Survival of the Richest

Europe's role in upholding an unjust tax system
In general, there are two main models for tax treaties being
used, one developed by the OECD and the other by the UN.
A key difference between the two models concerns the
issue of how the profits of multinational corporations are
allocated between the countries where they do business.
Whereas the OECD model favours the country where the
corporate headquarters and investors are based, the UN
model is more favourable to the so-called ‘source countries’,
where the income arises. 108 Since most developing countries
are source countries, this difference has a significant impact
on the corporate tax income in developing countries. 109
The UN model is therefore seen as more favourable to
developing countries than the OECD model.
A third option is treaties which only focus on exchange
of information, the so-called Tax Information Exchange
agreements (TIEA). These treaties don’t contain the
elements such as lowering of tax rates and distribution
of taxing rights between countries, and are therefore not
controversial in the same way as ordinary tax treaties.
In its resolution on policy coherence for development,
the European Parliament in June 2015 called on the EU
‘to ensure fair treatment of developing countries when
negotiating tax treaties in line with the UN Model Double
Taxation Convention, taking into account their particular
situation and ensuring a fair distribution of taxation rights’. 110
In its communication on an external strategy on tax,
published in January 2016, the European Commission
acknowledged that the tax treaties of EU Member States
can have negative impacts on developing countries. Rather
than suggesting concrete measures to address the issue,
such as a spillover analysis (see above under ‘EU spillover
analysis’), the Commission intends to launch a debate with
Member States on the issue and suggests that the Member
States could ‘reconsider’ aspects of their tax treaties with
developing countries. 111 It is still unclear what the concrete
outcomes, if any, of this work will be.
Common Consolidated Corporate Tax Base
Box 3
Multinational corporations – separate
or single entities?
The underlying problem in the international tax system
today is that multinational companies are treated
as a collection of ‘separate entities’ even though in
reality they function as unified firms, with subsidiaries
under the central control of the parent company. In
today’s system, subsidiaries of the same company are
expected to trade with each other ‘at arm’s length’, as
if they did not have any connection to each other.
The fundamentals of the transfer pricing rules
governing taxation for multinationals date back almost
100 years. Since then, the way companies do business
has changed radically. Technological transformations,
increasingly complex corporate structures and
business strategies based on branding are all part of
the explanation as to why the arm’s length principle
has become prone to misuse. Setting up long chains
of separate entities within the same company has
been normalised and it is not always easy to decipher
which corporate structures serve legitimate economic
purposes and which are designed solely to avoid
paying taxes or to circumvent other regulations and
social obligations. 112 Another underlying problem with
the arm’s length principle is that the data needed to
determine whether multinational corporations have
used an ‘arm’s length price’ in their internal trades is
either not available to tax administrations, or simply
does not exist. 113
However, the arm’s length principle is being called
into question, as it is becoming increasingly clear that
it lies at the heart of the problem of profit shifting by
multinationals. The UK’s disputed tax deal with Google
in January 2016 prompted both the Financial Times
and the Economist to write about what the Economist
called the ‘damaging fiction’ of separate entities. 114
According to the Economist, ‘the “transfer pricing”
rules that police this system are complex and flawed.
Keeping this approach, but toughening up the policing,
means creating yet more rules – and loopholes. Better
to think of each firm as a single entity.’
24 • Survival of the Richest