How to make companies pay tax

Tax protests outside a Vodafone store (picture Oxford Save Our Services)

Saturday is a day of action by tax campaigners UK Uncut against companies that do not seem to be paying their fair share of tax.  I have some reservations about the campaign even while endorsing the basic principle.

A particular concern is the way that corporate earnings can be routed through tax havens and thus avoid tax in the countries where they are actually earned.  I used the word “avoid” in the previous sentence because the practice is not illegal, but the word “evade” (which implies criminality) seems much more appropriate in some ways.

Of course, the idea that national borders are a means of escaping tax (“escape” seems a more neutral word) is abhorrent to federalism.  This is not to say that tax rates should be identical, but rather that gaming the differences between different tax systems ought not to be permitted.

My reservation about the campaign against companies that do this is that they are obeying the law and that ought to be sufficient.  If the law is inadequate, then change the law rather than blame the companies that benefit from the inadequacies.

So how to change the law?  A starting point would be an international treaty that established a common tax base, while leaving tax rates to competition among the signatories. It can be made to work even without every country in the world signing up.

Crucially, the treaty should provide for an objective definition of which taxable activity falls within which tax jurisdiction, based on the location of production, sales and management, and render the notion of an “official domicile” redundant.

It would be wise for such a treaty to establish a court to adjudicate disputes between member states and corporations, and a consultative parliamentary assembly in order to maximise transparency and accountability.

Lastly, there is the question of enforcement.  This might be better achieved via the taxpayers rather than the tax collectors.

Corporations should be invited to declare that they will apply the rules of the treaty in every territory in which they operate, whether or not that territory has itself signed the treaty.  Those countries that have signed the treaty will therefore be able to collect the amount of tax properly due to them, the continuing existence of tax havens elsewhere in the world notwithstanding.  Those corporations that do not make such a declaration would be ineligible for government contracts, perhaps, and other sanctions might also be necessary in order to bring them to comply.

It is wrong to complain about the corporate escape from tax without proposing a means of preventing it.  To do this requires concerted international action: will the campaigners say so tomorrow?

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