The long trend of falling corporate taxes is being reversed

FOR world peace, the League of Nations was an abject failure. For companies, it has proved a great success. In the 1920s it set a basis for corporate taxation that has endured ever since. Recognising that taxing profits in different places can hurt trade and growth, rights to tax were allocated first where profits are generated and only second where a company sites its headquarters.

This principle has now been enshrined in bilateral tax treaties - with unintended consequences. Governments have realised they can lure investment with lower tax rates. Between 1985 and 2018, the average corporate tax rate fell from 49 per cent to 24 per cent. Many tax havens charge zero. The idea has grown that collecting taxes from rapidly growing, efficient firms is "whipping the fast ox".

Companies have also learnt to pay less tax by shifting reported earnings, which is easier with the rise of intangible assets such as brands. Although only 5 per cent of American multinationals' foreign staff work in tax havens, they book nearly two-thirds of foreign profits there, twice as much as in 2000. In 2016, around US$1 trillion of global profits were booked in "investment hubs" such as the Cayman Islands, Ireland and Singapore, whose average effective tax rate on profits is 5 per cent. According to an Organisation for Economic Co-operation and Development (OECD) study in 2015, this robbed public coffers of US$100 to 240 billion a year, equivalent to 4 to 10 per cent of global corporate tax revenues.