A proposal for unitary taxes on the profits of transnational corporations

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A proposal for unitary taxes on the profits of transnational corporations

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Foreign direct investment (FDI); in developing countries has been increasing at an unprecedented rate, and the profitability of the operations of the investing firms in poor regions like Sub-Saharan Africa is extraordinarily high. Yet at the same time there is growing evidence that transnational corporations (TNCs); are paying less and less in terms of tax. The developing countries in particular have suffered from this —it has been estimated that developing country governments lose at least US$35 billion a year of revenue through tax avoidance practices. This paper presents empirical evidence and a proposal for applying a unitary tax system on the profits of TNCs. Such a system would eliminate one of the most powerful mechanisms at the disposal of TNCs for illegally avoiding tax payments—transfer pricing. The paper concludes by arguing that a proposal for a unitary tax system on a worldwide basis may be sufficient to unblock the negotiations on a multilateral investment code.

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