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Motherhood, Apple Pie And International Taxation

piece of apple pie on a white plate, cut with a fork
photo by David Leggett

Finance ministers for the Group of 20 club of large economies will give their blessing this week to a package of proposed rules changes designed to boost their tax collections from multinational companies that are supposedly gaming the system.

On the surface, this goal sounds reasonable to most people - and about as surprising as Bill Clinton giving his blessing to his spouse’s decision to run for president. Why wouldn’t you want to seize an opportunity to spend more time living in the White House or, in the G-20’s case, to collect more taxes from entities that don’t vote and that do a lot of their business someplace else?

Life has a way of turning out differently than planned, however. We’ll see how things go for the Clintons. As for the new tax rules - in which the G-20 actually just forms the greater part of an overall effort that involves nearly 50 nations under the auspices of the Organization for Economic Cooperation and Development - they are almost certain to produce some unintended results, regardless of whether they achieve their prime objective.

Consider that the OECD is not, actually, a rulemaking or tax-enforcing body. Some of its members may try to enforce any new agreements strictly; others haphazardly or hardly at all. Countries are not required to follow the organization’s recommendations. The uncertainty will prove an early hurdle to the agreement. Francesca Lagerberg, an international tax expert, told The Wall Street Journal, “The general sense is that people are unsure how much key governments are willing to implement it.”

Many member countries, however, can be expected to take advantage of any system when they deem it in their national interest - and history has shown that most nations deem it in their national interest to give home-field advantage to local businesses against foreign competitors. Already some countries have been anticipating tweaks and accommodations; for example, Britain’s “patent box” tax breaks are designed to encourage tech investment on European soil, though others contend they offer a payoff to non-European multinationals that know how to exploit these tax incentives.

Seen against that backdrop, the proposal that companies provide extensive details about their costs, supply chains and research efforts in every jurisdiction in which they do business is likely to produce a competitive disadvantage for firms in places like the U.S., Germany, the U.K. and Switzerland. These are countries whose enterprises tend to work efficiently across borders. Advantages may accrue in places like China, Italy, France and Russia, whose businesses tend to rely more extensively on home-field advantage.

Or consider the stated objective that the new rules will help countries protect their tax bases and provide predictable rules for taxation, while minimizing compliance burdens and double taxation. Here in America we call that “motherhood and apple pie.” Everyone is in favor of it, but when you get into the details, the consensus collapses. A good rule of thumb is that tax authorities rarely do much to minimize compliance burdens because they, and their governments, do not bear them.

But the two big problems with the initiative are most apt to be these: First, it is really just a justification to try to raid the cash hoard that multinationals - especially U.S. multinationals - have built up in low-tax jurisdictions to avoid triggering unwarranted taxation at home. Second, if big countries justify taxing activity that can be legally housed almost anywhere, on the grounds that the work to create the property does not occur in those low-tax places, the long-term result will be to push that work, such as the return on intellectual property, right to those low-tax places. Not necessarily to the Cayman Islands or Bermuda (though that could certainly happen to an extent), but to places like Ireland, Luxembourg and the Netherlands.

After all, since the work is so portable, multinationals have every incentive to move it. The new rules may cause a temporary headache for companies like Apple and Google, but those are exactly the companies that have the resources to move their creative endeavors somewhere with a less punitive tax environment.

The U.S. is particularly vulnerable because of our self-defeating system of imposing tax on American companies for profits they earn everywhere in the world, rather than just locally, as other countries do. This has made U.S. companies the world leaders in stashing cash overseas to avoid our tops-in-the-big-leagues corporate tax rate of 35 percent. And this, in turn, makes U.S. companies the prime targets of tax collectors worldwide. Revenue agents go where the money is.

With corporate tax reform gridlocked in a Congress that is entering a presidential election year, the Obama administration is poised to sign onto the international tax collection drive, even though that effort simply paints a target on American firms. (Too bad executives of Silicon Valley firms didn’t anticipate this sort of policy bias before they largely cast their lot with the current president in his re-election drive.) The Treasury Department may not actually have authority to implement many of the rules, including the extensive demands for additional non-U.S. data they are likely to include, as in fact some congressional Republicans have argued it does not. But lack of authority has rarely stopped this administration for trying to do whatever it has decided to do.

It will take some time before the new OECD rules get final approval. The G-20 heads will probably rubber-stamp them next month, but national legislatures and rulemaking bodies will then need to get involved. It will take even more time before anything gets implemented. My guess is that, to the extent we see consequences at all from this latest initiative, they are going to be as much unintended as they are planned. The tax shelter industry in Luxembourg might take a hit, but that tiny nation-state would be wise try to find room for a few new office parks and condo towers. Extra space for businesses and workers may soon be in high demand in low-tax places.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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