HM Treasury has confirmed that the OECD’s review of the international tax system will consider all options for reform, including unitary taxation. The Sunday Times reported yesterday that the Treasury said all options for reform would be on the table. ‘We plan to look at all options for reform, including this one, but we can’t prejudge the outcome,’ a Treasury spokesperson confirmed today.
The UK will lead a review of the transfer pricing rules as part of the OECD’s project on base erosion and profit-shifting, the findings of which will be presented to the G20 summit in July. The UK will use its chairmanship of the transfer pricing group to draw up ‘necessary changes’ to the principles on which multinationals’ profits are allocated between countries, George Osborne said in a joint letter to the Financial Times at the weekend.
The Sunday Times noted that some accountants believed unitary taxation ‘could create as many problems as it solved’. But it quoted Sol Picciotto, emeritus professor at Lancaster University and adviser to the Tax Justice Network, as saying: ‘The only rational way to tax modern multinational companies is to tax them according to where their genuine economic activity is, rather than where their tax advisers pretend it is.’
Picciotto argued, in a recent paper advocating a serious study of the unitary approach, that that tax revenues gained from the elimination of profit-shifting and tax avoidance through havens, as well as ‘substantial savings’ in enforcement and compliance costs, would make it easier for states to lower corporate tax rates.
Vanessa Houlder, tax correspondent at the Financial Times, noted last week that the OECD’s report contained ‘no sign of going back to the drawing board … although [it] talked about a need to ‘revisit some of the fundamentals of the existing standards’.
But the OECD said that it was ‘important’ to revisit some of the fundamentals. It added: ‘Indeed, incremental approaches may help curb the current trends but will not respond to several of the challenges governments face.’
The OECD was committed, the report added, to suggest ‘concrete solutions to realign international standards with the current global business environment’. That would require some ‘out of the box’ thinking.
Transfer pricing was a key pressure area, particularly ‘in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group, and transactions between such entities that would rarely take place between independents’.
Transfer pricing guidelines were perceived by some, the report said, as ‘putting too much emphasis on legal structures … rather than on the underlying reality of the economically integrated group, which may contribute to base erosion and profit-shifting’.
Picciotto accepted in his paper that the weighting of factors – assets, labour and sales – in the formula for allocating profits between countries would be ‘the most difficult issue’ for the international adoption of a unitary approach.
‘It would be preferable to exclude intangibles such as intellectual property rights from the assets weighting,’ he argued. ‘Inclusion of intangibles would run counter to the basic principles of unitary taxation. The unitary approach does not attempt to evaluate the contributions to total income made by the different parts of the [group], it assumes that the income results from the combined efforts and synergy of the [group] as a whole.’
Responding to recent criticism of the unitary approach, Picciotto denied that it would reduce national sovereignty by removing state powers to decide their own taxes.
‘Quite the opposite, in fact, he said. ‘States’ taxing powers have in reality been drastically undermined by economic globalisation. Unitary taxation would help restore their ability to tax multinational corporations, leaving states free to decide their own tax rates … and would strengthen the sovereignty of states to decide their own levels of taxes and public spending.’
HM Treasury has confirmed that the OECD’s review of the international tax system will consider all options for reform, including unitary taxation. The Sunday Times reported yesterday that the Treasury said all options for reform would be on the table. ‘We plan to look at all options for reform, including this one, but we can’t prejudge the outcome,’ a Treasury spokesperson confirmed today.
The UK will lead a review of the transfer pricing rules as part of the OECD’s project on base erosion and profit-shifting, the findings of which will be presented to the G20 summit in July. The UK will use its chairmanship of the transfer pricing group to draw up ‘necessary changes’ to the principles on which multinationals’ profits are allocated between countries, George Osborne said in a joint letter to the Financial Times at the weekend.
The Sunday Times noted that some accountants believed unitary taxation ‘could create as many problems as it solved’. But it quoted Sol Picciotto, emeritus professor at Lancaster University and adviser to the Tax Justice Network, as saying: ‘The only rational way to tax modern multinational companies is to tax them according to where their genuine economic activity is, rather than where their tax advisers pretend it is.’
Picciotto argued, in a recent paper advocating a serious study of the unitary approach, that that tax revenues gained from the elimination of profit-shifting and tax avoidance through havens, as well as ‘substantial savings’ in enforcement and compliance costs, would make it easier for states to lower corporate tax rates.
Vanessa Houlder, tax correspondent at the Financial Times, noted last week that the OECD’s report contained ‘no sign of going back to the drawing board … although [it] talked about a need to ‘revisit some of the fundamentals of the existing standards’.
But the OECD said that it was ‘important’ to revisit some of the fundamentals. It added: ‘Indeed, incremental approaches may help curb the current trends but will not respond to several of the challenges governments face.’
The OECD was committed, the report added, to suggest ‘concrete solutions to realign international standards with the current global business environment’. That would require some ‘out of the box’ thinking.
Transfer pricing was a key pressure area, particularly ‘in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group, and transactions between such entities that would rarely take place between independents’.
Transfer pricing guidelines were perceived by some, the report said, as ‘putting too much emphasis on legal structures … rather than on the underlying reality of the economically integrated group, which may contribute to base erosion and profit-shifting’.
Picciotto accepted in his paper that the weighting of factors – assets, labour and sales – in the formula for allocating profits between countries would be ‘the most difficult issue’ for the international adoption of a unitary approach.
‘It would be preferable to exclude intangibles such as intellectual property rights from the assets weighting,’ he argued. ‘Inclusion of intangibles would run counter to the basic principles of unitary taxation. The unitary approach does not attempt to evaluate the contributions to total income made by the different parts of the [group], it assumes that the income results from the combined efforts and synergy of the [group] as a whole.’
Responding to recent criticism of the unitary approach, Picciotto denied that it would reduce national sovereignty by removing state powers to decide their own taxes.
‘Quite the opposite, in fact, he said. ‘States’ taxing powers have in reality been drastically undermined by economic globalisation. Unitary taxation would help restore their ability to tax multinational corporations, leaving states free to decide their own tax rates … and would strengthen the sovereignty of states to decide their own levels of taxes and public spending.’
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