Unitary Taxation: Tax Base and the Role of Accounting

Abstract

SummaryFor more than twenty years there have been discussions on the issue of multinational corporations shifting profits from high-to low-tax jurisdictions, with resulting gains to them from the resulting reduction in their effective tax rate. Underpinning much of this debate has been an implicit assumption that, first of all, profits are a fixed and constant known factor in this tax baseshifting equation; and, secondly, that by adopting consistent international financial reporting standards (IFRSs) the risk of arbitraging on tax is removed from this equation. Arguments for unitary taxation have particularly advanced this assumption.We seek to show that the relationship between tax and financial reporting is now remote, and that no jurisdiction that we can identify relies upon unadjusted traditional accounting profit as a basis for the taxation of corporate income. This paper argues that this problem would, if anything, increase with dependence upon IFRSs, which serve entirely different purposes. IFRSs contain many subjective elements within their concepts of income and expenses, to provide the certainty that tax reporting requires. We draw instead upon the thinking underpinning the European Union's (EU's) Common Consolidated Corporate Tax Base (CCCTB), to suggest that tax-specific measures of income and expenses for taxation purposes need to be defined. Such a transactional approach provides a potential basis for developing unitary taxation and determining a taxation base that could then be apportioned to each jurisdiction. However, in the practical political context the EU needs to be sensitive to the interests of member states, which have an interest in adopting particular ways of dealing with deductibility of interest, royalty payments and allowances for capital expenditure. In order to secure political momentum for change, we suggest that for the time being such contentious matters be deferred by allowing relief on these items to be granted at a national level after apportionment of other income between participating states in a regional unitary tax system. The paper then makes some suggestions for the development of a conceptual framework for taxation accounting standards that could be used to address these issues.

The Current Challenges for EU Company and Financial Law and Regulation

“…A market basis of accounting for enterprise groups raises a theoretical and practical debate as to the determination of the corporate tax base (Biondi, 2017;Sikka & Murphy, 2015). This accounting approach understands the enterprise group as a set of separate entities related to each other by arm's length transactions at current market prices that are assumed to be identifiable.…”

BEPS Policy Failure—The Case of EU Country-By-Country Reporting1

“…The purpose of CBCR is to indicate whether the risk of BEPS exists and not to, in itself, be the basis for taxation assessment. That said, there is now a growing awareness that accounting data based on most existing accounting standards, including those issued by the International Financial Reporting Standard Foundation that are used by most multinational corporations, are not suitable for the appraisal of many taxation issues [53]. This is partly by design: the International Financial Reporting Standard foundation states that they are not intended for this purpose [26, para 1.10].…”

“…This is partly by design: the International Financial Reporting Standard foundation states that they are not intended for this purpose [26, para 1.10]. This might explain why every country adjusts accounting numbers when determining tax charges [53]. The issue is compounded by the fact that accounting rules and practices also vary internationally and that even where there are international standards, their interpretation is often variable, making the implementation and enforcement of tax rules, technically very complex and difficult to enforce [48,53].…”

“…This might explain why every country adjusts accounting numbers when determining tax charges [53]. The issue is compounded by the fact that accounting rules and practices also vary internationally and that even where there are international standards, their interpretation is often variable, making the implementation and enforcement of tax rules, technically very complex and difficult to enforce [48,53]. The consequence is that there are very serious and frequently intractable technical problems in determining what a fair taxation liability for a multinational corporation might be, and how this can be apportioned among states in an equitable manner.…”

“…The consequence is that there are very serious and frequently intractable technical problems in determining what a fair taxation liability for a multinational corporation might be, and how this can be apportioned among states in an equitable manner. As a result Sikka and Murphy [53] proposed a whole new conceptual framework for tax accounting, something that has never been attempted before. In the current and likely continuing absence of the adoption of such a standard, there are serious problems for the enforcement of tax rules, given the power and resources of these giant corporations and the lack of any global tax monitoring authority.…”