Reforming Corporate Taxation
European Straits #109
Dear all,
This week I’m doing something unusual: spending five consecutive days in Paris! 🇫🇷 This made it possible for my colleague Zineb Mekouar, who’s in charge of public affairs in The Family’s Paris office, to set up meetings with many people in the policymaking world. Monday evening, we had a panel with Paula Forteza, a pro-Macron member of Parliament, on citizen participation and the . And yesterday evening I participated in another panel, this time at the Assemblée nationale, with another En Marche MP, Bénédicte Peyrol. This time the subject was on taxing tech companies.
The long march toward reforming corporate taxation
Corporate taxation is one of my fields of expertise. I originally trained as a senior civil servant and then joined a French grand corps known as the Inspection générale des finances. During my initial four years there (2006-2010), I explored various policy fields: payroll management, research and higher education, upgrading public accounting rules, promoting cutting-edge research in hospitals, etc. The last task force I participated in at that time was working on the digital transition of the entertainment industry, which actually put me on the path to joining the tech world.
Then I left for about two years to try and grow a startup in the field of social marketing before coming back to the Inspection for 15 more months (2012-2013). It was during that time that I became a specialist in corporate taxation. I led a task force on how to better audit transfer pricing in multinational enterprises’ profit assessments. Then I co-wrote the “Collin & Colin” report about taxation in the digital economy, which caused a bit of buzz. Finally, I became a part-time consultant with the OECD as the organization was tackling, alongside the G20, the challenge of reforming corporate taxation at the global level—a decade-long project known as Base Erosion and Profit Shifting (BEPS).
The global effort at upgrading corporate taxation started in the US. As you remember, 2008 was the year of the financial crisis, which prompted Congress to have a look at the low rate of taxation of large corporations. Then-US Senator Carl Levin, a Democrat from Michigan, was leading the effort as chairman of the Senate Permanent Subcommittee on Investigations. There was indeed a problem: using various provisions, US large corporations were able to bring their taxation rate close to zero, while every other taxpayer was smashed in the effort to lower deficits. With Democrats having the majority in both chambers of Congress, the context was favorable for asking tough questions—if not for taking action.
This US-specific context was enough for the OECD and the G20 to launch the BEPS works. But then Democrats lost their majority in Congress and everything stopped. The US ceased to be the driving force behind the effort at upgrading the corporate tax system. And that’s roughly when France took the lead.
Why France, you ask? This is the way I usually explain it: Among the few countries where the tax system actually works (that group includes the US, the UK, Germany, and the Scandinavian countries), France is distinguished by its singular passion for playing with taxes. The French don’t hate taxes as much as Americans do. They are not as pro-market as the British. And unlike the Germans, France does not have a system of government in which all tax decisions must be taken in consultation with local governments.
This passion for taxation isn’t by definition a disadvantage. Indeed it has often allowed us to be pioneers. For example, in the 1950s Maurice Lauré, who like me was trained in the Inspection générale des finances, invented the VAT, an ultra-efficient and easy-to-administer mechanism that most countries of the world then emulated (with the US as the notable exception).
More recently, the “Collin & Colin” report, which I co-authored with Pierre Collin, a judge at the Conseil d’Etat (the highest administrative court in the country), has had, I think, some influence on what has been happening. When it was published in 2013, it was immediately translated into English, which made it accessible to the international tax community as well as US tech companies. It landed Pierre and I on the global list of the 10 most influential people in international taxation in 2013 and contributed to framing the subsequent discussions on how to upgrade corporate taxation for the digital age.
Most of the document was dedicated to how value is created in the digital economy. Pierre and I went to great efforts to explain that individuals, because they form a network of active users, are net contributors to creating value. And that key idea makes it possible to move forward with radical measures without having to renounce the principle that governs international corporate taxation—that is, that profits should be assessed in each country based on the amount of value that’s created there.
The problem now is that collected data and other user contributions are not listed in the definition of what is known as a permanent establishment. And so if we want to make tech companies pay more taxes where they operate, we should upgrade the rules so that users (whom I call the ) are considered part of the value chain and a share of the profits is accounted for as a result.
This idea is often misunderstood. Journalists write about ‘corporations finally paying taxes in the countries where they’re selling their products’. What we should do instead is to realize that individuals are now more than consumers. As once written by Nilofer Merchant, “across industries and worldwide markets, buyers are not parked at the end of a value chain, but often in the middle of its flow”.
I wanted to write this issue on that topic to celebrate the great leap forward recently achieved by the OECD, where there are now multiple proposals on the table—including one (the UK’s), which is in line with what was in my report. Progress is also due to the fact that Trump’s tax reform has ended virtually all US opposition to reforming corporate taxation at the global level. The US Supreme Court recently changed the definition of a substantial nexus when it comes to states taxing sales in the US. Finally, as recently remarked by the FT’s Rana Foroohar, a great deal of investment is being done to better assess the value of personal data, which will make it easier to account for the share of user contributions in corporate profits.
And so, as sound ideas are making progress, I wanted to help you understand that no, it’s not about taxing sales rather than profits. Rather it’s about seeing that profits are formed differently in an economy that’s now driven by users more than by tangible assets, employees, patents, and brands.
News!
🇺🇸 I’m off to the East Coast at the end of this week. If you’re in New York, Philadelphia or Washington, DC between February 24 and March 2, don’t hesitate to reach out!
📰 Tom Cassauwers wrote a piece for the US magazine Ozy, for which he interviewed my two favorite women: economist Carlota Perez and my wife Laetitia Vitaud ❤️. It’s mostly about my book Hedge, but it’s also a bit about me personally. Here's the link: Amid Upheaval in the West, He’s Sketching a Social Safety Net 2.0.
📕 Buy a copy of Hedge by visiting the relevant Amazon website depending on where you are: 🇺🇸US, 🇬🇧UK, 🇫🇷FR, 🇩🇪DE, 🇮🇹IT, 🇪🇸ES.
Further readings on corporate taxation
Corporate Tax 2.0: Why France and the World Need a New Tax System for the Digital Age (me, Forbes, January 2013)
The interview: Pascal Saint-Amans, Director, OECD Centre for Tax Policy and Administration (Chris Sanger, EY, April 2017)
On Tech Companies and Taxes (me, my weekly newsletter, August 2017)
It’s Time to Tax Companies for Using Our Personal Data (Saadia Madsbjerg, The New York Times, November 2017)
World’s Largest Economies Can’t Agree on How to Tax Digital Companies (Paul Hannon, The Wall Street Journal, March 2018)
Supreme Court's Quill And Wayfair Cases Explained (Timothy M. Todd, Forbes, June 2018)
The US counterpunch to the OECD BEPS Project (Aparna Mathur, American Enterprise Institute, July 2018)
Taxing Tech Companies Won't Save Legacy Industries (me, Forbes, August 2018)
Europe needs tax system overhaul for digital age (me, Politico.eu, November 2018)
Philip Hammond's Digital Tax Will Probably Never See The Light Of Day (me, Forbes, November 2018)
World’s Tax Collectors Look to Divvy Up Tech Giants’ Billions (Sam Schechner, Paul Hannon and Richard Rubin, The Wall Street Journal, February 2019)
Warm regards (from Paris, France),
Nicolas