Economy

How To Stop Trump From Creating The World's Biggest Tax Haven

With its new president, the United States may now become a massive new fiscal haven for global companies. But France, with its own upcoming elections, could lead Europe in undermining Trump's plans.

Apple Store, Paris
Gabriel Zucman*

-OpEd-

PARIS — What does our next French president intend to do to build a modern tax system that's prepared for a globalized world? It's difficult to know, given how vague candidates are about the topic in their manifestos ahead of this spring's election. And yet, it's a pressing issue. Without a clear direction, France risks losing significant public revenue.

A major, and unprecedented, disruption of the tax system that's brewing in Washington hasn't yet been weighed in Paris. Adieu to Ireland, Luxembourg and Bermuda. These tax havens are about to be made obsolete by Donald Trump's America. Congressional Republicans want a border adjustment tax meaning that exports wouldn't be taxed while imports would be.

If this effort succeeds, the U.S. will siphon off the fiscal base of countries all over the world. It would become the biggest de-facto tax haven on the planet. It will be in the interest of multinationals to manipulate transfer prices — the prices different branches of one company charge each other for the goods and services they exchange — so as to artificially move profits back to the U.S.

Apple California, for instance, could charge its overseas subsidiaries a hefty price for using their brand and logo, thereby reducing the same amount of taxable profit in France. Yet it would not add one cent of tax in the U.S. since exports won't be taxed. Zero percent — that's a tax rate that even Ireland's 12.5% rate can't compete with.

At this stage, it's not yet certain that these tax policy changes will ever see the light of day. It faces opposition from the importing lobby — companies such as Walmart — that stand to gain nothing.

Even if this effort by the Trump administration doesn't succeed, the alternatives aren't more reassuring. Trump and congressional Republicans unitedly loathe taxes on capital. Reducing corporate tax — with or without border adjustment — is one of their priorities. Trump wants a 15% tax rate, the Congress would be content with 20%. In both cases, the rate is well below the current 35% rate in the U.S. and France's 33%.

In Britain, Prime Minister Theresa May got entangled in a tough fight when she promised to keep her country's corporate tax rate the lowest in the G20. Company profits are now taxed 20%; by 2020 it will fall to 17%, maybe even 15% or lower if Trump does what he said he would.

Fortunately, France and the European Union aren't powerless. Tax optimization can be thwarted: You just need to change how taxable profits are calculated in each country. In concrete terms, the right approach consists of taking the consolidated global profits of companies.

For instance, if Apple makes 10% of its global sales in France, then 10% of its global sales would be taxable in France. This approach would neutralize tax optimization efforts in U.S. and Britain. It would become impossible to register disproportionate profits in Ireland or in the U.S. If companies can now easily choose where they locate their profits, they cannot control the location of their clients; they can't move them from France to the Cayman islands.

Container ship, Le Havre, France — Photo: Thibaut Demare

This solution is well-adapted to tech companies, which have become experts in the fictitious relocation of profits to Bermuda (Google Alphabet), Luxembourg (Amazon) and even — the ultimate absurdity — to non-existing territories (Apple). France's finance ministry knows the total value of the computers, phones, tablets and digital services sold by Apple in France. The company's end clients are fully identified because that piece of information is necessary to collect VAT.

This corporate tax reform is in the interest of most European countries. The only losers would be tax havens like Luxembourg and Ireland, which have turned the manipulation of accounting into their main business. But their opinion is non-binding. Nothing prevents the EU's most important members — France, Germany, Italy and Spain — to decree that they'll start dividing up their companies' profits according to the sales in their countries. Luxembourg's permission isn't required.

If France isn't able to convince its partners, it could adopt this reform unilaterally as a last resort. The finance ministry would demand that companies working in France communicate their global profits and the share of their sales made on French territory, which would be enough to calculate how much tax they need to pay. Access to the French market would be refused to companies that refuse to hand in this accounting data.

If it wants to avoid seeing its tax revenue devoured by the ogre Trump, then France urgently needs to equip itself with a modern corporate tax system that's immune to tax havens. It should allow for the fair redistribution of the fruits of globalization. Cooperation is always best. But in the absence of a quick European accord, let's get ready to do it alone.

