Why Do Multinationals Pay So Much Tax?

by Jason Gorringe, Tax-News.com, London

29 August 2001

A report published by the UK's prestigious Institute for Fiscal Studies shows that corporate taxation in the main OECD countries is higher today than at any time in the last 30 years. At first this is surprising given that headline corporation tax rates have actually declined by an average of 13% in the last ten years, but the explanation is to be found in a wider definition of profits, and in more efficient mechanisms to collect tax such as Controlled Foreign Corporation rules which prevent companies from keeping profits in low-tax areas,

Have taxes on mobile capital declined?, by M. Devereux, R. Griffith and A. Klemm, quotes statistics produced by the Organisation for Economic Co-operation and Development showing that corporate tax revenues have risen as a share of gross domestic product from 2.2% in 1965 to 3.3% in 1998, the most recent data. They have also been stable as a share of total tax revenues, which have themselves risen over the same period.

The Financial Times asks in an article today why multinationals don't do more to minimise their tax bills, given the opportunities open to them. These are described in an article, 'The taxing task of taxing transnationals', by Thomas Gresik, published in the Journal of Economic Literature, September 2001. Gresik says that multinationals can manipulate accounts to "earn" profits in the country with the lowest tax rates, by shifting the jurisdiction in which profits are made. Transfer pricing is well understood by governments but Gresik says the complexity of companies makes it hard to stamp out. He also argues that increased competition among governments for foreign direct investment leads to lower corporate tax rates: "Ultimately, the beneficiaries of such strategies are likely to be the transnationals and not the local jurisdictions."

The OECD's figures give the lie to this attractive theory, although the FT doesn't have an answer to why it is that some companies, such as News International, manage to get away with a tiny tax charge (7% last year) when other companies with a comparable spread of activities pay 30% or more.

The answer is that News International is a private company, whose owners want to keep their profits in cash, whereas most well-known multinationals are publicly-owned, and their shareholders and executives care far more about the stock price and their options than they do about bottom-line profits - and stock prices are measured against EBITDA, which excludes tax from the calculation. It's a separate argument as to whether this is healthy. There's no doubt that the asset price boom of the last ten years has distracted attention from long-term profit ratios as a measure of corporate health; but it's also possible to argue that tax is irrelevant as long as it's paid about equally by all businesses.

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