Some thoughts on unitary taxation…

Here is a reply I started writing to a comment made by Christie Malry on Andrew Jackson’s blog… It got a bit long and off topic as I was also trying to capture some of my thoughts from a conversation I had on twitter earlier (starting with this comment).

So it is a bit of a mess but I’m loathe to delete it. Anyway here it is…

I agree that Richard has a point over IP being problematic.

But his purpose in arguing to remove IP appears to be making unitary taxation a workable solution. Whilst simply removing IP might appear an attractive solution in terms of simplicity, I am sure it would open the door on a whole raft of abusive practices. But I don’t think you even need to consider using the word “egregious” or “scheme” for detrimental effects to occur.

If you have this situation where the value of IP is ignored in determining allocating the tax base, you’ll just end up with IP being moved into high tax jurisdictions in exchange for assets that do alter the tax base. I wonder where we’ll see tangible assets accumulating instead? Low tax jurisdictions, perhaps? That’s one third of Richard’s formula taken care of right there. Probably do wonders for property prices by increasing demand too…

I’m thinking that Ireland has a lot of land which is cheap right now. Worth a punt for when Google want to increase their tangible assets base there?

If you then allocate taxation partly based on employment, another third of Richard’s formula, low tax jurisdictions will be further rewarded with higher employment.

Higher tax jurisdictions currently have the incentive of encouraging costs to be incurred there through increased CT relief. UT will just mean that low tax jurisdictions get the benefit of the costs occurring there and also the taxation on profits.

And where do the sales occur? That’s a big thorn in UT’s side and one which we currently can’ t deal with either. That’s the digital economy for you, creating ambiguity over where a sale occurs. I don’t think that ambiguity will disappear if you start determining taxation of profits on that basis as well as for VAT purposes. I think it might just get worse…

All in all, I think unitary taxation will be a shot in the arm to the competitors in “the race to the bottom”.

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About Ben Saunders

I'm a Chartered Tax Adviser and a freelance writer. This is my personal blog about, well, mainly taxation. I might put other stuff in. Who knows.
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5 Responses to Some thoughts on unitary taxation…

  1. Feel free to leave long rambling replies on my blog – I do on yours… 🙂

  2. Pingback: The OECD’s public consultation on transfer pricing – and a lively discussion on tax and intellectual property | Andrew Goodall CTA

  3. What does “anti-avoidance” look like in a UT regime? In a TP tax system, a country can object if the costs claimed by a country inside its borders are overstated. Or indeed if its sales are understated.

    But in a UT regime, the taxable profit for a country inside its borders are set by the formula, which is spat out by a combination of:

    1. the financial reporting profit (perhaps adjusted for standardisation, FV uplift (maybe? Richard seems to say cost, but that can’t be right), disallowing some/all intangibles, any others??);
    2. assets (again, adjusted for FV uplift?);
    3. employees
    4. sales

    So a country that feels it’s not getting its fair share only has these four things to disagree with.

    Can it dispute the tax base (item 1)? Maybe, but that would mean every country getting more. And a key benefit of UT is its simplicity. If any country can dispute the base, the system will gum up with disputes in no time. So UT will have to restrict countries’ ability to play games like this in respect of the base itself.

    Can it dispute assets? Perhaps. If we have a FV uplift for TFAs, I can see countries arguing that companies are playing too conservative in their asset valuations. But of course, what you win on the roundabouts, you lose on the swings, so any amounts grabbed for “your” country will be taken off all the other countries.

    Can it dispute employees? Sales? Again, perhaps. Might some countries seek to argue that employees in one country are “really” working on behalf of their country? And similarly with sales? (Think recent claims about Google). The swings and roundabouts issue applies here too.

    Disputing the elements that go into the formula rather than the base itself are going to kill UT. Because it can only work if all countries in the system agree to participate in it. If countries feel they’re not getting their fair share, they’ll opt out.

    I suppose this is another way as saying “UT is only as good as the formula that goes into it”. It’s naive to presume that you can replace something as complex as our existing system of transfer pricing with a simple formula and expect to produce fair results immediately. Unfortunately, if the formula isn’t perceived to be fair, countries won’t want to be part of a UT system.

  4. Mike Truman says:

    Just commented on Richard’s blog (so won’t appear until moderated) on how this will affect developing countries. I’m not sure, for example, that it would capture more of the profits of De Beers to be taxed in Namibia (which you would think unitary taxation would aim to do) because the sales are all outside the country and the assets and employees are owned by a 50/50 JV.

    The latter, incidentally, looks like a classic cut-out to put into a situation like this for tax planning if unitary taxation comes in. In fact I think Ben had the right idea yesterday – we should be stress-testing unitary taxation by looking at how we would game it. After all, at a theoretical level, arms’ length pricing doesn’t look so bad.

  5. Pingback: A general criticism of unitary taxation | Ben's white space entries

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