571 Bankers call for Re-regulation. Unitary Taxation of Transnational Corporations

Bankers call for Re-regulation. Unitary Taxation of Transnational
Corporations

(1) Former Morgan banker says split the banks, restore Glass-Steagall,
end self-regulation on Wall St
(2) Bankers who lobbied for repeal of Glass-Steagall law now say it was
a mistake
(3) A fix for corporate tax avoidance: Unitary Taxation - Nicholas Shaxson
(4) Towards Unitary Taxation of Transnational Corporations

(1) Former Morgan banker says split the banks, restore Glass-Steagall,
end self-regulation on Wall St

http://www.businessinsider.com/why-should-the-banks-be-broken-up-2013-1

Why Should The Banks Be Broken Up?

Larry Doyle, Sense on Cents | Jan. 14, 2013, 9:54 AM | 49 |

Larry Doyle was formerly the National Sales Manager for securitized
products at JP Morgan.

As much as I detest the involvement of the government in what are
supposed to be free markets, I can appreciate the need for Uncle Sam’s
stepping in to save our banking system in late 2008.

Now going on five years hence, it is time that we move to save
capitalism. How do we do this? We need to break up the banks. Why so?
Here’s a handful of reasons why:

1. Since 2008, the then too big to fail banks have only gotten that much
bigger and hence would require that much more of a government bailout.
Does anybody believe that the system could support itself without
further government intervention? Really? In light of this information:

2. The four largest banks write issue approximately 50 per cent of the
home mortgages in our country and close to 70 per cent of the credit cards.

3. The six largest banks hold assets close to two-thirds of the
country’s GDP.

4. The five largest banks hold approximately 95 per cent of the
derivatives. Can you say too big to fail right here?

The marriages of the banks - – - both by choice and by shotgun – - –
have brought us a system that is not reflective of free market
capitalism but one that is the essence of an oligopoly.

What are the key factors at work within an oligopoly?

1. Ability to set prices.

2. Barriers to entry across a wide array of business lines are VERY high.

3. Firms within the oligopoly can retain long run abnormally high profits.

4. Firms within the oligopoly can and will share, retain, and withhold
perfect information and knowledge.

5. Individuals, firms, and institutions outside of the oligopoly do not
have access to that information and knowledge and pay the price
literally and figuratively in the process.

What is the other consequence of this oligopoly which has been
developing on Wall Street over the last few decades and escalated as a
result of the crisis?

Cronyism.

Think of the major scandals on Wall Street and how they tie into this
economic system.

1. Manipulation of Libor an dother overnight interest rates that has
likely been going on for the better part of the last twenty years.

2. Money laundering within the Treasury operations of the largest banks.

3. Price controls and glorified front running on the equity exchanges
that are dominated by the trading of the major Wall Street banks.

4. Insider trading within hedge funds that is very often facilitated by
the prime brokerage operations of the largest banks.

Shall I go on?

The oligopoly and cronyism is only further exacerbated by financial
regulators — and especially the self-regulatory model – - – that
operates really more like meter maids than real financial cops. The
oligopoly pays for its own regulation. How is that working?

What is the result of the oligopoly and cronyism? A pervasive lack of
trust and confidence in our markets, our economy, and our government.

I firmly believe that breaking up the banks, reinstituting
Glass-Steagall, and ending the self-regulatory model on Wall Street are
issues that an overwhelming percentage of people within our nation will
embrace and pols from both sides of the aisle can get behind.

In fact, we are starting to see that as just the other day the Financial
Times highlighted in writing, Republicans Join Liberal View of MegaBanks,

America’s liberals have long demanded that the largest US financial
groups be forcibly broken up following the financial crisis. Now, an
increasing number of influential conservatives are joining their cause.

Republican lawmakers on Capitol Hill have introduced legislation and
written letters urging government officials to study the allegedly
harmful effects on financial stability and economic growth posed by
“megabanks”.

Increasing attention on Capitol Hill coincides with rising attention
among influential Republican commentators such as George Will of the
Washington Post, Peggy Noonan of The Wall Street Journal and Erick
Erickson of the blog RedState, who have argued that Republicans should
embrace the idea of breaking up large financial groups.

