. Is that an unacceptable thing or an acceptable thing? Ireland would say, “we’re a small country, we don’t benefit from the economies of the scale of Germany, we don’t have the cultural cachet of Paris, we don’t have the cosmopolitan nature of London, so we need something to attract multinationals, and tax is a thing we’ve chosen, it’s a legitimate choice,” Ireland would say. But other people would say that Ireland are facilitating tax avoidance.

Paul Johnson

We can talk for a long time about the philosophy of what counts as tax avoidance and it has been fascinating to do so, but let’s move on to what the OECD is doing. I mean Dan has already talked about two big proposed changes for the OECD, Helen do you want to give us a sort of introduction to what those two changes are and then I’ll come onto Dan to add a little colour to that and tell us a bit more about where we got to.

Helen Miller

So, the background here is the OECD has been working for about a decade, as you said up front, to try to get lots of different countries to agree to change their rules in ways which make it harder for companies to shift profits. In particular, harder to shift profits to low tax counties in cases where there’s not much real economic activity going on. And Dan mentioned earlier that there’s already been some changes in the last decade where counties have tightened up rules to make some of these things more difficult. But last year, most countries agreed, at least in principle, to implement two new rules, which the OCED happened to call pillars. So, these are the sort of two big things that are happening right now, we should probably do one at a time because they’re kind of complicated.

So, the first one is effectively going to try to reallocate some profits, so for most companies, they are going to stay under the current rules, and nothing will change. But for the very largest global companies, and you’re thinking here about a handful of, you know a few in a hundred companies worldwide and most of their profits will actually stay under the current system, but a slice of their profits will be taxed differently. So rather than be allocated as they currently are, they’ll be reallocated towards the countries basically in which sales are happening. So, as Dan said earlier, a lot of people have a problem with the idea that you know companies are taxed where the activity happens, it’s saying we’ll take the biggest companies, take a slice of their profits and reallocate those profits towards the countries where sales are happening. And if you think broadly the underlying idea here is that these market countries, so counties where sales are happening, think they’re not getting their fair share at the moment, that profits are being stripped away from them towards other low tax countries and they want to find ways to get the profits back into their countries so they can tax it, so changing, not necessarily in how much is taxed, but who gets to tax it. So that’s the idea.

To give you sense of scale here, I think the OECD things that one US$125 billion will be relocated roughly, it’s a ballpark estimate, as a result of these pillar one changes, and that is a big number, but its actually, I think it gets quite a small number once you start thinking there are lots of countries here that will want a slice of that profit. So, the big picture is you know for some companies this will shift where some of their profits are taxed, but this is now a wholesale change in the regime to say, “let’s move towards taxing profits where markets are,” this is a, “keep the current system, and at the margin, for a small handful of companies lets tweak the allocation.”  And in sort of the grander scheme of things I think that’s actually, its large in the sense it’s a big change conceptually to what we currently do, but in terms of like pounds that are changed in countries I think it’s actually relatively small.

Paul Johnson

That’s a 125 billion of profits not of tax, is that right?

Helen Miller

Exactly, this is profits, this is basically saying, take the biggest companies, take some of their profits, and you’re still going to tax them but basically rather than tax them where they’re currently being taxed, we’re going to change where the profits are taxed and now market counties, so counties in which sales happens, get a bigger slice of the tax pie. So, look, the governments aren’t going to turn down that revenue, I’m sure they’ll be glad of it, but you should be thinking of, if any given country relatively small changes in how much money they’re actually going to raise from these big tech companies. So, this is not a situation where suddenly the UK is going to be racking in many billions from you know Amazon, Facebook, Google, and all the tech giants.

Paul Johnson

Just to give people a sense 125 billion of profits, presumably translates into no more than 25 billion of tax. 25 billion dollars of tax across all the countries in the world is diddly-squat.

Helen Miller

Yes, basically. And as I say, I think, my take on this is I mean people differ on this, some people get excited about the revenue. My personal take on this is that, to an extent this is exciting, it’s exciting because it marks governments’ willingness to think about a different system, and a different type of allocation and maybe it holds a different in the future. I’m sceptical about that, I worry we’ll just get stuck in this new unhappy much more complex two-tiered system. But you know I think it’s the, it’s the direction of change rather than the actual number of dollars or whatever that are going to change hands here.

