PARIS — It’s hard to know whether men really are from Mars and women from Venus. But you can almost be certain that tax collectors live on Uranus and large companies on Saturn, the two Solar System planets furthest from one another.
Let’s start our tour with a visit of the “ice giant.” Uranus needs 84 years to revolve once around the sun, and tax collectors also want to make their revolution in a little under 100 years. They want to break the wonderful corporate tax system created in the 1920s. A wonderful system indeed… for its time. We were then in the waves of what economist Suzanne Berger calls “our first globalization.”
In the previous 50 years, the biggest companies from Germany, the United States, France, established themselves all over the world. After World War I, the penniless nation-states were tempted to tax foreign companies heavily. The biggest companies of the time often paid their taxes twice: for the headquarters and the branches. To avoid a tax war, the League of Nations proposed one principle, namely that tax must be paid only once and at the place of production, which was easy enough to determine in the industrial era.
“Stable establishment” became the founding principle of the taxation of mutinational companies. As decades passed, thousands of bilateral conventions between countries made those rules more precise.
But in today’s digital era, this system is like a broken net. Companies localize their profits — and more and more often their turnover too — in countries where tax is the lowest, like Ireland where profits are taxed at 12.5%. Gulliverian companies pay Lilliputian taxes. And once again penniless after the great recession of 2009, states want to tighten the net around corporations.
The Organisation for Economic Cooperation and Development (OECD), the think-tank of developed countries, has taken on with success the project under the double instigation of its Mexican Secretary-General Angel Gurría and the director of its Centre for Tax Policy and Administration, the Frenchman Pascal Saint-Amans.
Encouraged by real political will and crucial technical support, the project is moving forward fast, unlike for example the international negotiations on environment, which do not benefit from neither of these two resources.
The plan presented in mid-September by the OECD, and adopted by the G20 Finance Ministers in Australia, circumvents the “stable establishment” by demanding companies to indicate to the tax authorities of each country their sales, profits and workforce in their local branches.
The plan also comes with a series of measures aimed at curbing, or even preventing, aggressive practices leading to base erosion and profit shifting (BEPS). And the 3,000 bilateral conventions would be replaced with a single multilateral convention. Almost a century of practices will be turned upside down, even though poorer countries, those less equipped to face tax evasion, will still struggle to get their money, as NGO Oxfam has warned.
Let’s now go to that gaseous giant, Saturn. There, on the contrary, the war against tax is on and American giants are spearheading it. One clear signal is that the issue of tax played a central part in all the big mergers attempts of the past few years. Pfizer-AstraZeneca, Publicis-Omnicom, Lafarge-Holcim, and others.
The movement started in the U.S. for two reasons. First, corporate tax there is high (up to 35%) and tax breaks are scarce. Second, it’s the homeland of information technologies and they juggle with borders. As a result, multinationals big and small hide their profits abroad. According to Bloomberg, seven American companies, including General Electric, Merck and Apple, each have more than $50 billion dollars parked abroad.
On top of that, Internet giants like Google and Amazon have built their whole global organization on tax minimization, and have done so with a formidable efficiency. Google thus paid in France 8 million euros of tax on last year’s benefits, with declared revenues of 231 million euros, although the company represents more than 90% of a search engine advert market worth over 1 billion euros.
Their competitors have but little choice. If they want to follow them in their price war, they also must go for fiscal optimization, whether their business is in information technologies, trade, banking or any area that is embracing the digital revolution.
“The digital economy is becoming the economy itself,” the OECD underlines in one of the hundreds of pages of documents it published on the BEPS. The sector already represents some $16 trillion of revenues.
This power struggle between the two planets will be decisive for two major challenges of the next few years. The first is the ability of each state to protect their money. The second is the ability of all states to take common decisions together. Beyond the issue of tax evasion, what is at stake is the very future of an open world.