Why we should jump first on corporate non-taxation

The OECD describes current corporate tax arrangements as “double non-taxation”. That’s quite a damning statement. The drive for a more rational global corporate tax structure has three related themes: first, governments are strapped for cash; second, companies are not; and, third, technological change means that finance ministers are finding it next to impossible to tax that pot of corporate cash. They are not even sure where it is.

If “follow the money” is sensible advice, then Ibec’s suggestion that we get ahead of the corporate tax reform curve is a good one. Many observers have already been surprised by the speed with which the OECD is moving to promote change, to find and tax multinational profits.

The debate over corporate tax reform touches many contemporary controversies. One of the little-noticed aspects of the rise in global income inequality is the extent to which it has been driven by the increasing income (and wealth) of corporations. The share of the economic pie that accrues to firms has been rising for years in many – most – economies, at the expense of workers. Even uber-capitalists recognise that this cannot continue without limit. Pragmatic governments, desperate for new sources of tax revenues, salivate over an obvious pot of cash, albeit an elusive one.

Economic output that has no physical form – the software that I use to type this article, for example, lives in the cloud – is easily seen to have associated revenues that are stateless. The “weightless economy” is a term that captures the idea that we are moving from a system of production that used, mostly, to create stuff that we could touch, measure and weigh. Indeed, the accountants that originally drew up our measurement systems for whole economies talked about GDP in terms of volume, a reflection of the physical nature of economic output.

The idea that we can weigh Google's or Apple's output is, of course, daft, but it is still one that is embodied in our systems of national accounting. Statisticians struggle to keep up, and issue "patches" to GDP measurement in the same way that Microsoft programmers try to fix bugs in Windows software. Accountants, obliged to produce a true and fair view of multinational company finances, face similar problems. We have reached the point, some would argue belatedly, where a new operating system is clearly needed.

Consensus on reform

The need for comprehensive reform is obvious to just about everybody, which is unusual and is, therefore, a reason for thinking something really is going to happen. Anyone with any degree of familiarity with cross-border taxation will be familiar with double-taxation treaties. The thinking behind these cross-border arrangements was an attempt to provide a level and fair playing field so that, as the name suggests, companies (and individuals) didn’t get taxed twice. What we have now, with the latest OECD initiative, is an attempt “to eliminate double non-taxation”. The language speaks volumes. Again, the aim is to establish a fair and level playing field, albeit from a different starting point.

For Ireland, the only issue is whether or not to follow Ibec’s advice and try to seize the initiative. Our choices will tell us a lot about ourselves. The right thing to do, broadly defined, would be to accept both the logic and inevitability of change and to show some leadership. That approach would have, at least, an ethical advantage. It might also have more concrete benefits in terms of reputational enhancement.

The risk, of course, is that it takes ages for the OECD initiatives to bite and that if we jump first we could lose inward investment and jobs. It’s a cold calculation. The default position, to do as little as possible and wait for somebody else to jump, will in all likelihood prove tempting. But that would be a missed opportunity.

Globally, good corporate governance is in very short supply, and this is particularly so in large parts of Europe. This is an opportunity for us to show that we are good at something else, not just low and slightly dodgy taxation arrangements. Reputation-building is a long, slow process but one that will pay dividends over the long haul. We should try it.