“It is absolutely a conservative imperative to break up the big banks,”
Mr Erickson recently wrote on his blog. “If we want smaller government,
we need smaller banks too.”

Some regulators including Thomas Hoenig, Federal Deposit Insurance
Corporation vice-chairman, have wanted to break up big banks for years.
Dallas Fed governor Richard Fisher is also a proponent of breaking up
the banks and is speaking on this topic on Wednesday. I will be
addressing it this evening at The Monday Meeting in New York. How do
people feel about this? Larry Doyle
Isn’t it time or overtime to subscribe to all my work via e-mail, an RSS
feed, on Twitter or Facebook.

I have no business interest with any entity referenced in this
commentary. The opinions expressed are my own. I am a proponent of real
transparency within our markets so that investor confidence and investor
protection can be achieved.

http://www.complinet.com/global/news/news/article.html?ref=157529

Big four might make better eight

Australian Financial Review Aug 06 2012

Australia's major banks are too big and complex and they should be
broken up. That is the controversial and unconventional view of a
retired senior local banker. It follows similar provocative thoughts
from former Citigroup global chief executive Sandy Weill ...

(2) Bankers who lobbied for repeal of Glass-Steagall law now say it was
a mistake

http://www.bloomberg.com/news/2012-07-25/former-citigroup-chairman-weill-says-banks-should-be-broken-up.html

Former Citigroup CEO Weill Says Banks Should Be Broken Up

By Donal Griffin & Christine Harper - Jul 26, 2012 8:00 AM ET

Sanford “Sandy” Weill, whose creation of Citigroup Inc. (C) ushered in
the era of U.S. banking conglomerates a decade before the financial
crisis, said it’s time to break up the largest banks to avoid more bailouts.

“What we should probably do is go and split up investment banking from
banking,” Weill, 79, said yesterday in a CNBC interview. “Have banks do
something that’s not going to risk the taxpayer dollars, that’s not
going to be too big to fail.”

Weill helped engineer the 1998 merger of Travelers Group Inc. and
Citicorp, a deal that required repeal of the Depression-era
Glass-Steagall law that forced deposit-taking companies backed by
government insurance to be separate from investment banks. The New
York-based company became the biggest lender in the world before taking
a $45 billion taxpayer bailout in 2008 to avoid collapse.

Weill joins regulators, investors, analysts, former bankers and
lawmakers in calling for the break-up of too-big-to-fail banks to unlock
shareholder value and prevent another financial crisis.

“There is finally a growing recognition among a wide range of market
analysts, financial market participants and policy makers that the
repeal of Glass-Steagall was a mistake,” said Thomas Hoenig, a Federal
Deposit Insurance Corp. board member and former head of the Kansas City
Federal Reserve. “It’s time now to restrict banks to core services.”

House Bill

Rep. Brad Miller, a Democrat from North Carolina, has introduced
legislation that would cap the size of the biggest banks.

“There are very credible establishment voices now saying we really gain
little if anything from the size and complexity of these banks,” Miller
said in an interview. He said he doesn’t hold out much hope the
Republican-controlled House of Representatives will take up his bill,
meaning any breakup would be up to shareholders taking the initiative.

Arthur Levitt, a former business partner of Weill’s who was chairman of
the Securities and Exchange Commission when Citigroup was created, said
Weill was “largely responsible” for the rollback of Glass-Steagall.

“He fought very hard for it, and really what Sandy did was to take
advantage of regulators who weren’t and still aren’t doing their job,”
said Levitt, who is a member of the board of Bloomberg LP, the parent of
Bloomberg News.

‘Weak’ Job

Levitt said he regrets supporting the bill that overturned
Glass-Steagall, and didn’t realize “how weak a job as regulators the Fed
and Comptroller’s office were doing,” referring to banking oversight by
the Federal Reserve and Office of the Comptroller of the Currency.

David Knutson, an analyst with Legal & General Investment Management,
said it was hard to believe Weill, “the shatterer of Glass-Steagall,”
has now changed his mind. “He enjoyed the benefits of the demise of
Glass-Steagall and only now has he become remorseful? Where was he five
years ago?” said Knutson, whose firm owns bonds sold by Citigroup and
JPMorgan (JPM) Chase & Co., now the biggest U.S. bank by both deposits
and assets.

