Financing for Development

The Inspiration Behind this Special Issue.

2024-08-17T15:29:38+00:00

Sol Picciotto is a living legend in the tax justice movement. Almost every single activist involved has heard of him and most likely read some of his work. I myself came across his writings almost immediately after joining the movement and was fortunate to meet him shortly afterwards.

Sol’s writings have the uncanny ability to go straight to the essence of the issue. Indeed, he is most famous for his consistent and prescient articulation of global formulary apportionment (GFA), which has today become the basis of the Two Pillar solution. GFA underlies profit allocation under Amount A and also the Under Taxed Payments Rule (UTPR) of the GLOBE Rules. This is directly the result of Sol’s ceaseless campaigning pointing out the deficiencies of the Arm’s Length Principle, and I for one am very glad that he is seeing his dream come true. As we all know, we are living through a historic period of reform in the international tax system, and this is only the beginning.

Sol Picciotto - Inspiration.

2024-08-17T15:29:38+00:00

I happened upon Sol’s name when reading some now forgotten article in Tax Notes International about a decade ago. At the time, I had been writing and communicating on my own with people at the OECD who had just started up the initial BEPS process. I had the personal satisfaction of being listened to (including an hour’s phone discussion), but definitely no satisfaction from seeing any of my golden thoughts reflected in the mid-2013 BEPS Action Plan.

After about a half year of corresponding on a few tax and other matters, Sol introduced the BEPS Monitoring Group (BMG) to me and asked whether I might be interested in joining the group. Being retired (though periodically teaching in a Tax LLM program as an adjunct), I responded:

Due to my retired status and our periodically being out of touch with things when we take off on our bicycles, I'm not sure how dependable I can be or how much I can contribute, but I am very happy to help out when I can.

That started my active participation in some high percentage of the BMG’s output over the past decade. Prior to joining the BMG, as noted above, I had been involved individually corresponding and speaking with the OECD about the BEPS project’s direction.

The Theories of the State and the Internationalisation of the State as a Framework for the Discussions on International Taxation.

2024-08-17T15:29:39+00:00

The reproduction of global capital requires the construction of supranational legality, an internationalisation of the State. Furthermore, the participation of States in this world system is characterized by competition among States to attract capital, with tax incentives playing a central role. The discussion on the theories of the State can then serve as a framework to understand current discussions on international taxation. Since 1991, Picciotto has been proposing - with a growing movement of followers in the academic faculty and/ or civil society - unitary taxation as an alternative to the arm's length principle that has been transposed into most national tax regulations since the beginning of the 20th century. Such proposal arose at a time of intersection between his contributions to the discussions on the theories of the internationalisation of the State and his first study on international business taxation. Following several other OECD proposals from 1998 onwards, in 2018, the G20/OECD’s Inclusive Framework on BEPS proposed a unified solution to tax the digital economy, along with a proposal to combat base erosion of the taxable income and the transfer of profits. Both proposals are based, conceptually, on the principle of unitary taxation. This article discusses the challenges of international taxation within the framework of the debate on the internationalisation of the State. Both ends of this discussion draw heavily on Picciotto's academic work.

The High Road and the Low Road - What Should be the US Reaction to the end of Pillar One.

2024-08-17T15:29:39+00:00

The likely failure of Pillar One of the Base Erosion and Profit Shifting (BEPS) 2.0 effort raises the question of what the United States (US) may do in response. One possible response to the revival of unilateral measures such as Digital Services Taxes (DSTs) and withholding taxes is to deny them foreign tax credits and possibly engage in other retaliatory measures. However, these measures are unlikely to persuade other countries not to tax US Multinational Entities (MNEs) and, in the long run, may be more likely to harm the US economy by increasing double taxation of US MNEs and reducing trade. One other option is for the US to adopt Pillar One unilaterally along the lines of the Indian fractional apportionment proposal. A recent empirical study suggests that this will lead to a revenue gain of over $7.6 billion per year, much of which is derived from US MNEs selling into the US products manufactured in low-tax jurisdictions such as Puerto Rico based on intellectual property (IP) developed in the US. This may be a much better result and would be based on and justified by the global consensus on the principles of Pillar One.

Formulary Apportionment for the Extractives Industry - How Should Resource Rents be Taxed.

