Business are global, but the laws they have to follow are national. Nowhere is this conflict more severe than in the arena of taxation.
Every nation has the right to tax as it pleases. And businesses have to abide by the tax laws in every country it operates in. But when businesses go global, it causes a real problem. Its common these days for a company to buy materials from 10 countries, manufacture in 5 others, transport via 3 others, sell in 20, account for them in 3, have employees in 15, be headquartered in 4, - all completely different countries. The profit it makes is of course a composite one. Where does it get taxed ?
The answer is, in all of them ! Welcome to the world of a monster called transfer pricing. The only people who salivate on the very mention of this term are the accountants and the tax lawyers. Only one thing is for sure in transfer pricing - you will pay more tax collectively across all these countries than if you paid all your taxes in the country having the highest rate of tax. And you will be dragged to court irrespective of what you do.
Businessmen being businessmen, will try and find the lowest tax option out. Enter the world of tax havens. Countries you may have never heard of. And countries who use tax as a competitive advantage. Like Ireland in the past. Now Switzerland where many European supply chain operations are being headquartered. Singapore in Asia.
Is this all not simplifiable ? Actually the world has made huge progress in the area of indirect taxation, especially customs duty through the WTO. Likewise, it must surely be possible in income tax as well.
How's this for an idea ?
- Tax bands are globally agreed. Income tax on companies cannot be lower than x and cannot be greater than y by multilateral agreement
- Double Tax agreements are multilateral (through the WTO) and not bilateral between countries.
This will remove much of the pain global businesses face from the inevitable conflict of national tax laws.
Nobody can do justice to this area without writing a 1500 page PhD thesis. I have absolutely no intention of doing so ! All I am catalysing is a thought.
Tomorrow I'll post on another aspect of globalisation - why it seems to be dirty word in the minds of many.