Directors of Citigroup paid Weill about $1 billion, including stock,
during his 17 years as CEO, as he assembled a behemoth with operations
across the world that offered investment banking, trading, commercial
banking, insurance and consumer finance. He left the board in 2006.

Taxpayers rescued Citigroup in 2008 after losses tied to subprime
mortgages threatened the financial system. Bank of America Corp. also
accepted a $45 billion bailout while JPMorgan and Wells Fargo & Co.
(WFC) each took $25 billion. Goldman Sachs Group Inc. (GS) and Morgan
Stanley (MS) were given $10 billion apiece.

Taking Deposits

“We can have size and scale but it doesn’t have to be connected to a
deposit-taking institution,” Weill said in the interview. “Have banks be
deposit-takers, have banks make commercial loans and real estate loans.”

Banks would be even more valuable if they heeded his advice, Weill said.
Citigroup’s shares, which traded as high as $564.10 at the end of 2006
adjusted for a reverse stock split, plummeted to $10.20 during March of
2009, six months after Lehman Brothers Holdings Inc. filed for
bankruptcy protection. They closed at $25.79 yesterday.

Jon Diat, a spokesman for the bank, declined to comment on the remarks
by Weill, who held the positions of chairman and chief executive officer
of Citigroup after the Travelers merger. He retains the title of
chairman emeritus.

Parsons, Reed

Richard Parsons, who earlier this year ended a 16-year tenure on
Citigroup’s board, said in April that the repeal of Glass-Steagall made
the business more complicated and ultimately helped cause the financial
crisis. Former Citicorp CEO John Reed apologized in 2009 for his role in
building Citigroup and said banks that big should be divided into
separate parts.

The four most complex U.S. financial holding companies -- JPMorgan,
Goldman Sachs, Morgan Stanley and Bank of America -- each contain more
than 2,000 subsidiaries, with two of those controlling more than 3,000
subsidiaries, according to a research paper published this month by the
Federal Reserve Bank of New York. Citigroup has 1,645. Just one firm
exceeded 500 subsidiaries in 1991, the report shows.

Weill said he hasn’t spoken with Citigroup CEO Vikram Pandit, 55, or
JPMorgan’s Jamie Dimon, 56, about his change of heart. Dimon is a former
protege of Weill’s and helped build Travelers before the merger with
Citicorp.

Wall Street chiefs have resisted calls to break up their companies.
Morgan Stanley CEO James Gorman, 54, described the debate as a
“knee-jerk discussion” in a June 27 interview.

Dimon’s View

Dimon said he disagreed with a shareholder who asked on a July 13
conference call whether the bank had become too big to manage.

“I beg to differ,” Dimon said. “There is huge strength in this company
that the units get from each other.”

Breaking up the banks into different parts would make the firms much
more valuable, Weill said. The stocks of five of the six biggest U.S.
banks -- Citigroup, JPMorgan, Bank of America, Goldman Sachs and Morgan
Stanley -- are languishing at or below tangible book value. That means
different pieces of the banks are worth more than the whole, fund
manager Michael F. Price said last month.

Citigroup’s shares trade at 50 percent of tangible book value and New
York-based Morgan Stanley’s are at 47 percent, according to data
compiled by Bloomberg.

“Now you have the preeminent creator of the large financial-conglomerate
model agreeing that large banks should be broken up,” Michael Mayo, an
analyst at CLSA Ltd. in New York who has covered the largest U.S. banks
since before Glass- Steagall’s repeal, said in an interview. “It’s going
to make some people pretty upset, since he’s the one who created the
current Citigroup model, and now he’s saying, ‘Look, we messed up.’”

Greenspan Speech

Even Alan Greenspan, who fought for the repeal of Glass- Steagall when
he was chairman of the Federal Reserve, said in 2009 that breaking up
the banks might make them more valuable.

“In 1911, we broke up Standard Oil -- so what happened?” Greenspan said
at New York’s Council on Foreign Relations. “The individual parts became
more valuable than the whole. Maybe that’s what we need to do.”

