International Company Taxes: Who Pays Them; Who Gets Them?

How Tech Giants Pay Low International Company Taxes

According to Jean-Baptiste Colbert, the French economist and Minister of Finance under King Louis XIV, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”

In recent years, governments around the world have lacked the ability to develop a fair system to tax international corporations.

Technology giants, in particular, make a substantial part of their revenues by selling their products and services around the world and employing people in factories across other countries, either directly or as part of global supply chains. However, they have become adept at declaring the majority of their profits only in countries that offer low corporate tax rates, even though they may have little or no physical presence and make few sales in those low-tax localities.

They achieve this by so organizing their operations and corporate structure such that the low-tax localities host their intellectual property, which they claim to be the major driver of their profits, rather than the labor of their employees or the fruit of their sales to customers. This is all done in the cause of maximizing shareholder profits, and in the name of shareholder primacy.

More recently, however, C-suite executives have increasingly come to realize that companies have a duty to other stakeholders, such as employees and customers, in addition to shareholders. Moreover, companies also need to be aware of the externalities of their operations, which result in costs borne by the countries that host their operations, their employees, and their customers, but which are not fairly compensated if they pay little or no tax to the countries bearing these costs.

EU and UK Proposal: International Company Taxes Based on Sales

Some countries in the European Union and the UK have proposed to tax tech giants unilaterally on the basis of sales made in their respective jurisdictions, pending the agreement of an international framework for how such companies should be fairly taxed. However, coming up with a fair system by attempting to levy a tax on revenues, regardless of a company’s profitability, is fraught with difficulty and has been rightly criticized.

A fair treatment would recognize that a company should pay tax only on its profits, not its revenues, but a proposed treatment should also recognize that the profits are generated principally from the sales of its products and services and are not generated simply in the location where its intellectual property may be held.

One Single Global Tax Rate for International Corporations

If governments could agree upon a single global corporation tax rate to be applied to international companies, then a fair system would apply that unified global rate to each company’s consolidated global profits in order to determine the aggregate amount of tax for which each company would be liable.

To avoid accounting shenanigans, this should also be the profits a company refers to when communicating with equity analysts and the market, and upon which it bases the compensation for its chief executive and other members of senior management. That aggregate amount should then be sub-allocated pro-rata to the governments of each of the countries in which the company operates, in proportion to the percentage of global consolidated revenues sales in that country represent.

Thus, if a company makes 50% of its global consolidated revenues in the United States, it should pay 50% of the global corporation tax amount (determined by applying the unified global corporation tax rate to its global consolidated profits) to the US government. Likewise, if the company makes 20% of its global revenues in France, then it should pay 20% of its corporation tax to the French government, and so on.

In this way, an international company would pay a fair amount of corporation tax in aggregate, and would have no incentive to artificially shift profits into a low-tax haven over any of the other countries in which it operates.

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This article was originally published on February 12, 2025.]

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