One of the interesting arguments of the right wing is that corporate taxes should be reduced or eliminated because otherwise, corporations will build their business in jurisdictions with lower taxes. To a certain degree, this is true—a huge proportion of tech manufacturing happens in Ireland because of its attractive tax benefits.
However, this is also a bit of a red herring argument because it assumes that the only way that countries can deal with this issue is by lowering taxes instead of focusing on reducing tax avoidance. I see two potential ways to deal with this issue, one of which I’ll discuss today
Look around the world
One method of dealing with this issue is by taxing corporations based on their global income, rather than just domestic income. One common way corporations avoid taxes is by setting up subsidiary corporations in countries with low taxes. The subsidiary will pay the low taxes on sales outside the company’s home country, and the cash will sit in the subsidiary indefinitely since, if it is bought back to the home country, it will be taxed.
Over the last few years in the USA, there has been a debate about whether corporations should receive a tax holiday on foreign profits (i.e. whether corporation should be allowed a brief period of time to move those profits to the USA without paying full tax on them.) The theory is that those profits would stimulate economy rather than just sitting around in some offshore bank account. To me, that sort of strategy would just further encourage this sort of tax avoidance, so probably isn’t a good idea.
Instead, I’d suggest taxing companies on their full global income, including the income of all domestic and foreign subsidiaries and parent companies. In cases where a subsidiary isn’t fully owned, it could be taxed proportionately, or taxed as if it were fully owned if the ownership is more than, say, 25%. After all, often the reason for the creation of subsidiaries is to avoid taxation or liability, both of which aren’t actually things that benefit society as a whole. (e.g. Do we view it as acceptable if Canadian subsidiary pollutes in China because the pollution is done through a Chinese subsidiary?)
There are, of course, some problems with this approach.
First, there is a double taxation problem since companies could have the both countries trying to claim the taxes. For instance, suppose Ireland has a 10% tax and Canada has a 25% tax. It would be unfair for a Canadian company’s Irish subsidiary to pay 35% tax. To avoid this, companies could get tax credits for foreign taxes paid, effectively paying 10% tax to Ireland and 15% tax to Canada.
Second, if the taxation of subsidiaries isn’t proportional to ownership, it would make joint ventures less attractive, but to me, that seems like a reasonable sacrifice (mostly because I suspect that if taxation was proportional to ownership, people would find some way to exploit that feature as a taxation loophole.)
Taking the ball and going home
Third, companies might not want to do business in your country if you taxed this way. As far as I know, taxing companies based on not just their subsidiaries but also their parent company would be unprecedented. But if you don’t do that, the business can just set up the parent company in a non-taxing jurisdiction and operate as before. Taxing the parent is one of the only ways to ensure the company won’t avoid taxes by setting up in Antigua.
But you can see why Apple might hate this. Perhaps only 4% of their profits come from Canada, but Canada is trying to tax 100% of Apple’s $45 billion in profits. That might be enough to make Apple not want to sell in Canada. But, if you actually believe in the invisible hand of economics, this likely won’t matter long term, since other companies will rise in Canada to create the products that Apple would refuse to sell here. The market won’t be as efficient as it would be otherwise, but that’s a natural consequence of taxes in every case.
What’s more, if USA imposed this sort of taxation, Apple would have no choice but to give in because that market is so big that they couldn’t avoid it. And, if all countries did this, you’d have solved the problem of companies relocating their operations to low-tax locales.
One of the biggest challenges in this form of taxation would be getting accurate global documentation. As the Canadian government, you can force Canadian subsidiaries to feed you documents, but you can’t force a Chinese subsidiary to provide you with accurate information.
This problem could be solved in two ways. The first would be with a global tax treaty, where documents were shared between governments to ensure fair taxation. In theory, this sounds good, but in practice, it might be tricky, since I imagine many of the rich people practicing tax-avoidance strategies are also influential in government. Thus, while the governments of all countries seem to have an incentive to reduce tax fraud, in practice, the individuals running the government may not.
Thus, another alternative is prosecution of corporate executives. In the last few decades, corporate malfeasance has been punished by corporate fines (i.e. not actually punishing the people who committed the crimes). If, however, you actually threw corporate tax cheats in prison (e.g. literally putting the whole board of directors and the ten highest level managers of the corporation in prison for a decade) for the discovery of tax fraud, then I think it would help to address this problem. Essentially, this standard for proving guilt shouldn’t be “did you know about the tax fraud?”, but rather, “In a well-run corporation, should a person in your role have been responsible for, or able to recognize, the tax fraud?”
The bottom line
This solution certainly isn’t perfect. Businesses relocating to low-tax jurisdictions is a challenging problems with no easy solutions. Nevertheless, as globalization makes this sort of tax-optimization easier, the issue becomes even more important to solve, even if all solutions are flawed.