Weill altered his view about the industry because “the world changes,”
he said, adding that he’s “been thinking about it a lot over the last year.”

“The world we live in now is not the world we lived in 10 years ago,”
Weill said. “Good things are simple.”

Former President Bill Clinton said when he signed the repeal of
Glass-Steagall in 1999 that it was “no longer appropriate” for the economy.

“The world is very different,” Clinton said at a White House signing
ceremony.

To contact the reporters on this story: Donal Griffin in New York at
dgriffin10@bloomberg.net; Christine Harper in New York at
charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at
dscheer@bloomberg.net

(3) A fix for corporate tax avoidance: Unitary Taxation - Nicholas Shaxson
http://blogs.euobserver.com/shaxson/2012/12/11/a-21st-century-blueprint-for-taxing-multinational-companies/

A 21st Century blueprint for taxing multinational companies

Nicholas Shaxson

December 11, 2012

The British press is awash with stories about corporate tax avoidance,
involving Google, Starbucks, Microsoft, Amazon and many others. Much of
the avoidance takes place through European tax havens – notably
Luxembourg, Ireland and the Netherlands – or through British
dependencies such as Bermuda and (to a lesser extent) the Cayman
Islands. Parliamentarians have grilled corporate executives and the tax
authorities, and protesters have taken to the streets in a number of
British towns and cities. There has been similar concern, even if not at
quite such a high level, in other European countries, as well as in the
United States, Australia and elsewhere.

The essence of the problem is that the international tax rules,
originally framed about a century ago, have failed to keep up with
massive changes in the global economy. A system overseen by the OECD is
no longer fit for purpose. Countries will never be able to tackle
corporate tax avoidance seriously under the rules jealously guarded by
the OECD and by vested interests in favour of the current status quo.

There is a clear, radical, and tried-and-tested alternative available:
unitary tax

The UK’s Observer newspaper on the weekend carried an article about a
new report on taxing transnational companies, in which Professor Sol
Picciotto, Senior Adviser to the Tax Justice Network, makes the case for
shifting to Unitary Taxation, with profits being apportioned to the
various countries in which the TNCs have a genuine economic presence.

Picciotto’s report is available in full here, and you can download the
press release here. The report is summarised below.

The European Union is already pushing ahead with a version of this
proposal – the Common Consolidated Corporate Tax Base (CCCTB) but its
scope needs to be expanded.

The report is briefly summarised below. ==

Towards Unitary Taxation of Transnational Corporations – a 21st Century
blueprint for taxing multinationals

Today’s international tax rules, which were drawn up nearly a century
ago, have not kept pace with the massive changes in the world economy.

Separate Entities and the Arm’s Length ‘Principle’

The system is governed by two broad principles. First, it treats
transnational corporations (TNCs) as if they were loose collections of
separate entities operating in different countries. Because there is
only weak co-ordination between tax authorities, however, this ‘separate
entity’ approach allows TNCs scope to shift profits around the globe to
escape tax.

Second, entities within a multinational trade with each other across
borders at prices governed by the so-called Arm’s Length Principle (ALP)
– as if they were independent actors trading with each other in the open
market.

Yet TNCs enjoy unique global synergies and advantages that come from
combining economic activities on a large scale and in different
locations. These advantages cannot be attributed to a single location,
but to the whole global entity. So treating each affiliate as a separate
entity for tax purposes is impractical and does not reflect economic
reality; and their internal cross-border trades typically bear no
relation to any supposed “arm’s length” trade between independent actors
in an open market. It is, as a top U.S. tax expert puts it, “delusional”
to think this principle can be applied effectively.

This international tax system is dominated by the Organisation of
Economic Cooperation and Development (OECD). The OECD’s Fiscal
Committee, consisting of unelected state officials, presides over an
increasingly complex set of rules which they are also responsible for
applying. Its often arbitrary decisions involve billions of dollars of
taxes – yet it is effectively unaccountable.

This press release introduces a new report, Towards Unitary Taxation of
Transnational Corporations by Sol Picciotto, emeritus professor at
Lancaster University, senior adviser with Tax Justice Network and author
of International Business Taxation (1992), and Regulating Global
Corporate Capitalism (2011).

