By Alexander Gillespie

There are an estimated 77,000 transnational corporations and 770,000 of their foreign affiliates in existence.

Their combined value is perhaps up to 25 per cent of the gross world product.

At their core is a subset of 147 companies that are interconnected by cross-ownerships and this group controls 40 per cent of the total wealth of the entire network.

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Of this super-elite group, the majority are financial institutions like Barclays Bank, JP Morgan Chase and Co and the Goldman Sachs Group.

The incomes of such entities are so large that studies suggest that of the top 100 economies in the world, 51 are corporations and 49 are sovereign states.

For most of the second half of the 20th century, much of the global community tried to create binding international laws for such powerful transnational entities. These efforts came to nothing, and in the 21st century, the goal is soft voluntary initiatives.

The exemplar of these voluntary standards is the United Nations Global Compact to which entities commit to a type of market driven responsible citizenship, promising to be transparent, accountable, and upholding fundamental labour standards, human rights, fighting against corruption and promising environmental responsibility.

These standards are to be applied in whatever countries the entities operate in, irrespective of whether the country they are in has subscribed to those principles or not.
The problem is twofold.

First, only 9000 companies and 4000 non-businesses from 162 countries, including only a handful from New Zealand which include Air New Zealand, ANZ banking, Fairtrade and the Chartered Accountants of Australia and New Zealand, have pledged themselves to these standards.

Second, even angels sometimes fall from grace. The most recent example of this being Volkswagen which, despite being a signatory to the Global Compact, could not resist cheating in their air pollution tests to hide the fact that some of their vehicles were emitting some pollutants at 40 per cent above permissible levels.

While the quest for profit had made some transnational corporations break the law, most prefer to simply push its boundaries.

The best example of this is with tax. As it stands, there has been a remarkable reduction in corporate taxes around the world with the average for the member countries of the OECD falling from around 50 per cent in 1981 to 30 per cent in 2016.

It can be expected these rates will fall even further as politicians the world over offer tax rates which are a fraction of the 30 per cent average to entice transnational corporations, or their money, into their countries.

The governments where the transnational corporations were based and where their substantive economic activities occurred, then lose their ability to tax them because they artificially shift profits to locations where they are subject to non-taxation or reduced taxation.

This is done by creating complicated chains of ownership, part-ownership and co-ownership and bouncing between jurisdictions.

Google achieved an effective tax rate of 2.4 per cent on its non-American profits of 2007 to 2009 by routing the profits through Bermuda, via Ireland and the Netherlands.

The total revenue lost to countries from such profit shifting exercises in 2017 is estimated to be US$100-US$240 billion per year, or the equivalent of 4-10 per cent of global income tax revenues.

The good news is that the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing was recently concluded, and Judith Collins has signed it.

The core of the convention is to prevent country shopping, where companies go through the hundreds of bilateral treaties available for businesses attempting to lower their tax bills, and exploit the differences between the country where they made most of their profit, and the countries where they base their headquarters of subsidiary companies so as to pay lower taxes.

The ideal is to create a much greater coherence between the existing tax treaties, greater transparency, and creating an atmosphere in which it is more difficult for companies to shift to low or no tax environments where they have little or no economic activity.

If a country had enticed a transnational corporation to their shores and that is where they do their work, if they are enticed on a promise of minimal tax, that situation will remain.

Where it will change is when the transnational corporation tries to jump to other countries where it does not do the core of its work, in search of cheaper taxes.

Although considerable uncertainty exists over how this will play out, more work needs to be done to ensure countries do not allow a race to the bottom by consenting to corporations paying minimal tax, just to get them to do their work there. But the new convention is a significant achievement and a step in the right direction.

• Alexander Gillespie is a professor of law at Waikato University.