The OECD’s proposal to allow national governments to tax a slice of multinationals’ profits on the basis of sales in their countries would hardly raise any additional revenues, according to an independent assessment for the French government.
A simulation performed by the French Council of Economic Analysis, which has the role of advising the French government, found that the change in corporate tax receipts would not be substantial for France, Germany, the US and China under the OECD’s proposals to rip up a century of international corporation tax rules. Meanwhile, it would create bureaucratic complexities, the study noted.
France, for example, would gain from being able to tax an element of the sales of likes of Facebook, Apple, Amazon, Netflix and Google at home but would lose some of the rights to tax its giants such as luxury group LVMH, the council said.
Instead, any extra tax collected by advanced economies would come from the OECD’s second proposal to agree an effective global minimum corporation tax rate — a much more contentious plan than the first proposal.
Mathieu Parenti, assistant professor of economics at the Université Libre de Bruxelles, said the limited results of the OECD’s proposals might make them “politically feasible because nothing changes”.
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The big tax gains, he said comes from the other proposal for a global minimum tax, which is a “bit brutal” in getting “a big slice of the pie and decreasing the incentive for tax shifting” to low-tax countries such as Ireland, the Netherlands or Luxembourg. But the OECD would also have a harder time securing an international agreement for it.
The Paris-based institution is engaged in its own impact assessment of its proposals and believes the change in the location of taxing rights would be significantly greater than the French Council of Economic Analysis study suggests.
The independent analysis estimated that France currently loses at least €5bn a year from its multinationals shifting profits and the location of intangible assets, such as brands, to low-tax jurisdictions. That is roughly 10 per cent of annual corporate tax revenues.
The council estimated that there would be only a 0.3 per cent increase in French and German corporate tax revenues under a scenario that attempted to replicate the OECD’s plans to stop multinationals from shifting profits around the world to avoid tax.
Philippe Martin, chairman of the French Council of Economic Analysis, said the low revenue estimates resulted from the proposals to tax “only a tiny bit of global profits of multinationals” based on where they sell rather than where they are physically located.
The OECD plan is to split global profits into “routine” profits that are taxed as now and “residual” profits, of which a proportion would be taxed in the country of sales. Given the weak results, the council therefore suggested a much more radical policy of taking a proportion of overall profits in the country of sales rather than just residual profits.
The minimal effects found in the independent study is questioned within the Paris-based international organisation, however. It is still working on its analysis and Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, expected the change in taxing rights to have a larger and more positive impact on revenues in large European countries, the US and China, with heavier losses in tax havens.
But he accepted the broad direction of the French council’s results, with the first part of the OECD proposals always intended to address the allocation of taxing rights between countries, thus raising less money than the second part, which ensured all multinationals paid a minimum level of tax.
