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Reader feedback: unitary taxation

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As attention turns to finding a solution to the world’s broken tax system governments are facing a fundamental choice. 

Do we defend the individual entity principle, which states that the hundreds of thousands of companies that make up multinational groups should all be taxed as independent businesses? Or should we go down the path of unitary taxation, which treats multinational groups as one single enterprise, dividing the right to tax their consolidated profits between the nations where they operate?

As a matter of pure principle, the latter must surely be the correct approach. As was set out long ago by Lord Carnwath LJ, tax statutes ‘draw their life-blood from real world transactions with real world economic effects’. In the real world, multinational groups are single businesses rather than a set of loosely affiliated, separate entities. 

Heather Self, in her recent column (Tax Journal, 8 November 2019), is heavily critical of those advocating a unitary approach, calling it an overly simplistic answer to a complex problem. 

One of her main arguments is that such an approach conflicts with the UK’s 130+ tax treaties, all of which would need to be renegotiated.

Of course, the ideal outcome would be for governments to agree on a comprehensive solution. But that does not mean that nothing can be done until that happens. As has been set out in the recent paper by Professor Sol Picciotto (Taxing multinationals: a new approach), many tax treaties already in force already permit the use of a profit split methodology to determine taxable profit attributable to permanent establishments, and the OECD accepts that this could provide a ready made legal basis for countries adopting an apportionment method. In addition to this, there are new and long standing anti-avoidance initiatives which move towards a unitary approach. Full inclusion CFC rules are one example, as are the much newer US GILTI provisions. 

It could also be argued that in order to stem the clearly abusive schemes that are commonplace today, more drastic action is required. It is possible for Parliament to legislate to unilaterally disapply the provisions of tax treaties. This last happened in the UK in 2008, when the government legislated to override certain provisions of any tax treaty in force to close down a disguised remuneration scheme (FA 2008 ss 58 and 59, which amended ICTA 1988). 

The action by the UK government was subsequently upheld by the European Court of Human Rights, which noted that double tax treaties should do no more than seek to relieve double taxation, and should not be permitted to become an instrument of avoidance.

Mrs Self also points out that the unitary principle is also not without its difficulties. That is undoubtedly the case. But the mere existence of problems in the future is never a good reason not to fix a broken system today.

I speak from no personal experience, but I am sure there are problems with driving a Ferrari. I am also sure that it is a better car than a Trabant. 

George Turner, Tax Watch UK (

Author’s response: The main aim of my comments was to point out that the Sunday Times’ article was an over-simplified response to a complex problem: the headline said that Labour plans to ‘launch a £14bn tax raid on big companies such as Amazon’. I directed readers towards the more detailed paper, and said that the unitary principle may well work better, in the long term, than the current arm’s length pricing principle. But it is not within the power of Labour (or any other UK political party) to deliver this result without wide international agreement.

Heather Self, Blick Rothenberg