The revelations of the respectable rich and famous’ ‘legal’ tax arrangements contained in the Paradise Papers are hardly a surprise, but outlawing tax havens wouldn’t work, says QUT Professor Pascalis Raimondos.
Professor Raimondos, head of QUT’s School of Economics and Finance, said some of the suggested alternatives were an activity-based taxation system between countries, the taxing of consolidated global profit, or a destination-based cash flow tax system.
“Tax havens offer a service for which there is high demand and if we closed one tax haven, 10 others would open,” Professor Raimondos said.
“This means we should focus our energy on making changes where they can have an impact, and in particular on the way that we tax multinational corporations.”
Professor Raimondos said activity-based taxation used a formula based on three tangibles: the number of employees, the assets, and the sales of a company to calculate the tax it should pay in a country.
“People, buildings and sales are difficult to hide – you can’t have 50 employees and say you’ve got only 10, and it is also easier for auditors to look at activity, than chase profit,” he said.
“Instead of trying to recover tax after profit has left the country, activity-based taxation could be the answer since it is used successfully in the United States where it was first instituted in the '70s to overcome the different tax laws between states.
“Activity-based taxation system was used by countries which are federations such as the US and Canada.
“All these proposals demand some form of coordination and while this is easy to do within the EU (among member countries) or the US (among states), they cannot be implemented easily at the world level.
“The World Trade Organization could take that lead and try to coordinate a new international taxing system, but even then there would be non-WTO member countries that would not agree.
“Alternatively, without using any international coordination, there are also proposals out there where instead of taxing the profit that the multinational reports in a country, we should tax the sales they make within that country.
“This will be similar to a sales or value-added tax. The US Republican party put forward a so-called destination-based cash flow tax system in January this year.
“While the proposal was not implemented, there is a lot of traction in the policy debate about such a tax reform.”
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