TAXING COMPANIES solely on where their economic activity takes place is unlikely “any time soon”, OECD director Pascal Saint-Amans (pictured) has told Lords.
Appearing before the House of Lords Economic Affairs Committee, he told the Lords a move away from transfer pricing would mean a move to something like unitary taxation or global formulary apportionment.
“…[This] would require that all jurisdictions across the world – and we have 190-plus states, plus jurisdictions which are tax-sovereign – to agree on criteria and trust each other enough to rely on the information on the consolidated accounts which will held in the headquarters of the group.
“I just don’t see this happening any time soon.”
Transfer pricing sees multinational corporations value and purchase goods and services moving across international borders from one of the group’s corporate entities to another.
Formulary apportionment is a method of allocating the profit earned, or loss incurred, by a corporation or corporate group to a particular tax jurisdiction in which the entity has a taxable presence. Similarly, unitary taxation sees profits made by multinational corporations declared in each jurisdiction they operate in and taxed accordingly, with the aim of preventing profit shifting and tax base erosion.
Saint-Amans added he is more concerned with “fixing the problems so that governments don’t have to wait a century before a solution to the problem”.
He went on to say he is “agnostic” on which system is the best, but added he felt the current transfer pricing system “works more or less”, with the exception of some flaws.
“What is wrong is how we deal with intangibles. Is it right that most intangibles in low-tax jurisdictions where no activity is taking place, where activity is divorced from where the profit is? It is an issue. But we can address that without throwing the baby out with the bathwater.”
The hearing also took evidence from academics on the issue, with Professor Rita de la Feria of Durham Law School noting the current system is based on principles drawn up “in the 1920s”, recommending that instead of building on existing rules, fundamentally reforming them.
“These principles were created in a very different economic environment, so I think it would be helpful to instead of constantly trying to improve on their functioning, we should revisit them and consider factors of production that are not as movable as others,” she said.
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