A historical section charts howthe international tax rules, despite
significant opposition and viable alternatives, were established in the
early 20th century, at a time when TNCs were in their infancy and loans
were the main form of international investment. As TNCs became more
dominant in the second half of the century, however, they increasingly
took advantage of the ‘separate entity’ principle to set up affiliates
in convenient low-tax jurisdictions (tax havens,) to cut their taxes.

In response, increasingly diverse and complex and rules have been
elaborated to patch up the system, which has consequently become ever
more arbitrary and opaque.

Many experts now argue that a fresh approach is needed, starting from a
recognition that TNCs are not loose collections of separate entities but
operate as integrated businesses under central direction. This approach,
which a majority of U.S. states (and many others) already use
successfully, is known as Unitary Taxation.

It is time for a system fit for the 21st Century to be rolled out
internationally. The paper outlines how the change could be phased in
quite quickly.

Unitary Taxation and Profit Apportionment

Instead of the current system where multinationals are taxed according
to the legal forms that their tax advisers conjure up for them, unitary
taxation would see TNCs being taxed according to the genuine economic
substance of what they do and where they do it. This not only fits
economic reality and is a far more legitimate basis for international
tax, but it is much simpler to administer, a particular benefit for
developing countries. It would massively reduce tax abuse and
dramatically curb TNCs’ use of tax havens, thus removing much of the
political cover protecting these secretive jurisdictions, and
consequently making them easier to deal with on secrecy and a wide range
of other issues.

Under unitary taxation a TNC engaged in a unified business submits a
single set of worldwide combined or consolidated accounts, in each
country where it has a business presence. This overall global profit is
then apportioned to the various countries, using a formula that reflects
the TNC’s genuine economic presence in each country. This allocation is
often called ‘formulary apportionment’ or, much better, ‘profit
apportionment’. (The formula typically considers the TNC’s assets,
labour and sales in each jurisdiction.) Each country involved sees the
combined report and can then tax its portion of the global profits at
its own rate. Widespread international co-ordination is not necessary
for this to work, though it would help.

Unitary taxation would place on a sounder basis the `territorial’
principle, where profits are supposed to be taxed by the countries in
which the business activity takes place. This apportionment would be
done according to factors measuring real economic presence in each
territory, rather than according to the fictional devices and entities
devised by the fertile minds of highly paid lawyers and tax advisers.

Tax experts have long known that this unitary approach makes more sense.
It has long been applied in federal systems, notably in the United
States: a pioneer was the State of California which was missing out on
revenues thanks to Hollywood film studios siphoning profits through
their use of Nevada incorporated affiliates.

But the approach has not yet been rolled out internationally. Indeed it
has not even been seriously studied by the closed groups of tax
specialists running the system. Powerful vested interests support the
current system.

Preparing the ground

Even in the 1930s when the “separate entity” approach was first agreed
internationally it was accepted that in practice national authorities
could look at the firm’s overall financial accounts in order to ensure a
fair split of the total profits. However, this was never done in a
systematic way but through this increasingly complex array of often ad
hoc, unworkable methods.

Some techniques allowed by the OECD already go a fair way towards profit
apportionment, the basis for unitary taxation. Indeed, the European
Union has already prepared proposals for adopting a version of unitary
taxation,[1] though with a restricted scope.

A phased roll-out of Unitary Tax transition would see:

· expert studies exploring economic and legal aspects of the change;

· the requirement by countries that transnational companies
publish full trading information – a Combined Report – to eliminate
abusive transfer pricing and profit shifting.

· one or more major international trading blocs adopting the
change. The EU project could be the first. Its scope could be steadily
expanded.

OECD under fire

The OECD has for decades stubbornly refused even to consider the
viability of the approach, strongly influenced by lobbying, such as in a
campaign led by British TNCs in the early 1980s against worldwide profit
apportionment by US states, especially California. The system is also
defended by a large and growing avoidance industry including the Big
Four accounting firms, which derive large fees helping TNCs navigate the
increasingly complex arena of international tax. TNCs defend what they
know is a dysfunctional system, because it helps them avoid tax.

