The announcement by the Conservative UK government of a tax on diverted profits (popularly referred to as the “Google Tax”), along with reports that the Abbott government may follow suit, has received only limited attention (as far as I have seen) but seems like a very big deal. A few observations on this
* It’s notable that these are conservative, business friendly governments that are, like all governments, short of money. It appears that, thanks to the steady drip feed of revelations about the “Double Irish”, Luxembourg private rulings and so on, that, even for such governments, highly profitable multinationals have become an appealing target, at least relative to domestic taxpayers
* If successful, this tax will turn two of the standard presumptions of the corporate tax debate on their heads. First, that corporate tax minimisation is not only legitimate but part of the obligation of managers (the corresponding shift was made with respect to individuals, in Australia at least) decades ago. Second, and more important, that global corporations can choose where they pay tax. The point of the UK tax is that, once corporations are found to be engaged in tax avoidance (pretty much a slam dunk), they can be made to pay in any jurisdiction, at rates that jurisdiction considers appropriate.
* It’s hard to see how corporations like Apple and Google can dodge this. They could refuse to supply their goods and services to the UK, but that would be immensely costly, and would be likely to provoke retaliation from other EU members.
* This will make a big change to the OECD processes aimed at a co-ordinated response to base erosion and profit shifting. Until now, corporations have had a strong interest in slowing this process down, and shopping around for good deals from the likes of Ireland, Luxembourg and, of course, Delaware. Now that they face the risk of facing unco-ordinated punitive action applied in many different countries, enlightened self-interest would suggest that they should support a global deal.
* In combination with the GFC, which revealed the extent to which “global” banks actually depended on protection from their home national governments, limits on global tax evasion undermine much of the analysis of globalisation that was dominant in the late 20th century
* If capital income can be taxed effectively in the countries where profits are generated, there’s much less need for ideas like Piketty’s global wealth tax.