The reason is that the existing international taxation system was established in the 1920s when there were very few multinational companies. So a company was basically located in one or possibly two countries and was taxed there in the normal way.

The world has changed dramatically since then, and particularly through the process of globalization. Companies have spread all over the world, they have operations in many different countries, and the production process happens all over the place. So the car industry will produce different parts in different countries — parts will go from the US to Mexico, and then the same part will go back inside a car. Indeed, about two-thirds of world trade takes place within companies in this way.

It’s very clear that we need a global tax system, because otherwise companies can evade taxation very simply. Because these transactions are inside the company, the head office accountants can easily change the prices of the transaction that make one part of the company profitable and another part unprofitable. Therefore they can make sure that their Irish subsidiary or their branch in the Cayman Islands is extremely “profitable,” but there is little or no corporation tax there, while their operations in France or India are “unprofitable” — so although tax rates are high there, the company need pay very little tax there either.

Now, people have been pointing this out for a long time, including the civil society thought leaders who make up our commission. So the question is — what has changed now?

Firstly, since the international financial crisis, leading developed country governments have realized that they need more tax revenue, and that there are limits to the amount of tax that can be raised from personal income and consumption taxes. The second driver, I think, has been the growing digitization of the global economy, which means that companies can now effectively sell and operate in a country without having any physical presence. This is why the Googles and Microsofts have become a target for countries all over the world — governments see large profits being made in their countries, but because there’s no physical factory there, they can’t tax the company.

I think the drivers of the declining tax rates have been twofold. One of them has been the globalization I was talking about, which means that firms can move about all over the world, and countries have been forced to compete with each other for inbound investment by lowering the corporate tax rate. Although there isn’t any evidence that this strategy is actually very effective — as shown in research by the International Monetary Fund, OECD, World Bank, and UN — it is true that countries believe they have no option.

The second reason is a widespread ideological belief that somehow if you reduce taxes heavily on corporations, then you will stimulate investment and production and create more jobs and so on. Again, there’s not a lot of empirical evidence or theoretical support for this, but politicians seem to accept it as an article of faith. And reducing corporation tax does not only reduce the tax on corporations — it also means the wealthiest people who own these corporations receive more dividends and capital gains as well. So the net effect is to make inequality even worse worldwide than it already is.

The G20 asked the OECD to put together an international consensus by 2020 of what would be a suitable method of taxing multinational companies, particularly under the conditions of digitization that I was discussing. There were three major proposals on board. One of them came from the US, one of them came from the UK, and the other one came from the G24 — the group of leading developing countries, which includes China. The first results of this consultation have just become available in the last few weeks and will be discussed by the G20 early next year. The OECD plan is that there will be an agreed-upon proposal for all countries to sign up to by the end of 2020.

I think there are two positives: one of them is that this is the first time that any international attempt has been made to reform the international tax system in recent years. So this is a major step forward. Previously the position of the leading powerful countries has been that tax policy was a question that each country could decide on its own, and that it would be unwarranted interference to negotiate it internationally.

The second big step forward is that for the first time they’re arguing that multinational companies have to be taxed globally and not just at the local level. Previously, it has been argued that you take each subsidiary and tax that individually — so you tax IBM Mexico in Mexico, you tax IBM US in the US. Now, for the first time, there’s an international agreement that you’re going to tax, at least to some extent, IBM or Google at a global level and then distribute the results of that between different countries. The negative is that of course in the negotiation process, the proposals get steadily watered down and become less impactful.

One of the major impacts of this new approach would be to virtually eliminate the use of tax havens by multinational corporations, because if you’re taxed on your global profits, then there’s no gain from stowing them away in a low-tax administration if you just have to pay high tax somewhere else. But also, the main gains from the proposals at the OECD will be accruing to developed countries because the assignment of the global taxing right will be based on the location of final sales — which just so happens to be the principle proposed by the US, rather than that by the UK (users) or the G24 (employment).

In sum, there will be a substantial shift of the tax base away from tax havens and thus higher tax payments by multinationals, but the main gainers from this shift and increased fiscal revenue will be the US and the EU.

That’s right: because the OECD proposal is firstly, that it would only be consumer-facing companies, so it wouldn’t include mining companies and so forth, which are producing in developing companies, and secondly, that the share of taxation that would accrue to each country would depend on the final sales in that country. So poor countries that basically export but don’t sell a lot domestically would not get a lot of benefit from it.

The unitary enterprise principle is that a multinational group should be taxed as a single company. There’s an in-principle reason: because it is a global company it should be taxed globally. But also there’s a reason in practice: if you allow a company to be taxed from different jurisdictions, they can fix the accounting so corporate profit mostly accrues in very low tax countries.

One example I’ve studied is Vodafone, one of the very few companies that publishes its public accounts country by country. You see that they are making apparently enormous profits in Luxembourg and Malta and so on, and very little profit in countries where the taxes are higher. A patent or management service is set up in Malta, for instance, which then “charges” all the other companies in the group very high prices. In consequence, all the subsidiaries in the other countries have a very low profit rate because they’ve been charged enormously high prices to use the patent or the trade name or whatever, and the company in Luxembourg makes a very large profit because it’s allegedly holding on to the patent.

The US proposal was to go with sales only, and the UK proposal was that it would be sales plus users. The UK position is that Google is actually making money by using data about the consumer in the UK or Australia or somewhere else, so that in some sense the production process of Google is on your laptop. It’s getting all the information about you uploaded and then used in advertising. So the UK government’s position was that the user was part of the production process, which is not the same as sales at all, because of course Google does not sell anything to its users but gets its revenue from advertisers, who do sell things or services. The developing country position is that the physical production process — particularly employment — should be a major element in the allocation of taxing rights.

So there are three conceptual positions at play on taxing rights, which represent, if you will, the distinct positions of the players in the global economy. At the beginning of the negotiation process the OECD said they would look at all three proposals (from the US, the UK, and the G24) equally.

We at ICRICT analyzed the impact of these different proposals and showed that in fact the proposal would benefit developing countries more than the others. But in the process of negotiation — which has not been entirely transparent in that the OECD doesn’t reveal what went on in these negotiations — it’s fairly apparent that the result is ending up much closer to the US position than anybody else’s. It’s very difficult for developing countries to negotiate in this context because we don’t have information about the impact of the different proposals.

The OECD refuse to reveal, although they have the data, what any particular variant would mean in terms of more income for one country or another. We in the commission have published our own estimates based on the available data, and the IMF has made estimates which seem broadly consistent with ours, and all of these indicate that the G24 is quite correct that unless you include production then the share going to developing countries is very small.

Yes, multinationals already have been putting on great pressure. But they don’t stand up in public and say “tax us less.” They tend instead to apply pressure through the treasuries of the countries they’re operating in, the US or the UK particularly. Also they work through supposed experts, such as the Big Four accounting firms, who take a very strong position on these things. So I think the watering down was almost inevitable.

My own view is that any step toward unitary taxation of individual internationals, even though it’s not as much as we’d hope, is a huge step forward. Once you’ve accepted the principle that companies should be taxed internationally, and that the resulting tax should be shared out by negotiation between countries, it’s worth holding on to even though the result is not as beneficial to developing countries as we had wished. How things will proceed from here depends — as in the case of trade negotiations at the World Trade Organization — on the muscle of large players like the US and the EU on the one hand, and the ability of smaller and poorer countries to act collectively on the other.

The developing countries are trying to mobilize around a much stronger position on these taxing rights issues, particularly on the apportionment system on the basis of employment. But we’ll see what the outcome is — perhaps you would be better off asking Donald Trump or [European Commission president] Ursula von der Leyen!