The OECD Committee, for its part, consists of national tax officials
working closely with private sector tax specialists and advisers from
large accounting firms with a vested interest in the status quo.
Officials often leave public service to take up lucrative private sector
jobs, in a revolving door; each has invested huge intellectual capital
in understanding the complex rules they helped devise – so they are
understandably reluctant to reform the system.

The OECD says its Arm’s Length Principle (ALP) expresses an
international consensus and deploys it to close down debate elsewhere,
especially in the UN Tax Committee, which is potentially an alternative
forum for setting international tax rules.

Developing countries hope to tackle TNCs’ international tax strategies,
but they find the ALP difficult or impossible to administer in practice.
India has 3,000 cases challenging transfer pricing adjustment pending
before its tax courts. Brazil has modified the rules in ways the OECD
disapproves of. China is taking a similarly independent-minded approach.
Persisting with this failing system of rising complexity is a recipe for
international conflict.

Meanwhile, banks and other financial firms are the main users of the tax
haven system: their systematic tax avoidance, by reducing their cost of
capital, significantly contributed to the liquidity that fuelled the
speculative bubble which resulted in the financial crash.

Until now, tax authorities have not pushed for a unitary approach
because they have felt that political will is lacking. So instead they
take upon themselves the responsibility for deciding, on a case-by-case
basis, how each large company gets taxed.

That political will is now within reach. The time has come to reform
international tax for the modern era.

Notes

• It is impossible to calculate the amount of money multinationals
avoid globally not least because there is no agreement over what
constitutes avoidance. In the UK, the TUC estimated 700 of the largest
corporations avoid tax worth £13bn.
• This approach has been widely endorsed. See Sol Picciotto and
Nicholas Shaxson recently in the Financial Times. See Respected finance
thinker John Kay, also in the Financial Times, who commented: “The
repeated revelations that many major companies pay little or no tax,
even if they do so by legal means, fuels a public sense that tax is
mainly for little people. We need only look at Greece to see how
socially, politically and economically corrosive that perception can be.
. . . Well conceived apportionment is the best – perhaps only – answer
to the problem presented by multiple company tax jurisdictions.” See
also this FT editorial, also endorsing the concept.

• Please click here for a series of quotes about the scale of tax
abuse through TNC’s use of transfer pricing.

(4) Towards Unitary Taxation Of Transnational Corporations

Sol Picciotto*

December 9, 2012

http://www.taxjustice.net/cms/upload/pdf/Towards_Unitary_Taxation_1-1.pdf

SUMMARY

This paper puts forward proposals for a reform of taxation of
transnational corporations (TNCs). Although it would involve a new
approach to this issue, it builds on long experience and analysis of the
actual practice of tax administrations, and the paper discusses
transitional arrangements for the changeover. It has become increasingly
clear that a fresh look is needed at the international tax system, the
basic structures of which were devised a century ago.

The foundations for the current international tax system were laid early
in the 20th century, when TNCs were in their infancy, and most
international investment flows consisted of private and public loans.
Experts understood that TNCs posed a different problem, since they
generally operate as integrated businesses under central direction,
although they consist of groups often of very many companies. It was
agreed that national taxes should apply to the business profits of the
members of such a group operating within each jurisdiction, but tax
administrations could adjust the accounts if necessary to prevent
`diversion’ of profits. The aim was to ensure that they reflected `the
net business income which it might be expected to derive if it were an
independent enterprise engaged in the same or similar activities under
the same or similar conditions’. This became known as the arm’s length
principle (ALP). However, tax administrations could also adjust the
accounts based on comparisons with the profits made by local firms with
similar business, or considering the proportion of profits declared
locally in relation to those of the TNC as a whole.

By the second half of the century TNCs became increasingly dominant in
the world economy, managing operations in different countries. They also
developed increasingly complex techniques for reducing their overall
taxes, exploiting the loopholes in the loosely coordinated international
tax system.

* Emeritus Professor, Lancaster University, Senior Adviser, Tax Justice
Network, and author of International Business Taxation (1992), and
Regulating Global Corporate Capitalism (2011). I am grateful for
comments from Michael Durst, Ted van Hees, David Spencer and especially
Michael McIntyre and Richard Murphy; the responsibility for the paper
remains mine.