Dan Neidle

Helen’s right, it’s simultaneously revolutionary and very small, so a third thought to add to those two is that it’s not going to happen.

Paul Johnson

All right, go on, tell us why it’s not going to happen?

Dan Neidle

So, the reason it’s not going to happen is countries are not free to go ahead and tax the profits of foreign companies, because almost every country in the world has agreed a series of double tax treaties with other countries, which sets out the circumstances in which country A can tax companies from country B. And those treaties say very broadly, that you tax them in accordance with the status quo that we discussed at the start of this discussion. If you want to change that, you need to amend the tax treaties. Now, that requires, obviously, all these countries to agree. What’s the country most affected by this pillar one proposal? Answer: the US, because all of these multinationals everyone wants to tax are US companies, well almost all of them, what’s the chance that the US senate and house of representatives agree to tax US companies more? Answer: very slim. Add to which, to amend treaties you need a two thirds majority in the US Senate. So, I’m not sure I’ve met a single US tax policy maker, or tax nerd of any description who things this is going to fly in the US.

Paul Johnson

So, has the OECD just been wasting their time of the last decade?

Dan Neidle

That would be extremely harsh. The initial view was that this was a deal that other countries would get to tax US companies more under this pillar one, and the US will get to tax lots of companies more under pillar two. Which we’ll probably discuss in a moment, but this deal seems to have slightly broken down.

Helen Miller

Yes, so let’s do pillar two and then we can do the politics. So, pillar two basically is a minimum tax. So, its going to say, again, for the largest multinationals, not every company, but the largest multinationals, take every country in which they operate and make sure they pay at least 15% of their profits in tax in that country. So big picture the idea so to prevent or at least slow down tax competition, put a floor on tax rates, we can’t keep competing down to zero. But it’s not as simple as just saying, “has every country got a 15% headline tax rate?” because we’re not asking whether they’ve paid 15% of profits as defined by that counties tax regime. Effectively it’s a different definition of profits and the rules will be assessing whether they countries will be paying 15% of that definition. That kind of matters because effectively we’ll be allowing a lower rate to be charged on some real activities, soon real factories or investments, and there’ll be lots of debates about can governments keep competing over that stuff. But broad idea, minimum tax rate and if companies aren’t paying the 15% there’s going to be a top up tax that brings it up to that level to sort of level the playing field.

And I think there’s where the politics comes in, as I think Dan was alluding to. So, very broad-brush history here, historically, the US has actually been quite happy to do things that say its multinationals, when they operate abroad, it kind of helps them to avoid the tax they might pay on those foreign profits. And it kind of says, “well make it easy for you to just not really worry about paying foreign taxes.” And there’s been a bit of a shift in that over time and more recently, I think under the Joe Biden presidency, they want to raise their corporation tax rate, but they don’t want US companies to just suddenly all go offshore and move their investments offshore and avoid US taxes. So, it’s one thing of US multinationals to avoid foreign taxes, it’s not a thing to start avoiding US taxes. So, I think the deal here, I think that Dan was alluding to, is basically you know the US will get everyone under the OECD to agree to a minimum tax, that stops some tax competition and provides a backstop of US increasing its rate. And in a quid-pro-quo they’ll allow some of their multinational tech giants to be taxed a bit more offshore. The question is whether that deal is broken down or whether now the US things actually maybe it would be able to put up its rate without giving away this pilar one allocation. So, I think it’s a long winded way of saying the US is quite an important player here, both because it sets out how these big multinationals are taxed at the moment, and how they’re operating, and obviously how it ratifies a deal has a big effect on whether other governments are going to want to do it too.

Dan Neidle

And pillar two, doesn’t need countries to agree to it, because it has a sneaky way of getting companies anyway. So, a good example, so the basic idea of pillar two is that if you’re a UK headquarters multinational, you look at what your profit should be, in each of the counties in which you operate. And what your tax on that should be under these pillar two rules that Helen mentioned, and if its less than 15%, then all of that gets topped up as extra tax in the UK, in the headquarters jurisdiction. Let’s say the UK decided, “I’m not going to do this, I’m going to make myself more attractive and I’m going to compete by not adopting this rule,” so then there’s no top up tax in the headquarters in the UK. But all other countries where the company has subsidiaries get to apply their own tax to kind of grab that top up tax at as subsidiary level. So, you don’t need every country in the world to agree to pillar two for this minimum tax to work. You just need to get enough to agree. And there probably are enough to agree because for a start it looks pretty certain the EU will sign up to this.