2024-08-21T16:09:37+00:00

In contrast to the current transfer pricing (TP) regime with its arm’s length requirement, unitary taxation using formulary apportionment has for many decades been suggested as a more appropriate alternative for allocating income of multinational entities to jurisdictions for the purposes of taxing rights. The concept and application of unitary taxation and formulary apportionment is neither new nor novel, with inter-jurisdictional regimes having been in place around the world for many decades. Scholars such as Sol Picciotto (1992, 2013a, 2017) have long advocated for formulary apportionment at a global level while noting the difficulties that potentially arise in determining appropriate formulary apportionment allocation keys, as well as ensuring that countries of the Global South are not net losers from its application. The same scholars also emphasise that while formulary apportionment at a global level is the gold standard, there are many benefits to a more gradual move towards formulary apportionment within the current international tax regime. Through the recent work of the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN), there has been a proposed shift towards formulary apportionment with a focus on ensuring profit allocation is to jurisdictions where economic activity occurs. Economic activity is reflected in the allocation keys that make up the formula and their respective weightings. The biggest challenge to introducing formulary apportionment is global agreement on these allocation keys and their weighting. There are numerous examples of formulas used in domestic regimes as well as proposals at a global level. Generally, formulas consist of a combination of factors such as capital and labour that reflect the origin or source jurisdiction and sales that reflect destination jurisdiction. These formulas, however, may not be suitable for countries in the Global South, especially those that are resource-rich, where such an application results in a large proportion of income being allocated to jurisdictions other than the source country because the formula relies heavily on sales at the destination.

Picciotto (1992, 2013, 2017) has, in several papers, noted the exploitation of natural resources, especially the extraction of minerals, oil and gas, as being critical to the economic development of countries in the Global South, with the main benefit being the tax revenue generated. Corporate income tax, however, is generally found to be disappointingly low, with resource rent taxes producing much higher tax revenues. The above observations lead to two questions in designing a regime that adequately captures the value of natural resources for source countries. The first is whether the extractives industry should be subject to a corporate income tax regime that adopts formulary apportionment using the traditional three-factor formula or should include a fourth ‘resource rents’ factor. Second, the question arises of where the roles being separate but complementary charges should be imposed. Both questions address the overarching issue of whether the corporate income tax regime should capture a greater proportion of income from the extractives industry or the income should be captured through alternative means.

This article builds on the work of Picciotto and others who have previously highlighted the tensions around a formulary apportionment regime for the extractives industry and, in doing so, focuses on source jurisdiction entitlement concerns in the Global South. It addresses the questions outlined above and considers the arguments for and against a fourth factor or allocation key, such as a production volume factor or a source-based sales factor that modifies any general apportionment formula and reduces the significant emphasis on sales at the destination and the role of separate charges.

The article ultimately suggests that while economic rents should be taxed separately outside the corporate income tax regime, reform of the corporate income tax system based on unitary taxation and formulary apportionment that addresses the fundamental flaws in the current regime should be undertaken. However, the article also recognises that this top-down approach is one that is difficult to attain and that a pragmatic bottom-up approach, which is being witnessed in the current international tax reform arena, may also benefit resource-rich countries, especially those in the Global South.

Unitary Taxation - A Fit for Purpose International Tax Architecture for Transnational Corporations.

2024-08-17T15:29:39+00:00

The Pandora Papers were a timely revelation of years of persistent, nefarious actions of some Transnational Corporations (TNCs). The outcome of this leak, coupled with dissatisfaction towards the “Arm’s Length Principle”(ALP) and the impetus from scholars’ efforts in the field of international taxation and tax justice activists, legitimise the current discourse around unitary taxation. There is no doubt that the current international taxation framework reeks of 20^th century relics. Upon this premise, Prof Sol Picciotto doubled down on a unitary taxation approach for TNCs. Central to his work is the need to rethink the traditionally structured Corporate Income Taxes (CIT), which did not respond to the proliferation of TNCs. Notably, his role and contribution in this field are nearing success and are similarly being validated through the “Unified Approach “ being enshrined in Pillar One of the Organisation of Economic Cooperation and Development’s (OECD) Two-Pillar solution. With the inadequacies of the current tax regime being exploited by devious TNCs through: the creation of holding companies in tax havens under aggressive tax planning schemes, debt shifting and manipulation of transfer pricing (TP), we appreciate the departure from the ALP towards a system that taxes genuine economic activity, despite its political implications and general difficulty in implementation. With developing countries gravely affected by the ALP approach, which treats transnational corporations as separate entities, it goes without saying that the unitary approach presents real benefits for developing countries. This paper seeks to rely on Africa’s extractive sector and the specific Kenyan experience relating to transfer pricing amongst TNCs as a case study to demonstrate need for a unitary taxation regime.

Reflections on Theory and Practice.

2024-08-21T16:13:01+00:00

I am very honoured by this tribute, and grateful to everyone involved for their efforts in organising it. I count myself very lucky to have survived for so long and still feel relatively fit, so that I can continue enjoying an intellectual life that I do not regard as ‘work’, because I do not need to be paid, so I can do what I please. I am also fortunate because I was able to use my career in academia to gain some understanding of what became a hot political topic, taxation of multinationals. This put me into a perhaps unique position to try and bridge the wide gap between the often simplistic level of public debates and the recondite knowledge of specialists on the issue. These are some reflections about my experience of trying to combine a broad political commitment with the arduous but rewarding work of trying to understand how the world works, and to help change it.