1

International tax avoidance involves two main methods. First, TNCs can
create intermediary entities in convenient countries, usually those with
no or low income tax (known as tax havens), to carry out activities
(e.g. financial transactions, transportation, providing advice or other
services), or to act as ``holding companies’ owning assets (e.g.
intellectual property rights, bonds, shares). By attributing profits to
them the group’s overall taxes can be reduced, even though they usually
exist only on paper, perhaps with a name-plate on an office building.

Secondly, a TNC can adjust the prices of transfers between members of
the TNC group, to shift profits from high-tax to low-tax countries. This
is known as `transfer pricing’. However, it is not always easy to judge
whether the aim is tax avoidance, as the prices set between related
entities within a unitary group are generally decided administratively
and not competitively, so they may reflect various strategic concerns of
the TNC (e.g. management incentives, currency exposure).

Concerns about tax avoidance by TNCs resurfaced in the 1960s, especially
in the USA, the home state of very many of them. To combat the use of
tax havens, in 1962 US enacted measures to include in the profits of a
US parent company the income of its affiliates formed in low-tax
countries, if they fall within the definition of a `controlled foreign
corporation’ (CFC) Many other OECD countries later introduced similar
rules. To try to deal with transfer pricing, the US introduced detailed
regulations in 1968, elaborating how such prices should be determined.

Unfortunately, this dual policy response lacked coherence. Indeed, the
transfer pricing regulations made it more difficult to deal with
profit-shifting through intermediary companies, since they cemented into
place the ALP, requiring affiliates to be treated as separate entities.
In particular, the US regulations specified that where possible the
pricing of specific transactions should be based on those for similar
transactions between unrelated firms, or `comparable uncontrolled
prices’ (CUP). However, as a fall-back where these were not available,
they did allow estimation of the actual profit on the basis of
profit-rates for similar firms, either for a pattern of transactions or
for the overall profit (`profit-split’).

Despite its flaws, this US approach was adopted by the OECD in a report
issued in 1979, subsequently revised as the Transfer Pricing Guidelines.
Meantime, its application by the US itself was challenged as
ineffective. Studies showed that comparables could be found for only a
minority of cases, and a report for the US Congress found that applying
the regulations was time-consuming, burdensome and created uncertainty.
In 1988 the US Treasury announced a new approach, which would restrict
the CUP to where an exact comparable could be found, and proposed a new
method for calculating an `arm’s length return’, attributing to the
affiliate a profit based on analysing its functions and applying an
industry average rate (the `comparable profit method’, or CPM). This
caused considerable conflict within the OECD, but was eventually adopted
as the `transactional net margin method’ (TNMM) in the revised Transfer
Pricing Guidelines of 1995.

With this experience, pressures mounted for a new approach to TNC
taxation. Such an approach was already available, and had indeed been
considered in the 1930s. It consists of treating a TNC engaged in a
unified business as a single entity, requiring it to submit a single set
of worldwide combined or consolidated accounts in each country where it
has a business presence, and apportioning the overall profit according
to a weighted formula reflecting the proportion of its actual presence
in each country. The experts who considered the issue in the 1930s
considered that this system could not be adopted internationally, due to
the political difficulties of reaching agreement on the definition of
the taxable base and on the apportionment formula. However, they also
recognised that in practice national authorities would have regard to
the firm’s overall accounts and the proportion of the total profits
attributed to affiliates. Indeed, the increased use of profit-split
methods since the 1980s showed that this was necessary and inevitable.
It is not a very big step to move from profit-split 2

methods to a full unitary taxation approach, although it does require a
reorientation of approach. The main advantage, however, is that it would
deal not only with transfer pricing, but also with the tax avoidance by
TNCs through the tax haven system.

The unitary approach is based on the economic reality that TNCs exist
because of the advantages and synergies of combining economic activities
on a large scale and in different locations. They also generally are
oligopolies based on distinctive or unique technology or know-how.
Hence, treating a TNC affiliate for tax purposes as a separate entity,
and insisting that intra-firm transactions should be based on
comparables, is both impractical and senseless. ...