To Levy Taxes on Multinational Corporations : Allocating Rights and Making Them Enforceable

Abstract: Who, if anyone, should have the right to levy taxes on a multinational corporation’s (MNC’s) profits? Using a practice-dependent nonideal theoretical methodology this dissertation seeks to explore how the currently intended distribution of the rights to levy taxes on MNCs’ profits can be defended. That is, why we might value it and, what the goals of it is. Identifying the answers as related to ideas of reciprocity, and assuming that globalisation has increased MNCs’ mobility, the dissertation assesses what alterations of the current international tax structures that might be needed if we are to reach these goals.  Current practices distribute rights to levy taxes on an MNC’s profits among two types of states: its source and residence countries. Examining existing literature, two principles explaining why these states should be assigned these rights are found: one related to the consumption of public resources and, one to where value is created. It is argued that a combination of them best explains and defends the current distribution. Hence, it is argued that the current distribution is defendable as the state is the unit that supply an MNC with the public resources it consumes in its potentially value-creating processes. Moreover, it is argued that the reason for why the profits should be distributed in accordance with where value creation occurs relates to risk-pooling. When actors pool resources through public institutions they also pool risks. It is argued that we can understand this in terms of the actors investing in each other. Thus, it is argued that the currently intended distribution aims to ensure the opportunity for reciprocal schemes in states – since the actors invest in each other and, engage in risk-pooling, it should be ensured that they have an enforceable right to share in the resulting profits through publicly mandated tax schemes designed in accordance with domestic preferences. Due to opportunities for tax avoidances, and the issues with tax competition, the currently intended distribution of rights to levy taxes might not translate into de facto opportunities for enforceable reciprocal scheme the way current practices intend. Thus, to ensure that states coercively can force everyone it has invested in to participate in the reciprocal scheme on equal terms in a globalized world, alterations of the international tax structures are proposed. The first change is a shift of some duties to an International Tax Organisation, and the second one is an alteration of an MNC’s right to leave a state for tax purposes when it physically leaves it. As an MNC is likely to continue to benefit from the investments its old host state has made, and that states might continue to carry costs related to it also after it has left, it is suggested that the rights to levy taxes on an MNC’s profits only should shift gradually from its old to its new host state. The intention is that these alterations should lead to a situation where we better achieve the intended goals of having a reciprocity-based distribution of these rights.