Michael Devereux’s piece in the FT (22 May 2013) reflects his comments on Monday at the Tax and Reputation Conference. At the time I had some concerns at his proposal for taxing imports, and now that it is to become a research project for the Centre for Business Taxation at Oxford University I should voice those concerns.
But first, let me be clear, I do agree that the International Tax System needs reform urgently but I think evolution is better than revolution in this case. While the low taxation of sales into a country is a concern, we should look at the wider consequences for countries of such a change. Much of what follows echoes the problems with allocation keys that have affected the introduction of a Common Consolidated Tax system in the EU.
Put simply, if you tax imports and allocate more of corporate income to markets then obviously the share of taxable profits rises in countries with large markets. On the other hand, a small country with a small market but a large high value industrial base will lose out (ie the Nordics).
The effect on developing countries will be similar, as their markets are small they will lose as their export goods became taxed in markets elsewhere.
In terms of commodities, I see real problems. At present most of the profit arises in the country of production. I would imagine the Australian and other Treasury Departments would not accept a system that saw some of those commodity profits taxed in market countries – such as China.
It would appear that there are a significant number of losers for a corporate tax system based on taxing imports and complications with developing countries and commodities. Instead, I believe that there are ways to reform the system which address double non taxation without changing the basis of Corporate Tax.