Editor’s note: CPA board member Bill Parks concisely shows, in this Financial Times letter to the editor, why sales apportioned taxation fixes most of the important global and domestic taxation problems.
In his new letter to European finance ministers, US Treasury secretary Steven Mnuchin (FT View, June 19) declared an impasse in talks to adopt a global digital tax framework. Mr Mnuchin signalled again his lack of interest in truly fixing a broken international corporate tax system.
[Bill Parks | June 24, 2020 | Financial Times]
Clearly, the current framework benefits multinational corporations over smaller, domestic competitors. The system has been broken from conception, but the extent of multinational corporate tax avoidance has only recently been recognised.
Mr Mnuchin is now threatening tariffs from the US trade representative in retaliation for the potential imposition of digital taxes by other countries. The OECD should proceed without the US — and embrace an apportioned tax as the one equitable approach that would tax domestic and international companies equally. It started down that path with Pillar 1 and should simplify the proposal to embrace the logical conclusion.
Pillar 1 is a limited right to tax extreme profit levels based on the location of sales, not where companies are located. However, the limitations of the OECD proposal are a gift to multinational companies who will still preserve most of their tax benefits.
A sales-apportioned tax makes sense. Companies can always move their trademarks, patents, payroll and property outside a jurisdiction. But they cannot relocate the consumption of their product. Thus, countries with a large consumer market will benefit by taxing companies’ sales there. For example, if 20 per cent of a company’s sales occur in the UK, then 20 per cent of the company’s worldwide profits should also be taxed by the UK.
As countries demonstrate the strategic benefits of sales-based apportionment, others will quickly follow. They’ll recognise that sales-based apportionment benefits their domestic companies while also generating new tax revenues that multinationals are currently avoiding.
Moscow, ID, US