Tax competition is just another factor of a functioning free market

The unspoken benefits of tax avoidance

by Chris Berg

Source: www.capx.co

Chris Berg at ABC reveals that “profit shifting” for tax purposes affects just 2-4% of multinational business profits, and that despite international outcry about tax avoidance, revenue from corporate tax going up. Tax competition is just another factor of a functioning free market, so while governments may denounce it as unfair, the rest of us should be a lot more sceptical.
Few things excite a treasurer more than tax avoidance.

The idea conjures up fantasies of great pots of untaxed money - money the government is morally entitled to but for one reason or another (the weakness of previous administrations, probably) is being denied.

No surprise then, as his budget savings fade away into nothingness, Joe Hockey has turned his mind to the old corporate tax avoidance chestnut.

On the weekend in Cairns the G20 finance ministers agreed to tackle "base erosion and profit shifting ... to make sure companies pay their fair share in tax". Our very own Hockey, as G20 host, is leading the charge.

Profit shifting refers to the fear that multinational firms are structuring themselves to route profits through lower-taxing countries.

Base erosion is the fear that this profit shifting is eroding the tax base, starving governments of funds.

The Organisation for Economic Co-operation and Development (OECD) started focusing on base erosion and profit shifting last year, pushing it to the front of the G20's agenda.

They've been amply backed up by breathless newspaper stories about the complex tax structures of firms like Apple that have divisions in Ireland and the Netherlands.

All very interesting except for one thing. The profit shifting problem isn't that much of a problem.

It's true that in the 1990s, when economists and policymakers first turned their mind to how multinational firms plan their tax liabilities, they looked at aggregate country-level data and concluded (as one of the first major studies said) "companies locate a sizable fraction of their foreign activity in tax havens".

This early work implied profit shifting was both real and substantial.

But now economists are working with more fine-grained data specifying how firms structure their internal debt around global affiliates. And as they look closer at those affiliates, the evidence is telling a very different story.

..................

READ THE WHOLE ARTICLE www.abc.net.au