Pay ‘where you play’, not ‘where you say’

By requiring multinational companies to pay tax in the countries where they genuinely do business, the UN tax convention would deliver a huge boost to public coffers worldwide, a recent study finds.

COUNTRIES can collect $500 billion more in corporate tax a year from multinational corporations without increasing taxes by following through on the UN tax convention’s commitment to change where multinational corporations pay tax, according to research by the global union federation Public Services International (PSI) and the Tax Justice Network.

The tax boost would see:

•           European Union countries collect enough to quadruple spending on climate adaptation in agriculture, energy and transport;

•           the Global South collect more in a single year than the entire amount owed by Global South countries to the International Monetary Fund (IMF) in outstanding loans;

•           the United Kingdom collect enough to cover the cost-of-living measures newly announced by Prime Minister Andy Burnham six times over, or more than two-thirds of the estimated cost of a National Health Service (NHS)-style social care system; and

•           the United States collect enough to increase its current spending on renewable energy 45 times over, creating over 265,000 new jobs.

PSI General Secretary Daniel Bertossa said: ‘Multinational corporations have been robbing countries of billions in corporate tax every year by running circles around a tax rule written before most households had electricity. The UN tax convention can finally modernise our global tax system by requiring multinationals to pay tax where they actually create profit, instead of where they pretend to on paper. If this sounds like a low bar to meet, you’re getting a picture of how catastrophically mismanaged our global tax rules have been and why countries moved them to the UN. The only losers under this plan are tax havens and tax dodgers, and that’s a big win for workers and public services everywhere.’

The new study estimates how much tax countries would bring in under the UN’s commitment to change how countries determine where a multinational corporation pays tax on its profits. Countries currently rely on a 100-year-old ‘pay-where-you-say’ approach set up by the League of Nations, which requires governments to tax multinational corporations’ profits based on where they declare them. Multinational corporations have long gamed this approach by moving their profits into tax havens before declaring them.

The UN tax convention’s commitment would replace this with a ‘pay-where-you-play’ approach which taxes multinational corporations’ profits based on where they genuinely do business – i.e., where they employ their workers, and make and sell their goods and services. This makes shifting profits into tax havens useless, since multinational corporations tend to employ little to no workers in tax havens, and almost all their goods and services are made and sold elsewhere. (See box.)

The study finds that countries altogether would collect 24% more corporate tax from multinational corporations without increasing their tax rates by modernising from ‘pay-where-you-say’ to ‘pay-where-you-play’. The change would mean multinational corporations would have to abide by the tax laws of countries they do business in for the first time in decades, and so the amount of tax countries collect from multinational corporations would effectively fast-forward several decades to catch up with and accurately reflect the higher levels of profits modern multinational corporations make today.

The biggest sums would be gained in higher-income countries, while the biggest impacts would be felt in lower-income countries, where the smaller sums would increase the amount of corporate tax the countries collect annually from multinational corporations several times over.

High-income countries would increase the corporate tax they collect from multinationals a year by 21%, bringing in at least $140 billion more in tax a year; upper-middle-income countries would increase by 31%, bringing in at least $112 billion more. Meanwhile, lower-middle-income countries would triple the amount they collect, bringing in at least $61 billion more; low-income countries would quintuple the amount they collect, bringing in at least $3.6 billion more a year.

To further put the scale of tax revenue into perspective, countries that received grants from the US under the Marshall Plan to help rebuild postwar Europe would collect the inflation-adjusted equivalent of what they received at the time every two years.

India would collect $43 billion more a year, increasing its tax revenues from multinationals by 194%; Brazil $17 billion (+62%); South Africa $8.9 billion (+85%); Nigeria $2.5 billion (+641%); Kenya $1.3 billion (+406%); Jamaica $0.31 billion (+587%).

