In 2017 the “Paradise Papers” brought crucial debates on tax avoidance and evasion into the public eye, but these debates often failed to engage with the role played by globalisation and uneven development in giving rise to the vast offshore wealth suddently expoed to view. Labour has made clear that it now wishes to address that issue more directly in its policy-making around corporate tax, and this week it announced that it intended to proceed on the basis set out in a report on the subject by Public Services International. The focus of this report is Unitary Taxation by Formulary Apportionment (‘UTFA’).

For many years now, tax justice activists, academics and progressive politicians have been advocating UTFA as solution to the problems which arise from seeking to exercise corporate tax sovereignty within borders, in a world of globalised capital. In this approach, rather than taxing each company in the multinational group individually in the jurisdiction where it is resident, what is taxed is the group’s profits as a whole, with the tax being apportioned between jurisdictions based on a formula.

This constitutes an improvement on the existing system because under the existing system, taxable profits are allocated between group companies on the basis of the group’s own internal transactions, and (unsurprisingly) these transactions seem to result in the profitability ending up in tax havens. Under UTFA the tax haven entities are unlikely to possess substantial apportionment factors under the formula (e.g. labour, productive assets, sales &c) and so the profitability will be allocated to jurisdictions that will actually tax it.

This is such an obviously sensible approach that it may seem surprising it has not been adopted already, and indeed it has been adopted in certain non-global contexts: the USA uses it to allocate corporate tax between states, and the EU is pressing for it to be adopted internally between member states. But in the first round of the OECD’s recent G20-mandated international corporate tax reform project known as ‘BEPS’ a move from the existing approach to global UTFA was ruled out right from the start.

There are a number of reasons for this but undoubtedly the principal reason was political viability. Core jurisdictions such as the UK and the USA, for whom the fiscal pain of international corporate tax avoidance is experienced by the finance sectors they align themselves with as pleasure, were known to be opposed to it. And so it is a genuinely significant development that the Labour party has come out in favour of UTFA. They are to be applauded for aiming to turn the UK from a conservative jurisdiction hampering progress in this regard to a standard bearer for a policy proposal which tends towards more equitable outcomes. For the UK to be championing UTFA in a multilateral context would be an incredible step forward.

But what to make of it as an actual policy proposal? On one level it is too ambitious, and on another level it is not ambitious enough. As regards it being too ambitious, this is because UTFA is not really conceptually suited to being implemented unilaterally – the whole point is that multiple jurisdictions agree that UTFA is how the corporate tax base is to be allocated between them. Relatedly, UTFA is not (so most international tax specialists would argue) consistent with the obligations that states currently have under their double tax treaties with other states. It is not out of the question to just go ahead and enact domestic tax legislation which is felt by the tax industry to be inconsistent with treaty obligations, but states who do it should expect to have to battle it out in court (or elsewhere) when it comes to getting multinationals to actually pay the tax. When the UK enacted its ‘Diverted Profits Tax’, for example, it hired a respected senior tax barrister to draft the legislation so as to be treaty compliant (and held a big event for the tax industry to hear from him and interrogate his analysis) but the UK is nonetheless currently facing a treaty-based challenge over Glencore’s Diverted Profits Tax bill.

And as regards it being not ambitious enough, this is because UTFA, despite being widely trumpeted as more equitable in respect of low-income countries, suffers from an arbitrary block on the reallocation of taxable profits back up global value chains to production jurisdictions. Sure, if the multinational has its own subsidiary in a low-income country where it operates production facilities cheaply by employing poorly paid workers, then UTFA will allocate taxable profits to that country to the extent that productive assets and employee headcount are apportionment factors. But this approach still does nothing in the context of trade between independent enterprises, which is the method for organising trade which pervades in global production networks. In this context, where a multinational extracts value from a low-income country by dominating suppliers who are not actually within the corporate group, UTFA will make no difference. And in those instances the jurisdictions which stand to gain instead are ‘market’ jurisdictions like the UK. This is arbitrary, and inequitable on a global level, insofar as it preserves the benefits core economies generate through uneven development and protects only themselves from the depredations of tax havenry.

And so while, as I say, Labour is to be applauded for its enthusiasm for UTFA, and the tax justice activists and academics who have been advocating for it for years should undoubtedly chalk this up as a significant and well-deserved victory, there remain further theoretical steps to take as well as political ones. What, for example, would it look like, if we had unitary taxation by formulary apportionment of entire value chains, irrespective of whether the production takes place in-group or is outsourced? This is the kind of question which the next generation of corporate tax reforms needs to address, even as UTFA is taken up by previously recalcitrant jurisdictions at the global economic core.