Paul Johnson

Okay, and we’ve already seen Ireland saying it’s going to raise its tax for example?

Dan Neidle

Yeah, and the UK, I shouldn’t have used the UK as example not doing it, because it’s pretty clear the UK is going to do this, and the UK has been one of the countries in the driving seat behind it.

Paul Johnson

So why is this deal with the US breaking down then?

Dan Neidle

So partly it’s the politics, partly it’s the politics. That was probably all of your listeners are keenly aware, the partisanship in the US is so toxic there’s pretty much nothing the Biden administration could propose which is going to get through congress, no more this than anything else. The second reason is that the basic conception of pillar two is that it’s a win for the headquarters jurisdiction because they get to charge this top up tax. But in the last few months it’s been clear that actually, lots of the subsidiary jurisdictions will charge their own mini top up taxes, leaving nothing left for the headquarters. So instead of say Google in the US having a pillar two tax to the extent it’s not getting 15% taxed in all its little subsidies, that top up tax will be charged on all of its little worldwide subsidiaries by lots of different counties around the world leaving little or nothing of the US to tax.

Helen Miller

What’s happening here really is that governments are doing what sin their self-interest. Which is completely understandable. So, all the time that governments think that these changes in rule will let them raise more revenues, they’re happy. So, if they think minimum tax lets them raise more, either because they’re a low tax country and they’re going to get more from multinationals, so developing countries will like it because they think they can raise their standard, or if they think they’ll get more from their headquarter companies, that’s great. Once a country thinks they won’t get very much more, for example because it will be taxed somewhere else, the incentive to join this goes away. Countries aren’t joining this to be sort of noble in some in some broader sense, they’re thinking about their bottom lines. And if you’re going to do a big change and actually get not much more revenue, I think that’s where the consensus for these things starts breaking down.

Dan Neidle

In a way there’s been a big shift, the first wave of international tax avoidance coordination in the sort of early 2010s, that was about companies were avoiding tax, let’s make sure they pay more tax. Now the debate is more, “okay, we think the tax should be paid here, rather than there.” And that’s a zero-sum debate between all the countries in the world.

Paul Johnson

So where are we going to end up, Dan?

Dan Neidle

We’re probably going to end up, I think, with pillar two adopted, pillar one not adopted, pillar two being the subject of different and somewhat inconsistent implementation in the US, in the EU and in the UK and wherever else, meaning something of a mess. And whilst that maybe a better result in terms of fairness, than the status quo, it still won’t fix the fundamental problem which is that most people I think would say that its fairer to tax a company based upon where it sells stuff, rather than the vagaries of where it happens to be established, and a rather notional arm’s length computation of international property and everything else. So, you’re not solving that fundamental break between the way the tax system works, and the way that most people’s intuition would, I think, say that it should work.

Paul Johnson

And I think from what you’re saying, this will make no difference to the amount that we in the UK raise from the Googles of this world?

Dan Neidle

I think we’ll make more tax, Helen what do you think? Not much more but a bit more?

Helen Miller

Yeah, I think a bit more. And obviously it’s also a bit complicated because currently the UK is doing other things like digital services tax and things that are trying to claw some money back and they’ll change so, you know I don’t think we’ll lose out, I don’t think this will be bad for the UK, but I think my concern here is that its going to add a lot more complexity to the system, and I suspect in a couple of years’ time, we’ll still be sitting having headlines that say, “company X got big sales here but small profits here.” As Dan said people don’t like that, so in that sense, you know although I think the OECD absolutely deserves credit for just this huge amount of work that’s been going on behind the scenes and people have you know spent their careers trying to sort this out, I think we’ve still got a system where people aren’t going to be happy with the allocation we’ve got, its not going to change enough to make that big a difference.