Alison Schultz, one of the study’s authors and research fellow at the Tax Justice Network, said: ‘We’re not changing multinational corporations’ tax rates, just where they should pay them, and the result is huge, with almost every country benefiting, precisely because these corporations have been taking profits out of countries and into accounting “nowhere” zones for decades now. Multinationals make us all economically insecure when they extract economic wealth out of our countries and fuel billionaire-backed authoritarianism preying on that insecurity.

‘The UN tax convention is taking a stand by simply asserting that the “where” matters – our shops, offices and factories and the people working in them, where global profit is locally made, matter. Trump and his ilk might not like it, but democracy started with a fight for just taxes – no taxation without representation – and the UN is carrying on that torch today by demanding local representation on global taxation.’

Countries agreed to move decision-making on global tax rules to the UN and away from the OECD, a small club of rich countries and tax havens, after two decades of failed attempts by the OECD to reform the global tax system it built. While reform attempts by the OECD refused to move away from the ‘pay-where-you-say’ approach and instead focused on adding guardrails to the obsolete approach, the UN tax talks have made more progress in just three years of negotiations than the 20-year OECD process was allowed to entertain. The UN tax convention is scheduled to go to a final vote next year.

The study identifies a handful of countries – tax havens and a few countries with an ‘HQ bias’ – that would collect less tax under ‘pay-where-you-play’, but simply increasing their corporate tax rates to moderate levels like those of other countries would offset these losses. These jurisdictions that have operated as tax havens for decades – and have cost the world $3 to $18 in lost tax revenue for every dollar they collected – would no longer be able to tax the billions in profits shifted into their borders from around the world, but nonetheless would bring in the same amount of tax revenue by moderately taxing only the profits genuinely made within their borders, just like the rest of the world. This shows how inefficient and wasteful the tax-haven model is, the Tax Justice Network says.

PSI’s Bertossa added: ‘Under the archaic rules that exist, we have seen the cycle repeated a thousand times: a multinational wins a government contract, immediately diverts public money offshore through internal loans, related-party transactions and other profit-shifting tricks, and then turns around to plead poverty when it comes time to pay decent wages and invest in the workforce capacity needed to actually deliver quality public services.’

The PSI–Tax Justice Network report, A 500-billion-dollar decision for the world: The revenue impacts of global unitary taxation by Alison Schultz and Alex Cobham, is available here. – Tax Justice Network     

‘Pay-where-you-say’ vs ‘Pay-where-you-play’ The ‘pay-where-you-say’ approach taxes multinational corporations where they declare their profits, which multinational corporations have long gamed by shifting their profits into tax havens before declaring them. In contrast, the ‘pay-where-you-play’ approach taxes multinational corporations where they genuinely do business – i.e., employ workers, and make and sell goods and services. Under pay-where-you-play, the location where profit is declared on paper is irrelevant to where it gets taxed, which makes shifting profits into tax havens useless. Pay-where-you-say is primarily based on the 100-year-old ‘arm’s-length principle’ which requires governments to pretend that the local parts of a multinational corporation – its subsidiaries, headquarters and holding companies – are completely disconnected from one another and therefore ought to be taxed separately. It’s a legal fiction that pretends Apple Ireland deals and negotiates with Apple France as though they were unrelated companies, and even in competition with one another. Each country can only tax the profit made by the parts within its borders. Multinational corporations exploit this by shifting profit into their parts located in tax havens in order to underpay tax – with over a trillion US dollars shifted offshore every year. Pay-where-you-play replaces the arm’s-length principle with two components: ‘unitary tax’ with ‘formulary apportionment’. Unitary tax does away with the charade and treats the multinational corporation as one entity, as a multinational corporate group made up of all its local parts. The question then is: who gets to tax this unified profit? This is addressed with formulary apportionment, which allocates to each country where the multinational operates a portion of the profit to tax. The apportioning is based on a formula that takes into account things like how much of the corporation’s workforce, assets and sales are in the country – the bigger the presence of these, the bigger the portion. Together, unitary tax with formulary apportionment sees multinational corporations get taxed in the places where they genuinely do business. – Tax Justice Network

*Third World Resurgence No. 368, 2026/3, pp 19-21