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Adam Smith said that taxes should be efficient, certain, convenient and fair. We are a long way away from this today. Many of our tax systems are outdated and awash with complexity and loopholes. Some not only clash with government priorities but they also make it easy for multinational companies to ensure the amount of money paid to the state is kept to a minimum.
Public resentment in several regions has risen about this and there is widespread acknowledgement that that principles that tie tax to physical presence are no longer appropriate for a world in which California-based tech companies can sell services in Spain through a Dublin-registered subsidiary and so pay little or no tax. A move to a fairer system would not only help to share prosperity and create a more egalitarian environment, but it can also support the long-term competitiveness of firms and nations. Unsurprisingly governments around the world are keen to address the problem.
Companies that do business in more than one country have long been a challenge for tax authorities, because they can, quite legally, structure their business in a way that minimises their tax bills. Hugely profitable organisations are able to book profits against intangible capital in havens such as Ireland and Luxemburg, and as a result are not obliged to pay much tax elsewhere. In particular the winners here are those that rely on monetising data. In previous generations, where manufacturing was the dominant industry, the production of goods, sales, and associated taxation was largely national. Even within the services sector, the co-location of human resources and much of the corporate activity has supported regional tax income. Today, with customers in different countries to the employees that service them, and intellectual property sometimes assigned to different national jurisdictions, data-rich organisations have been able to reduce effective tax rates. For example, in 2018, compared to a standard US tax rate of 21%, Apple paid an effective tax rate of 18.3%, Amazon 15.0%, Facebook 13.1%, and Alphabet only 8.8%.Although it is easy to point to tech giants in this regard, an increasing range of other companies are also saving significant sums. Starbucks is, for example, one company that gains considerable advantage from licensing its brand and business processes from the Netherlands to other markets. By one recent estimate, close to 40% of multinational profits are shifted to low-tax countries each year. In 2019 the OECD conservatively calculated that the annual tax lost as a result of this was around $240bn.