Full disclosure: I don’t trust today’s mega tech corporations. Undoubtedly, they provide services that we all like, and nowadays, even need. But I don’t trust the supranatural profits that they extract. That screams either market failure or monopolizing techniques, or most likely, a combination of both: surreptitious in the former, unscrupulous in the latter. And these profits largely rest and accumulate offshore.
That brings us to Panama: a tax haven not located offshore but categorised as such given the general characteristics of tax havens. Revelations this week of national figureheads and establishment leaders having financial links to this offshore destination are just another in a recent catalogue of expositions of potential tax impropriety. Of course there are legitimate reasons to use tax havens for financial matters, but they are largely eclipsed by improper ones. Coming back to multinationals then, resting profits offshore could be characterised as either depending on the approach adopted. It could be an immoral shift of otherwise taxable profits, or it could be a rational response to loopholes in the international tax framework.
Indeed, the problem of profits ending up in tax havens was the catalyst for the OECD’s recent Base Erosion and Profits Shifting project. A fundamental problem at the heart of the OECD’s project however was that it was never going to depart from the arm’s length principle. In and of itself, the principle is defensible. It is problematic however when combined with the existence of tax havens, as corporations will inevitably use the rule so as to shift profits to places where they are not taxable (or where tax is minimised). Thus it becomes apparent the crucial problem in reforming the international tax rules: tax havens and countries which operate to facilitate tax havens.
This is all the more problematic in the 21st century when so much of a large tech companies’ value is wrapped up in intellectual property. Patents are issued for products processes which are novel. Herein lies the glaringly obvious problem with applying an arm’s length principle to transactions concerning something which is patented: it attempts to find a comparator for that which is unique. This fundamental tension allows companies to price patented materials in a manner most advantageous to them. When the patent itself is held offshore, the profits follow suit.
So what’s the solution? Fundamental reform of the international tax rules? Getting tough on tax havens? Increased resources in the hands of the revenue authorities and increased co-operation? In truth there is no simple answer. But in the case of multinationals engaging in aggressive tax practices, I’ve blogged elsewhere that a resolution may lie in antitrust/competition law enforcement. It should be remembered that Teddy Roosevelt took on America’s corporate titans in the early 20th century with the Sherman Antitrust Act. There is precedence in thinking outside the box on this one.