Many of the largest corporations in the U.S. pay no federal income tax on 40 billion in profits. While U.S. President Joe Biden has stated he’ll change that disparity, a global perspective on tax policies reveals that what’s good for powerful countries isn’t quite the same as what’s good for developing countries. While tax policies are complicated and often seem unfair, new global solutions can both simplify how corporations pay their taxes and make payment more equitable for countries owed their share of tax revenue.
In episode 10 of the second season of The New Normal podcast series, Desautels Professor Preetika Joshi joins journalist Dave Kaufman to discuss tax avoidance and income shifting by corporations, including whether country-by-country reporting is an effective tax avoidance deterrent and how new technologies like blockchain and AI will make tax avoidance more difficult in the future.
“Country-by-country reporting requires large multinational corporations to file a form, disclosing global allocation of activities and profits in all jurisdictions [a corporation] calls home,” explains Joshi. For example, Apple would file this form in the United States, RBC would file in Canada, but the U.S. and Canada would share this form with the tax administrations of every country where these companies have operations, including those considered tax havens. For companies like Apple, that’s almost every country.
Currently, tax avoidance and income shifting represent a significant problem. “The estimate can run into hundreds of billions of dollars globally, and this has been growing over the years,” says Joshi. In 2018, the international monetary fund estimated this to be around 500 to 600 billion, more than many countries’ GDPs put together.
How large of a worldwide problem is tax avoidance?
Joshi’s research found that country-by-country reporting (CbCr) has significantly transformed the global landscape in terms of information transparency. CbCr was one of the first tax initiatives adopted by many countries simultaneously, she says, but it does not introduce a tax, it’s not a tax rule, and it doesn’t make companies pay tax. Rather, it’s a disclosure requirement.
“What this has done is it has levelled the playing field in terms of how much information is being disclosed consistently by the same company in different countries—with the objective that this will allow these countries to coordinate their effort, to fight tax avoidance on an international level,” Joshi explains.
“To be able to quantify or identify the societal impact, what we have to understand is the problem doesn’t lie with shifting income to another country, because as long as a company is paying tax on profits in any given country, I think it’s fine,” says Joshi. However, a problem arises when these companies are able to structure their operations in such a way that they end up paying no tax in any country. In the case of developing nations, when revenue is not generated by governments, they don’t have enough revenue for development in the first place.
Playing by the tax rules or changing them?
“The fault lies in the rules,” says Joshi. “Most of these rules we talk about in Canada and globally were not meant for today’s economy.” Many of these rules date back to the beginnings of tax acts: the Canadian income tax act was first written in 1917 to help finance the first World War, a very different financial time in Canada and the world.
“The economies of countries have changed, and globalization has broadened changes,” says Joshi. “What has happened is that the companies have gotten more ahead than governments in terms of being able to identify the opportunities and challenges that globalization brings.”
In a 2020 investigation, CBC news analyzed the financial statements of 53 public companies that disclosed receiving over 10 million under the Canadian emergency wage subsidy program, or CEWS. They found that nearly 30 of them issued quarterly payments to shareholders while collecting the subsidy. As Joshi outlines, they just played within the rules.
“I think the disconnect comes in the view we have as a society: the view is changing from just being concerned about your wealth and your returns to looking at the overall the world, the global economy, and benefiting everything, everybody,” she explains.
Solving the fairness equation
“The question really is about what we think is a fair level of tax,” Joshi continues. “I do believe that most companies are probably using the deductions and credits and incentives provided to them. They hire very expensive tax advisors who know exactly what to do… Because of the scale of these companies being so big and being so global, they benefit from taking advantage of these tax deductions and breaks in different countries, which was not meant to happen. And when all of that is put back together, you have companies which are paying tax at 4% and 5%.”
At the same time, public scrutiny of corporate taxes has resulted in better behaviour by firms. “The question is how much information does the public need?” Joshi asks. “I don’t think I disagree at all with the point that a fair amount of public scrutiny and pressure on these firms makes them maybe abide and not behave badly. And that’s why all these leaks that come to light, when you see the names of these companies and these people, that makes a difference.”
Even with the transparency of information that public country-by-country reporting provides, questions still linger around both the value and concerns of transparency. Many companies, large and small, are concerned with disclosing detailed proprietary information in reporting their global allocations.
“We can make an argument both ways as to why public country-by-country reporting could be effective or, on the other hand, why it may not be effective,” says Joshi. “I really think that this is somewhat of an unanswered question that researchers needed to address.”
While Professor Joshi’s research shows that country-by-country reporting has a positive, albeit minor impact on tax avoidance deterrence, she is confident that gains in blockchain and AI technology could be significant contributors to the improvement of transparency and accountability. However, as long as shareholder capitalism remains the standard, companies will look for a way to increase their quarterly shareholder dividend. What is fair and equitable may depend on one thing: whether you’re a shareholder or not.
For more insights, listen to the full interview with Professor Preetika Joshi on the Delve podcast.
Delve’s The “New Normal” podcast series is a collaboration between journalist Dave Kaufman and Delve, the official thought leadership platform of McGill University’s Desautels Faculty of Management. The “New Normal” is produced by Delve and Dave Kaufman, with audio engineering by David Rawalia. Each episode looks in-depth at a different aspect of the new normal that we are all navigating due to the COVID-19 pandemic. Original music by Saku Mantere.
Dave Kaufman is a Montreal-based journalist and commentator. He has worked for CJAD 800 and TSN 690 Radio in Montreal, CTV News Channel, CTV Montreal, and TalkRadio and SkyNews in the United Kingdom. He has written for the National Post, Montreal Gazette, and Toronto Sun and other publications. Follow him on Twitter at @TheKaufmanShow.