For many countries, sharing the proceeds of multinational corporations’ unsustainable profits is urgently required to take full advantage of their productive potential and to rein in the global race to the bottom. Governments are called upon to close unfair tax competition, which siphons off billions of dollars from both the public and private sectors. “As countries redistribute the wealth they generate within the global economy, that wealth becomes ever more concentrated,” according to the World Bank. We need a global tax deal that rebalances the globally traded economy and levels the playing field so that developing countries no longer pay the same excessive tax rates as developed countries.
Tax on profits: the global structure of income
With multinationals’ gargantuan tax returns, the following table shows that income today is now reported by financial companies and multinational companies as stock profits or other assets. Unlike tax revenues, financial income—which is legal and tax deductible—is not taxed by any jurisdiction.
Global corporations are required to report stock profits to their shareholders who, in turn, report them to their tax advisors, one of whom has negotiated a tax discount that reduces the US corporate tax rate from 35% to 21%. Companies then aggregate their stock income with all the other stock income—indirectly distributing it globally to investors—and pay the combined global corporate tax rate of 27% on stock income, saving about $290bn in taxes. For US corporations, however, the savings are immediately plowed back into more capital investment, increasing the value of the company’s ownership to its shareholders.
The Tax Foundation estimates that US corporations paid $29.7bn more in taxes on global profits than they would have paid under the previous tax regime because of the US tax cut. In addition, the United States will collect $99.8bn in additional taxes next year alone from other countries, or 7.4% of all global tax collections. What’s more, all these profits are taxed after today’s tax cuts go through, further eroding tax revenue.
Unauthorized income declared on companies’ books could be an even larger source of tax revenue that is mostly not taxed. Because many non-US multinational companies’ income is subject to tax in their home countries, the full value of this income escapes taxation and, thereby, the US taxpayers whose hands it’s falling on. As of September 30, 2017, 12.3m individuals in the US declared income from investments held by about 530,000 incorporated foreign companies. Approximately 20% of this income should have been taxed by the US. Because of a US Securities and Exchange Commission (SEC) rule, most of this income escapes taxation.
Countries like the United States can’t force companies to pay the taxes they owe in their home countries. Instead, many developed countries – including the United States – have set up structures that benefit stock investors by having their companies report stock profits in lower-tax jurisdictions. By setting up domicile combinations, these countries are able to retain some tax revenues in their jurisdiction and redistribute the profits among their corporations that are not subject to tax. The design of these systems distorts the global competition for companies by reducing the tax burden on the shareholders.
While a number of countries, such as the United States, Britain, and Australia, have introduced reforms that shift income, revenues, and expenses among themselves, this partial solution won’t come close to reversing the harmful race to the bottom. Without international agreement, countries will continue to shift tax profits overseas in some way, with no assurance of reversing the harmful tax incentives.
That is why all countries need to commit to accepting and sharing the income of multinational corporations across borders. This would achieve the following objectives: