How Can Governments Tax Multinational Enterprises More Fairly?

Morrell et alKevin Morrell, Orlando Fernandes and Loizos Heracleous

The Organisation for Economic Co-operation and Development (OECD) estimate USD$240 billion is lost annually to national governments as a result of corporate tax avoidance by Multinational Enterprises (MNEs). This happens because MNEs can shift profits across their national subsidiaries to exploit differences in tax regimes. In our recent article in Policy & Politics, we explain how in 2013, the British subsidiary of Amazon was able to do this lawfully so it only paid £4.2 million in tax despite UK sales being worth more than £4.3 billion. Similarly, in a 14-year period, Starbucks generated more than £3 billion in sales to the UK but paid just £8.6 million in tax to the British government.

Several sources, including the media, identify a basic clash in worldviews between tax officials, regulators and policymakers on the one hand, and MNEs and their professional advisors on the other. This is unsurprising given a basic conflict in interests – the imperative for MNEs is to maximise shareholder returns whereas Members of Parliament (MPs) and tax officials want to secure revenues to pay for public services. In this project, we dug deeper in an in depth “discourse analysis” (discourses are spoken or written communications) from a number of different sources: in-depth interviews with MPs, regulators, tax officials, and analysis of parliamentary hearings between MPs and MNE representatives.

What we found supported the idea that there is this basic conflict of interests, but interestingly there were more fine-grained differences in worldviews and ideologies across the discourses of MPs, global accounting standard-setters, regulators and tax officials. Because there is a lack of alignment across these stakeholders, it becomes harder for national governments to tax MNEs. Just as MNEs can exploit differences in national territories, so they can exploit differences in the worldviews of those meant to hold them to account. For example, tax officials often have to compromise with MNEs to strike a pragmatic deal. Over time, this short-term goal can mean cross-jurisdictional unfairness is reinforced and so it frustrates the ideal of a longer term, fairer social contract between MNEs and the countries that host them.

We conclude that corporate tax avoidance thrives in an era of globalization partly because of differences in territory and jurisdiction but also because ideologies and worldviews remain concealed in the background. We identify the value of a discourse of idealism – which can more effectively connect regulatory agencies, legislators and civil servants to the logic of representative democracy. This cuts through complexity, taking us to the heart of what is “fair”, possible and doable. It can then be argued more clearly that paying tax is a civic responsibility for corporations just as it is for citizens. The implication of our findings for policymakers is that if MPs, tax officials and regulators were united in pursuing fairness, rather than at times seeking compromise, the prospects for taxing MNEs more fairly would be enhanced and MNE representatives would be less able to exploit gaps.

From a practical perspective, we indicate that tax regulatory agencies in association with intermediary organisations, including the OECD and IMF, will need to embed monitoring tools that may promote normative change. Besides country-by-country reporting initiative and automatic sharing of information, further tools need to be developed that may transparently benchmark outcomes for global tax redistribution to host market economies and developing economies.

You can read the original research in Policy & Politics:

Fernandes, Orlando; Morrell, Kevin; Heracleous, Loizos (2021) ‘How can governments tax multinational enterprises more fairly? A discourse analysis’,  Policy & Politics, DOI:  https://doi.org/10.1332/030557321X16292210017454

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