Companies don’t pay taxes, people do. But what does this mean for multinationals?
Make no mistake, governments have to impose tax imposts on companies. If governments only taxed people, and not companies, people would retain any money they did not need to take out, for their current needs, in companies. No tax would be paid on that money and it would also grow free of tax. Of course, the money would eventually have to be extracted, and tax would then be payable on it in the hands of the individual. This is because, at an individual level, there is no point to money you cannot eventually spend. But there is a timing problem. Governments need money now rather than when the individual chooses to give them a share of it. So some way of forcibly extracting money from companies on, at least, an annual basis is required.
Ultimately, however, 100% of the taxes borne by companies, as well as 100% of the taxes collected by companies, are borne by human beings. These people are either the company's ultimate shareholders (through lower dividends), or the company's staff (through lower wages) or the company's customers (through higher prices). Other costs, such as exactions to compensate for ill health borne by people affected by pollution caused by the company's activities, may lead to additional charges on the company but these charges are again borne by the same three groups of people.
Understanding this allows us to look from a different angle on the current debate about the 'fair' taxation of companies. What lies behind the debate is ultimately a dispute about whether the balance of the burden of taxation is correct as between the three categories. Put simply, to help fund the government in which a company operates, do we confiscate the rewards of invested capital (from shareholders)? Or do we confiscate the rewards of labour (from staff or customers). The answer is, a bit of all of them, but the balance is different, in every country, depending on local conditions.
Capital is global and highly mobile. If the country suffers from political instability and has insecure property rights, shareholders will only invest their capital in companies that operate there if a higher rate of return is available, because of the higher chance they will lose their money. For example, if you received the same after tax per annum return on your invested capital where would you invest it, in Switzerland or in the Central African Republic? Is your answer different if you are offered 3% for Switzerland, but 30% for the the Central African Republic? As a worker, or as a customer, you may have rather less choice about where you 'invest' your labour since you are a corporeal being and less mobile than an electronic dollar of capital: but if conditions or tax rates get punitive, we have economic migrants too.
If a government confiscates the rewards of invested capital to too great an extent (through profits taxation, capital gains taxes, transfer pricing imposts and the like) internationally mobile capital will not invest in that country, potentially depriving the people of that country of the chance of a job, and the consumers of that country the goods and services that would be made available. If a government confiscates the rewards of labour from the staff (through income and employment taxes) to too great an extent those people that do not emigrate will often, save to the extent that they must do so to survive, be inclined either to stop working or to evade the taxes. If a government confiscates the rewards of labour from the consumer (by sales taxes) to too great an extent the consumers do not buy the goods, thus depriving the shareholders of any return on their investment, and the workers of their jobs.
It is always the case that a balance has to be struck between these three types of taxation and each government will adjust the balance according to its political colour. The debate about the 'fair' taxation of companies needs to be conducted on the understanding that all three have their role. But the debate is particularly heated in the case of multinational companies. Let us imagine a multinational company providing purely electronic services. It may be able to operate such that it is able to get the best deal from a variety of different tax regimes at once (even assuming equivalent gross employee salaries in different countries) without any exotic tax planning. What if the shareholder is in one country (with comparatively low rates of taxation of dividends and low capital gains taxes), the staff are in another country (with comparatively low rates of taxation for employment income and low employer labour taxes), and the customer in a third country (with comparatively low sales taxes)? A company operating in such a way has a formidable business advantage over purely national rivals. No one government can act alone to deny them that advantage.
Ultimately, however, 100% of the taxes borne by companies, as well as 100% of the taxes collected by companies, are borne by human beings. These people are either the company's ultimate shareholders (through lower dividends), or the company's staff (through lower wages) or the company's customers (through higher prices). Other costs, such as exactions to compensate for ill health borne by people affected by pollution caused by the company's activities, may lead to additional charges on the company but these charges are again borne by the same three groups of people.
Understanding this allows us to look from a different angle on the current debate about the 'fair' taxation of companies. What lies behind the debate is ultimately a dispute about whether the balance of the burden of taxation is correct as between the three categories. Put simply, to help fund the government in which a company operates, do we confiscate the rewards of invested capital (from shareholders)? Or do we confiscate the rewards of labour (from staff or customers). The answer is, a bit of all of them, but the balance is different, in every country, depending on local conditions.
Capital is global and highly mobile. If the country suffers from political instability and has insecure property rights, shareholders will only invest their capital in companies that operate there if a higher rate of return is available, because of the higher chance they will lose their money. For example, if you received the same after tax per annum return on your invested capital where would you invest it, in Switzerland or in the Central African Republic? Is your answer different if you are offered 3% for Switzerland, but 30% for the the Central African Republic? As a worker, or as a customer, you may have rather less choice about where you 'invest' your labour since you are a corporeal being and less mobile than an electronic dollar of capital: but if conditions or tax rates get punitive, we have economic migrants too.
If a government confiscates the rewards of invested capital to too great an extent (through profits taxation, capital gains taxes, transfer pricing imposts and the like) internationally mobile capital will not invest in that country, potentially depriving the people of that country of the chance of a job, and the consumers of that country the goods and services that would be made available. If a government confiscates the rewards of labour from the staff (through income and employment taxes) to too great an extent those people that do not emigrate will often, save to the extent that they must do so to survive, be inclined either to stop working or to evade the taxes. If a government confiscates the rewards of labour from the consumer (by sales taxes) to too great an extent the consumers do not buy the goods, thus depriving the shareholders of any return on their investment, and the workers of their jobs.
It is always the case that a balance has to be struck between these three types of taxation and each government will adjust the balance according to its political colour. The debate about the 'fair' taxation of companies needs to be conducted on the understanding that all three have their role. But the debate is particularly heated in the case of multinational companies. Let us imagine a multinational company providing purely electronic services. It may be able to operate such that it is able to get the best deal from a variety of different tax regimes at once (even assuming equivalent gross employee salaries in different countries) without any exotic tax planning. What if the shareholder is in one country (with comparatively low rates of taxation of dividends and low capital gains taxes), the staff are in another country (with comparatively low rates of taxation for employment income and low employer labour taxes), and the customer in a third country (with comparatively low sales taxes)? A company operating in such a way has a formidable business advantage over purely national rivals. No one government can act alone to deny them that advantage.