Michael Devereux


Oxford University Centre for Business Taxation




Corporate Taxation

By Michael Devereux

A Marxist approach to international taxation

When Margaret Hodge complained about how little tax Amazon paid in the UK, the tax cognoscenti rather patronisingly pointed out that the existing system does not generally give the right to tax profit to the country in which a sale in made. But since then the US House of Representatives Ways and Means Committee, the European Commission, and also the OECD have all put forward proposals which move the system in this direction.

Of these, only the Ways and Means Committee (in its June 2016 proposal) seriously considered replacing the existing system with a new system based on the principle that companies should be taxed in the market country. That represents a clear new principle for the allocation of taxing rights – and one that is worthy of consideration. But the Commission and the OECD would maintain the existing system, but add a layer of tax in the market country. Their main concern seems to be that profit should be taxed somewhere – anywhere – rather than be untaxed. For them, a tax in the market country is a response to the failure of the existing system to adequately tax multinational profit elsewhere. But that is not a principled approach; there is no consideration of what is the best location for taxation, only a desperate scramble for more revenue.

To think things through, let’s start with the pre-BEPS position – which remains with us, despite the tweaks from BEPS. It is a system based on a 1920s compromise that, very broadly, taxes passive income in the country of “residence” and active income in the country of “source”. But neither of those terms – particularly “residence” – is being applied in ways the 1920s founders of the system intended. Did those founders really intend the country of “residence” to be a tax haven where a company owns IP, or lends to the rest of a multinational group? The founders did not really foresee the rise of intermediate companies, with the result that any economic notion of the residence of the ultimate investors has lost out to the notion of the legal residence of a multinational subsidiary. How the system of allocating MNC income globally developed over the intervening 90 years is explained in an excellent new OUP book by Richard Collier and Joe Andrus.

Unfortunately, things became less clear with the BEPS project’s insistence that tax should be levied in the place of “economic activity”, “relevant substance”, “substantial activity” or “value creation”. The OECD was presumably trying to reduce profit shifting to countries without such activity or substance. But there is no apparent reason for a country of “residence” to have any such activity or substance.

Where does that leave us? At a conceptual level, the OECD has attempted to overlay a new principle – of taxing in the place of value creation – on top of the existing principles of source and residence. Practical problems arise as a result. For example, when does the principle of value creation take precedence over the principle of residence? One answer appears to be when there is no-one in a residence country who may be bearing risk. So the principle of value creation is interpreted as saying that we have to see where the controller of risk is located. But that no more defines the location of risk – or value creation – than does a clause in a contract. In truth, no approach to assigning risk to a single subsidiary makes any economic sense. Risk is borne by the owners of a multinational company, who may be located around the world – it is not borne by any single subsidiary.

Perhaps not surprisingly, given that the principles on which it is based are so unclear, the system we now have is of mind-boggling complexity. Taxpayers and tax inspectors around the world are struggling to make sense of it, let alone apply it. The weight of complexity has brought the system to its knees.

But we haven’t completed outlining the confusion of principles. BEPS Action 1 also considered the notion that the country in which a sale is made – the market country – might also be a suitable place for taxing profit. The concern here was that nothing else would adequately tax the profits of digital companies. Hence we must now consider the possibility of a digital PE being located in the market country – an idea taken up enthusiastically by the European Commission. Indeed, it seems likely that in the near future some countries will introduce an “equalization tax” on sales by digital companies in market countries. What the proposed tax is supposed to equalize, and why it should be levied on turnover rather than profit, remains a mystery. What does appear to be clear is that it will only apply to digital companies – precisely the opposite of the line taken by both the OECD and the Commission’s own Expert Group on Taxation of the Digital Economy in 2014 (of which I was a member).

For many reasons – complexity, distortions to real economic behaviour leading to economic inefficiencies, and profit shifting – there is an unquestionable need to reconsider the principles of where profit is taxed. Let us have a proper debate about what principles to apply to taxing profit, including where to tax it. And let us try to find principles that might conceivably achieve some basic aims, such as fairness, efficiency and simplicity.

But simply adding a new location – the market country – through new ad hoc measures such as a digital PE or an equalization tax, does not amount to a reconsideration of principles. It is rather another attempt to overlay new principles on the old. The new additions will do little to address the current problems, and may well make them worse. So why is this a Marxist approach? Because it is really an attempt to collect tax on the profits of multinationals by any means, and any principles, available – like the old Groucho Marx quote, “those are my principles, and if you don’t like them, well I have others”.


This is the first of a regular blog to be written by staff and associates of the Oxford University Centre for Business Taxation.

Research from the Centre for Business Taxation relevant to this blog includes:


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8 responses to “A Marxist approach to international taxation”

  1. guillermo says:

    Nice piece!

  2. Iain Campbell says:

    Very accurate. From memory I think Groucho also once described an impossibly garbled legal contract as so simple a child of 5 could understand it. So a request went out looking for a child of 5.
    Maybe there are no 5 year olds out there who can explain international tax. But even the idea of trying to decide where the profits “really” arise seems fanciful. Why should it be where the consumer is? Why not with the R&D Dept or the investment in manufacturing? But these are also old and familiar problems.
    We may as well look to Groucho’s earlier comedy stars for advice – another fine mess you’ve got us into..

  3. Filip Majdowski says:

    The quote is very accurate (even hilarious) and the description of the reality also more than true. However, having said that it’s hard not expect countries to apply “quick fixes”, such as virtual PE. If a ship is sinking, first to need to patch holes, and only after that you can start reconsidering how to build them in a better way.

    • Michael Devereux says:

      Fair comment. But we need to know what our principles are even to know whether the ship is sinking. (For example, lack of tax in the market country is a problem only if we think tax on profit should be levied there). And history suggests that the quick fixes tend to remain in place for a long time while there is little attention on the longer term structure.

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  5. patricia lampreave says:

    It´s difficult to agree with the short-term options under discussion: equalisation tax (moving away from profit taxation to turnover taxation), withholding taxes (with destination-based elements) and separate levies (targeted on “ring-fenced ” group of taxpayers) …but until countries agree with long term solution probably quick fixes are the only chances for avoiding inappropriate unilateral solutions.

  6. Mike, I think you are channeling Karl as much as Groucho: “The philosophers have only interpreted the world, in various ways. The point, however, is to change it.”

    But was it philosophers or a good dose of ‘raison d’etat’ that created the source and residence principles in the first place? I think it’s Avi-Yonah who argues that the compromise between source and residence emerged because states were going to tax income wherever they could do so successfully, and so they developed a set of taxes that enabled them to do so. If that’s true, principles are framing concepts for international cooperation, but they emerge as justifications, rather than as a platonic ideal tax system that the real world first creates intellectually and then tries to approximate. ‘Value creation’, then, is a broad enough principle that any country can use it to justify taking a larger share of the corporate tax base. ‘Market country’ is more obviously aligned with one group of countries than another. The question is, will stand and fall on its intellectual merits, or on those of inter-state power?

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