The west must stop shortchanging developing nations over global tax reform

Proposals to link corporation tax in each country to the amount of sales a multinational makes are an improvement on the current creaking systems, argues James Moore, but risk shortchanging poorer countries where goods are more often produced

Joe Biden is putting consumer nations first with global tax reform proposals (AFP via Getty)

There’s a feeling of dams cracking, if not exactly breaking, when it comes to the cynical gaming of the decrepit international taxation system by multinational corporations.

The notion of a global minimum rate has moved from the radical fringes to the mainstream at the speed of one of Elon Musk’s rockets and is now being actively considered at the Organisation for Economic Cooperation and Development.

The US, once an impediment to making progress, has begun to drive it, in no small part because, with an enormous infrastructure plan to fund, the Biden administration has recognised that it is in its interests to do so. 

Acting globally, as it is now doing, and working with its partners, is putting “America first” far more effectively than Donald Trump ever did. 

This brings us to the latest proposal to have emerged from the talks taking place in Paris, the details of which have been obtained by the Financial Times.

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They suggest a new model for taxing multinationals that would involve divvying up their payments based on their sales in each country as part of a global minimum corporate tax deal. 

On the face of things, the idea has much to recommend it. The problem with the current system is that it targets profits, which are ridiculously easy to move around. This favours the leaders in the global game of beggar thy neighbour, such as Ireland, Luxembourg and the Netherlands. Before Rishi Sunak’s installation at 11 Downing Street, the UK tried to keep up with the neighbours but could never quite manage it. 

A link with sales takes away wheezes such as having your business in high-tax jurisdiction A where you generate a lot of revenue, then paying royalties for the use of the global corporate name to your business in low-tax country B even if you do considerably less business there. 

This would, obviously, also do away with the need for the hotchpotch of digital services taxes that various countries have imposed in an attempt to capture revenues from America’s tech giants.

Under such a system, there would in theory be no more news reports concerning, say, Apple paying 38 pence, a Mars bar and a secondhand third generation iPhone in corporation tax despite selling thousands of new handsets, as well as Macs, iPads and Apple Music subscriptions in the UK. 

Sunak would, under those proposals, receive something much more reflective of the amount of business Apple does in this country to spend on, I don’t know, levelling up? 

This would apply to other multinationals too. While tech companies have captured most of the global attention and outrage, they’re far from alone in playing the game. 

But while this US proposal is a distinct improvement on what we have now, it’s far from perfect.

It’s not quite as fair as it looks, so is deserving of only two cheers, not three. That’s because it tilts the playing field heavily in favour of developed economies, which consume more, and away from developing nations, which consume less but where goods are often made. 

With its consumption-led economy, a nation like Britain will come out ahead. The US should do just fine as well because the US is the biggest consumer of all. America first, see.

It’s rather less attractive for less-wealthy nations, which do a lot more producing than consuming. 

This is why the Tax Justice Network and other organisations are arguing for a hybrid system, linking levies to sales but also to labour, which holds out a prospect of sharing the proceeds more fairly. 

Of course, there will inevitably be resistance to this sort of idea from consumer nations, which tend to have greater economic clout and global influence. 

However, as the US proposal makes clear, yesterday’s radicalism can become today’s consensus with surprising rapidity if an idea gains enough traction. So it is worth campaigning for and it deserves our support.