Unitary tax system to prevent transnational companies ‘dodging tax’ is probably unachievable
13 May 2013
Posted by: Author: Louise Vosloo
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
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
"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
- 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
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.