But it’s a different matter for multinational corporations.
Large corporations have more flexibility on when and how they pay their taxes. And they have vastly greater leverage with government taxing authorities.
The biggest corporations can force governments to make special rules that apply only to them. They curry favour with senior politicians through expensive lobbying efforts and influence politicians by supporting their campaigns.
More importantly, corporations regularly threaten to delay or cancel major investments, putting at risk the jobs and tax revenues that would reliably flow into federal and provincial coffers.
Given the perilous state of most governments’ finances, this is a serious tax problem.
The Canadian government has, regrettably, identified small business owners as the worst offenders in this regard. So it has launched a highly controversial tax law reform to root out what it deems unfair advantages and tax loopholes.
The government’s focus on small business owners is a bit hard to explain, given that Canada is a signatory to the Organization for Economic Co-operation and Development’s (OECD) BEPS campaign. This initiative, sponsored by all the G-20 nations, clearly identifies big (multinational) business as the central focus of international tax reform efforts.
BEPS (base erosion and profit shifting) is a polite way of describing how multinationals avoid tax. It’s all about their ability to shift revenues around (eroding national tax bases) and lower profits in high-tax jurisdictions (profit shifting), transferring those profits to more favourable tax regimes.
The new BEPS rules, when applied, will bring much greater transparency to financial reporting. And the rules will allow national governments (not just taxing authorities) to analyze the gross turnover of companies, and compare that with the profits earned and the amount of tax paid.
The recommendations of the BEPS project are – we’re assured – “likely to spur the most significant changes to the taxation of international business since 1986.”
However, like most international efforts, the BEPS recommendations require significant international co-ordination. That, not surprisingly, is sadly lacking.
In addition, given that most of the BEPS tactics taken by corporations are perfectly legal, the campaign will rely on exposure and the public shaming of companies, supported by what proponents hope will be media attacks on major brands.
The very loopholes that multinationals use to avoid tax were approved by governments and their hungry politicians decades ago.
Fixing this problem is going to require more than public shaming.
The global economy is transforming radically. We no longer operate in a world of independent industrial economies. Factory production was once the engine of growth and factories once built stayed put. The modern income tax system was designed around this stability. Corporations paid taxes on their immovable profits and wage earners paid tax on wages.
But today, the underlying engine of growth in the global economy is digital, and digital assets aren’t fixed in any particular jurisdiction. This has shifted the balance of power further in favour of multinational corporations.
In the 15th century, the economy of the western world also transformed radically, from a closed feudal agricultural economy, where taxes were collected in kind (i.e. wheat from peasants’ fields or compulsory military service) to an open trading economy, where government revenues were drawn from excise taxes, stamp and corn taxes, etc.
As we leave the industrial world behind, we must recalculate all our major economic assumptions on a similar scale.
Corporate tax in the digital age will have to become more of a value-for-value transaction. In future, government revenues may well be raised in exchange for access to socially owned assets like a nation’s consumer base, its highly educated population and its reliable legal and judicial systems. Prices and quality will vary from country to country, but the highest quality social assets will naturally fetch the highest return.
The only thing we know for certain in this asset revolution is that the industrial-era tax system is quickly becoming obsolete.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.