The Panama Papers’ fall-out could be the impetus for adopting a worldwide activity-based taxation system, instead of one based on profits, which would make it harder to shift and hide profit, QUT economist Professor Pascalis Raimondos says.
Professor Raimondos, head of QUT’s School of Economics and Finance, will speak about the advantages of activity-based taxation systems in curbing tax avoidance by large companies on April 19 at an Economic Society of Australia event.
“Activity-based taxation has been adopted successfully in countries that are federations,” Professor Raimondos said.
“The United States was the first to institute the system back in the 1970s because each state had different taxation rules and companies were moving profits around to minimise tax.
“Canada followed in the mid-80s and recently Switzerland, Belgium, and Germany (all federations) brought the system in.”
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 arrive at how much tax it should pay in a country.
“Under this system, taxation authorities don’t care how much profit a business makes in a particular country. They only care about the activity the firm has had because people, buildings and sales are difficult to hide,” he said.
“When activity, not profit, is taxed it is not easy to manipulate these figures – 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."
Professor Raimondos said Europe had been debating such a taxation system since 2001."
“Countries such as Ireland, Luxembourg and the Netherlands, which are tax havens, oppose it as they would lose money if activity taxation was brought in as the incentive to shift profits would be lost,” he said.
“After the LuxLeaks scandal in 2014, the European Commission has been pushing again for such changes.
“If Europe ends up adopting activity-based taxation, the next step will be to discuss such proposals at the international level, eg the WTO.”
Professor Raimondos said activity taxing was not without its problems.
“Multinational businesses could still move their production, and thus their activity, to tax friendlier locations.
“Although moving production is more inefficient than moving profits, activity taxation can have negative effects on a country’s bottom line.
“However, given that production is less mobile than profits, a move towards activity-based taxation would be an improvement for taxing global firms.
“With the ongoing release of information from the Panama Papers we can expect growing popular support around the world for a more transparent taxation system that makes it harder for multinationals to avoid paying their fair share of taxes.”
For more information on Professor Raimondos’ talk at ESA in Eagle Street, go here.
Media contact: Niki Widdowson, QUT Media, 07 3138 2999 or n.widdowson@qut.edu.au
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