How to Tax a Multinational
For too long, multinational corporations – and digital firms in particular – have used existing rules to avoid paying taxes in countries where they do much of their business. But recent encouraging signs suggest that the idea of a global corporate tax on these companies' profits is gaining traction.
NEW DELHI – For some time now, multinational companies (MNCs) have been gaming the rules of the global economy to minimize their tax liability – or even eliminate it altogether. And for some time now, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) has argued for the unitary taxation of MNCs. Fortunately, there have been some encouraging recent signs that the idea of a unitary tax is gaining traction.
Introducing a global minimum effective corporate-tax rate on MNCs of between 20% and 25%, as the ICRICT (of which I am a member) advocates, would greatly weaken these firms’ financial incentives to use so-called transfer pricing among their subsidiaries to shift recorded profits to low-tax countries. Moreover, a global minimum would end the race to the bottom in which countries lower their national tax rates in order to attract investment by MNCs.
These global tax revenues could then be allocated among governments according to factors such as the company’s sales, employment, and number of digital users in each country – rather than on where multinationals decide to locate their operations and intellectual property.