Principles underpinning solutions
As the world has become increasingly globalised economically, certain principles have emerged to explain the fiscal relationship of corporations to nation-states, & these have inspired policy proposals to help ameliorate the situation. The principle of economic allegiance“requires anyone that obtains significant benefits from an economic community to pay tax to that community”. Dietsch terms this principle the ‘membership principle’ because it determines in which country or countries an individual or corporation is liable to taxation & thus a ‘member’. The membership principle states that ‘individuals & companies should be viewed as members [and pay tax] in those countries where they benefit from the public services & infrastructure’. The principle of economic allegiance, if followed logically, should rule out tax competition as MNCs are prevented from conducting economic activities in a high tax country while shifting profits to low or zero-tax jurisdictions or ‘tax havens’. However, as we have seen, that is not always the case because of mismatches & loopholes in tax systems between countries.
The second principle is the national rental principle. Since, from an internationalist position, states are entitled to the productive economic factors they control like capital, natural & technological resources, they are then also entitled to benefit from the productive use of those factors. They may do this by charging rent, in other words by taxing individuals & MNCs who create value by making productive use of the economic factors in their territory. By this logic, profit shifting, for instance by means of transfer mispricing, prevents states from taxing the economic value derived from the resources to which they are entitled.
Finally, there is a principle that says that taxes should be paid where value is created. However, it is not enough to say that activity is taxed where value is added. Due to the nature of global value chains, the distribution of value-added in GVCs is skewed against low-income countries, since if MNCs are taxed where they create value, they will mostly be taxed in high-income OECD countries where manufacturing takes place, rather than sales. Low-income countries, generally engaging in low value-added economic activity, are only then allocated a small share of the tax base if any, while high-income OECD countries, generally engaging in high value-added economic activity, are allocated a large share of the tax base.
