No single enterprise would doubt the necessity to comply with tax regulations and pay the taxes due under applicable tax law. At the same time, no politician would question that the tax expense is – as any other expense – one factor in the equation on which investment decisions are based. It is not surprising that both sides seek to influence that equation to their benefit. Countries wanting to attract investments will lower corporate income tax rates, implement certain beneficial regimes like patent boxes or grant other tax benefits. Other countries will seek to maximize their fiscal income by designing new taxes, limiting certain deductions and by otherwise trying to squeeze what is already in their realm.

Enterprises however will consider the tax environment in their investment decisions and try to lower the tax expense by setting up their business structures in a tax-efficient way using the various tax benefits that are offered to them by many countries. This observation is as true as it is obvious and unsurprising. So why is there a discussion about base erosion and profit shifting (BEPS) and multinational enterprises (MNEs) allegedly not paying their fair share of tax by engaging in aggressive tax planning schemes?

There is a simple answer. Most notably, it is important to realize that none of the MNEs blamed for their low effective tax rates did something illegal. They all structured their transactions according to the letter of the (tax) law. And in many cases, part of their tax planning is simply to embrace tax benefits that are willingly and openly granted by some countries. So one could argue that putting the blame on them would be lopsided. Especially when it is at best challenging to really define what the fair share of tax is or what practices constitute aggressive tax planning.

Should the taxpayer come up with this definition himself? No – tax law is public law. Public law regulates the relationship between citizens and the state. It does not matter whether you qualify that relationship as one of subordination or not; in any case public law and tax law intrude into the personal freedom of citizens obligating them to fulfil a certain public duty – paying tax. It is therefore the legislator which has to ensure that this public duty is clearly defined. Or in modern words of tax talk: to determine what the ‘fair share’ of tax shall be. And it is the citizen who can rely on his personal freedom rights in arranging his affairs in the most tax-efficient way under current law.

The simple answer reads well. The complicated part starts when you combine all the single local pieces to come to the global puzzle in which MNEs operate. Those pieces will simply not fit. Entities which are treated by one country as transparent will be considered non-transparent by the next, leaving ample room for efficient tax structures – transfer prices based on the ‘arm’s length principle’ as defined by the OECD’s Transfer Pricing Manual might be considered incorrect by some non-OECD countries exposing MNEs to the risk of double taxation, and so on. It is a brave attempt of OECD’s project on BEPS to try to round the edges of the puzzle pieces so that they fit better. But it is a Sisyphus-like task given the fact that tax law is and always will be in the hands of sovereign countries. And it still does not change the fact that any homo economicus would always seek to maximize his profit by using all available legal strategies and that it is the task of the legislator to define its claim on this profit – and not to take the simple detour of targeting MNEs as scapegoats for public failure to design an effective tax system.

When talking about the fair share of tax, there is one phenomenon that should not be forgotten: what one country might see as its fair share of tax would leave another country with a lesser piece of the cake than the latter country would consider fair. If both sides would enforce their ideas of ‘fairness’, the taxpayer would end up paying his taxes twice. Such a result would contradict many decades of concerted efforts to overcome double taxation fostering global growth and international trade and business – which so far has been the mandate of OECD. Unfortunately, this is a likely outcome of the current discussions around BEPS. It is this negative potential which should worry everybody; especially given the fragile state of the world economy after the financial and economic crises of the past years.

So can there be a balance? Can countries really form a fitting puzzle out of the various local legislations and avoid doubletaxing business at the same time? The key for this balance would be a dispute resolution mechanism which ensures that it is neither the taxpayer who defines the ‘fair share’ of tax nor two or more countries all with deviating results.

A ‘fair treatment’ would be to have the countries to agree between themselves on their respective share of tax of an MNE and not leave the taxpayer being taxed twice. Obviously this would take the stress out of all disputes related to transfer pricing. If an uncomplicated solution is required: almost a hundred years ago when the League of Nations developed its first Model Convention to avoid Double Taxation, the International Chamber of Commerce already proposed to simply split the taxable income, leaving both disputing countries with half of it to tax, if no other settlement could be achieved. Some would call this Solomonian. Others simply pragmatic. I would say: balanced!


Christian Kaeser is Chair of the International Chamber of Commerce Commission on Taxation and Global Head of Tax, Siemens AG