The Century-Old Legal Fiction Costing America $35.5 Billion a Year
The international corporate tax system treats the subsidiaries of major corporations as independent businesses, allowing these companies to pay tax where they say and not where they actually play.
One of the stranger features of the modern economy is that we no longer disagree about what a multinational corporation is—until the conversation turns to tax.
Investors value Apple as a single global business. Consumers experience it as a single company. Its executives manage it as an integrated enterprise, allocating capital, research, production, and marketing across continents according to commercial strategy rather than national borders. Nobody seriously believes that Apple's subsidiaries are independent businesses negotiating with one another as though they were unrelated companies. They are constituent parts of a single commercial enterprise.
Yet this is precisely the legal fiction upon which the international corporate tax system was built—and continues to rest.
That legal fiction does more than misdescribe how multinational businesses operate. It is routinely exploited to shift profits away from the places where real economic activity takes place and into jurisdictions where little or no tax is paid. This not only erodes public revenues, but also undermines the level playing field by giving multinational corporations tax advantages that purely domestic businesses cannot replicate.
No successful market is created by companies alone: It depends on public investment, functioning institutions, and the participation of millions of workers and consumers.
Taxing multinational corporations as the integrated businesses they actually are could generate an additional US$35.5 billion in corporate tax revenues for the United States every year—an increase of 12% in tax revenues from multinational corporations, without raising corporate tax rates. That is enough to fund current federal spending on renewable energy 45 times over and support an estimated 265,000 jobs.
The latest round of negotiations on the United Nations Framework Convention on International Tax Cooperation concluded in New York last week, putting one of the global tax system’s most entrenched rules squarely on the negotiating table. But while the session has ended, the fundamental choice confronting governments has not: whether the new framework will preserve rules that allow multinational profits to be separated from the places where economic activity actually occurs, or move toward a system that allocates taxing rights according to economic reality. For the United States, that is not an abstract question of international tax diplomacy. Billions of dollars in potential public revenue are at stake.
Behind those projected revenue gains lies one of the most consequential questions in the global economy: where governments are entitled to tax the profits of multinational corporations. Once a business is treated not as one integrated enterprise but as dozens of legally distinct entities, profits can be attributed across that corporate structure in ways that often bear only a limited relationship to where employees work, where customers live, and where the underlying economic activity takes place.
If Apple sells 1 million iPhones in the United States, few people would dispute that those sales depend on the American economy. Every iPhone sold relies not only on Apple's design and engineering, but also on consumers with the purchasing power to buy it, workers who market and service the product, infrastructure connecting businesses to markets, courts enforcing contracts, and the public investments that make economic activity possible.
Apple is only an illustration. The same principle applies to every multinational corporation whose success depends on workers, consumers, and public institutions spread across multiple countries.
Companies build products. Societies build the markets that make those products valuable. Prosperity depends on both. The question, then, is whether the international tax system should recognize where the economic activity that underpins those profits occurs.
With negotiations toward a United Nations Framework Convention on International Tax Cooperation set to continue in Nairobi, Kenya, later this year, governments still have an opportunity to rewrite a 100-year-old cornerstone of international corporate taxation. One proposal would treat multinational corporations as the integrated global businesses they actually are, rather than as collections of legally separate subsidiaries. Known technically as unitary taxation with formulary apportionment, it would allocate their profits among countries according to where genuine economic activity takes place.
Under today's rules, multinational corporations largely decide where profits are recorded within their own corporate structures, and those accounting choices largely determine where they pay tax. In effect, companies often pay tax where they say their profits arise—a system we describe as "pay where you say." The alternative now being negotiated at the United Nations would instead allocate taxing rights according to where companies actually play: where they employ workers, manufacture goods, provide services, and sell to customers. We call this "pay where you play."
This is not about increasing multinational corporations' tax rates. It is about deciding which governments have the primary claim to tax the profits those corporations already earn.
The implications extend well beyond the United States. A new study by Public Services International and the Tax Justice Network estimates that aligning taxing rights with where multinational corporations undertake their real economic activity could generate around US$500 billion in additional corporate tax revenues every year—equivalent to a 24% increase in the corporate tax currently collected from multinational companies. The gains would come not from higher tax rates, but from allocating taxing rights more accurately according to where real economic activity takes place.
Allocating taxing rights in this way would benefit countries across the income spectrum. Higher-income countries would receive the largest gains in absolute terms, while lower-income countries would experience the largest proportional increases because current international tax rules allocate them only a modest share of multinational tax revenues relative to the economic activity taking place within their borders. France, for example, would collect an additional US$25.5 billion in corporate tax each year, while Poland would gain US$5.7 billion. Kenya, meanwhile, would collect more than five times as much corporate tax under this approach, while Nigeria's revenues from multinationals would increase more than sevenfold. Those additional revenues could strengthen governments' ability to invest in healthcare, education, infrastructure, and climate resilience, while responding to economic shocks from a position of greater fiscal security.
Yet the strongest argument for reform is not the scale of the projected revenue gains. It is that the proposal corrects a century-old foundational error, bringing international tax rules into closer alignment with how multinational businesses and the economies that sustain them function. After all, no successful market is created by companies alone: It depends on public investment, functioning institutions, and the participation of millions of workers and consumers. If multinational profits emerge from this shared economic endeavor across many countries, the rules determining where those profits are taxed should recognize that reality rather than privilege the legal and accounting artifices that determine where profits appear on paper.
The principle that multinational corporations should pay where they play would replace that legal fiction with rules more faithful to how the modern economy actually works. The real anomaly, then, is not how multinational corporations operate, but that the international tax system remains the last custodian of a fiction that every other area of economic governance has long since moved beyond.