And I think it’s not even clear to me that this is the first step towards something. Like it’s one thing to say, “there’s a new destination we want to get to, we can’t get there over night but lets make progress towards it. The problem I have with these proposals is that it’s kind of saying “look, we’ve got this current system, let’s take that as given, and let’s put some plasters on the side of it to make it maybe work differently around the edges.” That’s not a movement towards a new system, that’s us stuck with the status quo approach, I think. And I think Dan and I are probably agreeing here, I mean I think the current system is broken and I don’t think it’s fit for purpose when we have multinationals which are genuinely multinational, genuinely operate across the world, and lots of things are intangible and digital, it makes no sense to me to try and divvy things up on physical locations of underlying activities that are themselves mobile. The only way to fix that is to reimagine the system and say, “let’s make a system of taxing profits that’s not open to these kinds of problems.” And I think actually taxing where consumers are is preferable. Not because its inherently fairer, I think you can argue both ways, but more practically because consumers don’t move. It’s actually, if you want to sell to the UK, you’ve got to sell to people who living in the UK, people who live in the UK live in the UK, they don’t move boarders for cooperation tax purposes. So, a more practical long run solution would say, “let’s give up trying to do the current allocation, and accept we can’t really do it, and actually just try to allocate profits to countries according to where immobile consumers are.

Paul Johnson

Dan, you probably heard that from economists before, as a lawyer is that, will that fly? 

Dan Neidle  

I think a lot of people thought it’s a complete pipe dream that any major country is going to make so big a change. But in 2016 it almost happened in the US, the US tax reform got really quite close to adopting a destination-based tax system of the kind Helen describes, where you tax on the basis of where your ultimate consumers are, not on the basis of other stuff that can be easily faked or is just the product of happenstance. So, it almost happened in the US, the US in the end didn’t go that way, maybe in the future it might, maybe the UK post Brexit could take the opportunity to do something really radical and try and reshape the entire worldwide debate about where tax is going. And it really would just take one large economy to take this step and that could give a big push to everyone else to seriously consider it too.

Paul Johnson

Is there an issue there for lower- and middle-income countries? If we moved to that kind of tax system, given that the kind of rich consumers are all in the west, would they be big losers out of that?

Dan Neidle

That has been studied, and provided that you maintained something like the current system for the taxation of oil, of gas, or mined commodities, provided that you don’t change that, the overall move should either be broadly neutral or even positive for most of the developing world. It would also, and this is a significant factor, be easier for them to operate, which for a developing world tax authority with limited tax resources, is quite a big deal.

Paul Johnson

Well thank you so much Dan, thank you Helen, that has just been extraordinarily illuminating for me, and I hope for everyone else. I mean whoever said that tax is anything other than extremely interesting and exciting and almost really, really matters although I have to say I’m glad I’m not one of the hordes of people who have devoted my life to trying to sort out these OECD tax treaties and to have Dan and Helen sit here and say, “well you maybe have devoted thousands of person years to this but it ain’t going to get you anywhere.”

It really does tell you, I think, this discussion of international cooperate tax first how beholden we are to history, we are still stuck with a regime that was put together a century ago where nobody imagined the internet or anything remotely like it or the degree of cross border shifting that we have at the moment. Secondly, just how difficult it is to make changes which require international agreement. And that’s not just between one or two countries, but between dozens of countries, if not more than a hundred across the world. I think third in this case how important the United States is, and I think even the focus that we’ve had on it is perhaps not even enough to give a sense to how central US policy is in all of this, and indeed, to some extent, how that’s created some of the problems that we’ve been thinking about over this episode. And then finally I suppose how inadequate the public debate is about this, in the UK, thanks to Dan and to Helen, we have tried to simplify this about as much as it is possible to simplify it for this kind of discussion, but it is clearly many, many times more complex than anything you see reported in the newspapers or on the news. And in particular, when you get people popping up and saying, “it’s just not fair, x, y, or zed, we could be getting tens if not hundreds of billions of pounds additional from these companies,” and I think the short summary of what we’ve just heard is no you can’t. And whilst some of them maybe, in Dan and Helen’s words, still being naughty and we can reign some of that naughtiness in, with the best will in the world, the pot at the end of the rainbow is not in the tens of let alone hundreds of billions.

Let us end there, thank you so much for sticking with us and listening to this episode of the IFS Zooms In, please do rate and share this episode and for all our latest work, please visit www.ifs.org.uk. And to further support our work, please consider becoming a supporter of the IFS for as little as £5 a month. You can find a link with further information on the episode description. Stay well.

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