The Guardian: Rita de la Feria - There’s a simple way to stop big corporations avoiding tax. Here’s how

If multinationals had to pay their dues where they make their sales, the kind of activities revealed in the Paradise Papers would be a thing of the past

Companies can set up their headquarters in tax havens and then they become difficult to tax, also, countries end up competing with each other to offer the lowest taxes to attract companies, but in 2008 two professors suggested a solution, impose a type of sales tax on the products sold in a country related to the profit the companies make. It might put the price of products up a bit, but, hopefully, competition will bring them down again. 

In our globalised economy, where production chains are spread across the world and highly movable, it is difficult to determine under existing rules where and how the profits of big firms should be taxed. In effect, we can no longer properly identify the countries that have both the legitimacy and ability to tax those profits.

There is therefore only one long-term means of effectively taxing corporations: we must remove the incentives to corporate mobility for tax reasons. How to achieve that is the key question. For years, people have advocated the introduction of a common method of taxing corporations – but political agreement, even within Europe, has proved exceptionally difficult. The likelihood of achieving that global agreement seems extremely low.

In 2008 a paper by professors Michael Devereux at Oxford University, Alan Auerbach at the University of California, Berkeley, and Helen Simpson at Bristol University came up with a new solution: what if we taxed profits in the country where the customers are? Their idea was to tax corporations at the least movable point of the production chain, at a point that corporations could not shift or manipulate.

The most common avoidance techniques rely on one crucial premise: that moving activities affects where profits are taxed

The most common tax avoidance techniques rely on one crucial premise: that moving your headquarters or activities will affect where profits are taxed. If your patents are located in a country with lower corporate income tax rates, then the income they generate will be taxed at lower rates; if your management activities are located in that country, most of your profits may be taxed there. What these avoidance schemes have in common is their reliance on mobility: moving can result in a lower tax bill.

If we taxed at the destination, or sales endpoint, there would be no benefit in moving headquarters or patent registrations to a lower-tax country. Because customers are relatively immobile, a destination-based tax would remove mobility from the equation. At a single stroke, we could almost completely eliminate tax competition and avoidance. Crucially, although international cooperation would make that more effective, it could still work if only one country unilaterally moved towards a destination-based corporate income tax.

The Guardian: Rita de la Feria - There’s a simple way to stop big corporations avoiding tax. Here’s how