Tax Base Erosion Hits Governments Hard

The attention of governments and international organizations is being focused on the erosion of national tax bases by global corporations. The G20 and individual governments have devoted attention to the issue and a recent OECD report addresses the issue of profit shifting.
In essence, profit shifting is a technique that has the aim of achieving 'stateless income', i.e. transnational profit that either bypasses the nation-state altogether or pays minimal taxation. This aim is pursued by using the networked structure of global multinationals according to the following sequence: income is produced by a multinational group as a result of its activities in a country other than the one where the transnational corporation is headquartered, but it is then 'transferred' to low-taxation country jurisdictions by means of various techniques of income extraction, for instance, by way of royalty payments for immaterial assets to financial holding companies in low-tax countries, and by using highly-leveraged assets in the jurisdiction where the company is based. It thus happens that while the group, in its totality, benefits from a tax deduction calculated at a high taxation rate (the country from which income was extracted), at the same time the actual recipient of such income benefits from a reduced or even zero tax rate.
The main driver for the massive weakening of the powers of national taxation is the strategic control that large multinational groups have over intangibles and capital, which are able to transfer along the group's value chain to reduce the global fiscal burden. All this has created tensions between governments and multinationals, with the former constrained within their territories and increasingly unable, unilaterally, to deter massive tax erosion.
There is only a multilateral solution to such problems and it requires international cooperation. Governments are now moving toward a concerted strategic effort for a global system of exchange of fiscal information focusing on companies, instead on individuals exclusively. This means proposing the establishment of transnational systems of fiscal consolidation.
At the EU level, in 2011 a proposal for a related directive was proposed, the so-called CCCTB (Common Consolidated Corporate Tax Base). According to such proposal, a corporate group based in the EU would determine its consolidated profits, which would then be allocated to individual member states for taxation according to the local corporate tax rates, based on a formula that looks at the actual localization of revenues, establishments, and employees. This would not only prevent unruly wealth transfers, at least within the Union, but would also give national authorities access to pooled fiscal information about consolidated multinational corporations.
In the US as well, proposals are being discussed to address massive tax base erosion, which occurs as US-based corporate groups are effectively exempted from taxation affecting the profits of their foreign subsidiaries by indefinitely postponing the repatriation of foreign income.
Whatever the outcome of these initiative on both sides of the Atlantic, there is no doubt that they represent a new multilateral perspective in tax policy. Just as for global pollution or financial volatility, also in the case of profit shifting measures are needed to limit opportunistic free-riding. All actors, multinationals included, shold be involved in the drafting of behavior codes. Conversely, norms generically designed against profit shifting by national fiscal authorities could end up being counterproductive, as they would increase uncertainty, as well as transaction and litigation costs.