One tax for all

Political article
The value chains of multinationals have long spanned the entire globe. Yet corporations are still being taxed at the nation-state level. Unitary taxation, a worldwide aggregate corporate taxation, could change this.

Zambia's mining industry employs thousands of people. With the help of bookkeeping tricks, the bulk of the profits from these mines flow into other countries, not infrequently to the corporate headquarters of commodity trading companies located in the Canton of Zug or on Lake Geneva, which often have just a handful of employees. This is for the most part legal, but it denies the Zambian State urgently needed tax revenues. And Zambia is one case among many.

But a reform of the international tax system in the framework of the OECD (Organization for Economic Cooperation and Development) could soon spell radical changes to the prevailing order in international tax policy. The USA and major emerging countries like India, Indonesia or Nigeria are working towards the redistribution of taxation rights. In future, in cases of cross-border value creation within multinational concerns, it will no longer be primarily those countries where their factories or headquarters are located that will be able to tax their profits. The reformers wish to reformulate international rules such that in future, the countries in which corporations sell their products will be able to benefit more from corporate profits. It is therefore a matter of shifting taxation away from what are referred to as "source countries" towards "market countries".

It is still unclear who would ultimately benefit from a new taxation system. First the 134 countries participating in the negotiations on the OECD’s Inclusive Framework would have to agree on a common position. The formula by which the profits of multinational corporations may one day be distributed will be of crucial importance. In the current discussions, there is a proposal that could play a pivotal role in laying the groundwork for a genuine and fair distribution of corporate profits – that of the unitary taxation. Through formulary apportionment, corporate profits would be distributed between the countries in which a corporation operates, irrespective of whether the corporation is even physically present in a particular country in the form of a factory, a service or administrative entity. Unlike the present day, the individual units of a multinational corporation would all be treated as a single corporation for tax purposes and no longer as individual firms independent of one another. Profits from individual units would be aggregated to arrive at an overall corporate profit which, on the basis of various factors would then be distributed among the various countries playing a part in the corporation's value creation.

Fairer distribution of tax revenues

Unitary taxation based on a profit distribution formula would considerably diminish the attractiveness of profit shifting to multinational corporations. At present, developing countries alone are losing three-digit billions per year in tax revenues, and tax authorities worldwide are forgoing trillions. Carefully structured unitary taxation that highly weights the labour factor could considerably expand the tax base, for example, of Africa's commodity-producing countries, where public services are being severely affected by profit outflows.

Unitary taxation is not a new idea – and certainly not in Switzerland. Already in 2013, National Councillor Margret Kiener-Nellen (Social Democrats) submitted a postulate calling on the Federal Council to produce a report on the pros and cons of unitary taxation. The Federal Council immediately moved to reject the postulate, the National Council postponed its discussion indefinitely, and after two years finally abandoned it. The current reform debate in the OECD's Inclusive Framework could give fresh impetus to the idea, however. Experts have long been wrangling over the question of whether unitary taxation can be implemented by any one country on its own, or whether it is only possible in a globally agreed action involving as many countries as possible.

If profits are first distributed amongst individual countries and taxed according to their domestic rules, it would be theoretically conceivable for Switzerland, as a prime location for the headquarters of global corporations, to lead the way by example. In such a case, however, Switzerland would have to require its corporations to furnish bookkeeping data that would allow for a fairer distribution of overall profits among all countries in which the particular corporations are active.

It is not hard to see that by introducing such a reform Switzerland would apparently be cutting off its nose to spite its face, as the country’s share of taxable profits from conglomerates domiciled here would most likely decline. Yet in the light of the ongoing reform debates in the international arena, it is at any rate doubtful that Switzerland will be able to maintain its current corporate taxation model, which is founded on taxing profits generated abroad. Besides, the prospect that the cantons above all could be operating in the red once the latest corporate tax reform is implemented is already an indicator that that the generous palate of tax optimization possibilities for multinational corporations is gradually ceasing to pay off, even for Switzerland. Soon, therefore, the country will no longer be able to afford its corporate tax havens. In the coming legislative period, the new Parliament would therefore do well to explore real alternatives to the current Swiss business model, which would ensure tax income from genuine value creation by Swiss concerns both domestically and abroad. The independent introduction of unitary taxation for corporations headquartered in Switzerland could be one of these alternatives. A possible first step in that direction would be to revive the old initiative by the National Councillor Kiener-Nellen. History has taught us, after all, that it takes at least two attempts before any social progress is achieved.