The US contribution to uncertainty

I co-authored a piece back in December, at the time of the DPT announcement, which highlighted the danger of unilateral tax reform by the UK, and the uncertainly this would generate. It can be found here.

Now the US has joined in, with a proposal from President Obama  to impose a levy on the  cash being held offshore by US corporations. The stated aim is to raise $200 billion from the estimated $2 trillion being held outside the reach of the US tax net.

This all sounds very laudable, if you believe that the international tax system is broken and that big business should be paying tax on these amounts. That is a debate for another day.

What I think is interesting here is that this is another move to make unilateral changes to the tax system by a G20 country, while the OECD is still only half way through the BEPS process instigated by the same G20.

Many decades ago we had a situation where each country had developed an approach to international taxation which was not connected to that of other nations. There was significant scope for double taxation (as well as double non-taxation). Huge amounts of work were then done by the OECD and member countries to put in place structures to, as best as could be achieved, eliminated these tax anomalies.

Then the world changed. Technology, new business models and the power of the multinational corporation left the old tax model behind.

We have heard repeatedly that the "international tax system is broken", and that there is a need for "and international solution". That "a collaborative, multilateral approach is the only way forward". And yet here we are again faced with a unilateral reform proposal.

As well as the intended consequence, being the US collecting additional taxes from those impacted multi-nationals, I see two potential unintended consequences:

1. Increased uncertainty for businesses. What does this reform mean? How does it interact with DPT? Who is going to be next in introducing a unilateral reform? What should businesses be doing in terms of making commercial decisions going forward, if the sands of taxation are shifting in uncertain ways?
2. If we see more countries bringing in new unilateral reform of the taxation of international operations, this carries with it a risk that we slip back into a world where there is more, not less scope for double taxation or double non-taxation. Is that really the aim?

I sincerely hope that this is not lost on George Osborne and Barak Obama. And after all, Osborne is heading into an election, and Obama is mired by a political system which makes any real tax reform virtually unachievable.

So is this is really just about the UK and US flexing muscles before the next round of BEPS proposals come out? Perhaps.

If not, we could be heading for challenging times. As Richard Murphy puts it in his blog piece:

"If the move is instead the beginning of a drift towards the breakdown in the international consensus on tax then I worry: that is potentially seriously harmful."

Richard goes on to suggest multinational co-operation is the way forward, which I'm sure many would agree is correct. He does then go on to suggest that unitary taxation could be the solution, but that again is a debate for another day.

I think the key here is collaboration, or we risk creating a web of complex different tax regimes which could make the "broken" system we have started with look quite appealing!