*Zucman is a French economist and specialist in tax havens. He is currently a professor at the University of California, Berkeley

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Society

Why Chinese Cities Waste Millions On Vanity Building Projects

The so-called "White Elephants," or massive building projects that go unused, keep going up across China as local officials mix vanity and a misdirected attempt to attract business and tourists. A perfect example the 58-meter, $230 million statue of Guan Yu, a beloved military figure from the Third Century, that nobody seems interested in visiting.

Statue of Guan Yu in Jingzhou Park, China

Chen Zhe


BEIJING — The Chinese Ministry of Housing and Urban-Rural Development recently ordered the relocation of a giant statue in Jingzhou, in the central province of Hubei. The 58-meter, 1,200-ton statue depicts Guan Yu, a widely worshipped military figure from the Eastern Han Dynasty in the Third century A.D.

The government said it ordered the removal because the towering presence "ruins the character and culture of Jingzhou as a historic city," and is "vain and wasteful." The relocation project wound up costing the taxpayers approximately ¥300 million ($46 million).

Huge monuments as "intellectual property" for a city

In recent years local authorities in China have often raced to create what is euphemistically dubbed IP (intellectual property), in the form of a signature building in their city. But by now, we have often seen negative consequences of such projects, which evolved from luxurious government offices to skyscrapers for businesses and residences. And now, it is the construction of cultural landmarks. Some of these "white elephant" projects, even if they reach the scale of the Guan Yu statue, or do not necessarily violate any regulations, are a real problem for society.

It doesn't take much to be able to differentiate between a project constructed to score political points and a project destined for the people's benefit. You can see right away when construction projects neglect the physical conditions of their location. The over the top government buildings, which for numerous years mushroomed in many corners of China, even in the poorest regional cities, are the most obvious examples.

Homebuyers looking at models of apartment buildings in Shanghai, China — Photo: Imaginechina/ZUMA

Guan Yu transformed into White Elephant

A project truly catering to people's benefit would address their most urgent needs and would be systematically conceived of and designed to play a practical role. Unfortunately, due to a dearth of true creativity, too many cities' expression of their rich cultural heritage is reduced to just building peculiar cultural landmarks. The statue of Guan Yu in Jingzhou is a perfect example.

Long ago Jinzhou was a strategic hub linking the North and the South of China. But its development has lagged behind coastal cities since the launch of economic reform a generation ago.

This is why the city's policymakers came up with the idea of using the place's most popular and glorified personality, Guan Yu (who some refer to as Guan Gong). He is portrayed in the 14th-century Chinese classic "The Romance of the Three Kingdoms" as a righteous and loyal warrior. With the aim of luring tourists, the city leaders decided to use him to create the city's core attraction, their own IP.

Opened in June 2016, the park hosting the statue comprises a surface of 228 acres. In total it cost ¥1.5 billion ($232 million) to build; the statue alone was ¥173 million ($27 million). Alas, since the park opened its doors more than four years ago, the revenue to date is a mere ¥13 million ($2 million). This was definitely not a cost-effective investment and obviously functions neither as a city icon nor a cultural tourism brand as the city authorities had hoped.

China's blind pursuit of skyscrapers

Some may point out the many landmarks hyped on social media precisely because they are peculiar, big or even ugly. However, this kind of attention will not last and is definitely not a responsible or sustainable concept. There is surely no lack of local politicians who will contend for attention by coming up with huge, strange constructions. For those who can't find a representative figure, why not build a 40-meter tall potato in Dingxi, Gansu Province, a 50-meter peony in Luoyang, Shanxi Province, and maybe a 60-meter green onion in Zhangqiu, Shandong Province?

It is to stop this blind pursuit of skyscrapers and useless buildings that, early this month, the Ministry of Housing and Urban-Rural Development issued a new regulation to avoid local authorities' deviation from people's real necessities, ridiculous wasted costs and over-consumption of energy.

I hope those responsible for the creation of a city's attractiveness will not simply go for visual impact, but instead create something that inspires people's intelligence, sustains admiration and keeps them coming back for more.

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