Unitary tax system to prevent transnational companies ‘dodging tax’ is probably unachievable

Source: Louise Vosloo (Deloitte)

Johannesburg, 13 May 2013- The implications of momentous changes to the global tax system in favour of a unitary system to stop transnational corporations organising their international affairs to their own advantage, will have to be seriously tested before proposals can be constructively considered, says Deloitte. 

"Although a proposed unitary tax system, which was proposed in 2012, would appear to be the solution to international tax problems involving base erosion, profit shifting and tax avoidance by transnational corporations who take advantage of the weak international coordination of tax, it has to be actively determined whether what looks viable on paper can be put into practice,” says Louise Vosloo,  Director in International Tax at Deloitte.

"The acid test on which a proposed unitary tax system would probably founder, would be the cooperation required between all nations to bring it into effect,” she says.

"Presently, the weak coordination between tax authorities offers transnational companies the opportunity to shift their profits to the most favourable jurisdictions available, usually tax havens or countries with low tax liabilities. These profit shifts are concluded by companies creating subsidiaries in suitable countries so that these companies can carry out activities, or act as holding companies. Transnational companies can also adjust transfer prices between members of the same group and so shift profits from a high tax jurisdiction to a low tax jurisdiction.”

The current taxing system views each entity in a group of companies separately and their trade with each other is treated as market-based "arm’s length” transactions. By shifting their profits to tax havens they ensure that they cannot be successfully ‘policed’. The tax authorities’ view of a transnational group’s state of affairs is therefore limited, with the picture of the group as a whole not being available.  

The proposed unitary tax system envisions the alignment of tax rules to improve the fairness and transparency of international tax and displays the true economic reality within participating countries.

"With a unitary tax system the authorities will no longer be peeping through the keyhole, but will be able to view a transnational company’s entire group of companies. This solution would require a transnational group to submit a single set of worldwide consolidated accounts for each country where it has a business presence.

According to the Towards Unitary Taxation of Transnational Corporations proposition this combined account should include details of all related entities engaged in a common or unified business and a consolidated set of accounts for that group.

Finally, there would be the inclusion of the proportion of the group’s taxable income attributable to the taxing state according to its apportioned formula for the group as a whole, and the amounts and proportion of those totals to the taxpayer.

The result is that transnational companies will be taxed according to their genuine economic presence in the countries in which they operate. They will also be required to make contributions to the public services for costs incurred by states where they do business. This combined report will bring a transnational company’s misuse of tax havens and low tax jurisdictions to light,” says Vosloo.

Difficulties with the proposals arise in several arenas, Vosloo points out. These include:

• The reluctance of specialists in the present system to implement a proposed change to the untried unitary tax system; 
• The fact that the existing system provides income for firms advising on international tax issues that will be negatively impacted by a simpler, compliable and uniform system.
• Difficulties involved with completely replacing the current tax system with a unitary system or, indeed, accomplishing a gradual transition.

"A report from the Organisation for Economic Cooperation and Development (OECD) on base erosion and profit shifting early in 2013, pointed out that it is not illegal to have tax planning strategies in place to locate entities in certain carefully selected jurisdictions, even though the result of such strategies is the erosion of the corporate tax base in the relevant state.

This, says the report, is costing governments substantial losses in corporate tax revenue. Going forward, the plan is to identify the actions needed to address base erosion and profit shifting, set deadlines to implement action and to identify the resources needed for implementation of a unitary system. 

Although the unitary tax systems seems to offer a solution to the international tax problems of base erosion, profit shifting and tax avoidance, the question is whether it is practical or not.

A global reform of the tax system will have momentous implications and will have to be carefully considered and examined before being considered for implementation. To be successfully introduced, it would require the cooperation of all nations across the globe - something that could be impossible to achieve,” says Vosloo.