Large transnational corporations (TNCs) are widely believed to be paying little tax. The ease with which they avoid tax and the declining corporate tax rates over the decades have deprived developing countries of much needed revenues besides undermining public faith in the tax system.
The rise of digital giants, such as Google, Facebook, Amazon and Apple, is an additional concern for all countries. Digitalisation makes it hard to establish where 'production' takes place. Hence, digital tech TNCs' revenues typically bear little relation to reported profits and tax bills.
CORPORATE TAX RULES FAVOUR RICH COUNTRIES: Through the OECD (Organisation for Economic Cooperation and Development), developed economies have long set corporate tax rules, without much consideration for the effects on developing countries' revenues.
UN initiatives on profit shifting and tax avoidance have been largely resisted by developed countries. At the Third UN Financing for Development Conference in Addis Ababa in mid-2015, developing countries failed to 'elevate' the UN Tax Committee into an inter-governmental body. Even more modest efforts to strengthen it failed, due to opposition from developed countries.
On-going efforts - under the OECD's Base Erosion and Profit Shifting (BEPS) project to reform international corporate tax rules, mandated by the G20 - suffer from legitimacy deficits, as developing countries continue to be marginalised, with only consultative roles.
BEPS Actions were decided by a group of 44 OECD, OECD accession countries and G20 members. Although the UN set up a subcommittee to facilitate inputs into the BEPS process from developing countries, the UN Committee of Tax Experts remains marginalised.
The so-called BEPS Inclusive Framework (IF) tries to ensure that OECD-set standards are enforced in developing countries even though their legitimate concerns remain unresolved, while unilateral actions by developed countries continue to harm them.
The OECD-designed BEPS still allows companies to move their profits anywhere legally via 'transfer pricing' to take advantage of low-tax jurisdictions which some OECD countries provide. This favours developed countries which can better afford lower corporate tax rates.
Therefore, the latest report of the Independent Commission for the Reform of International Corporate Taxation (ICRICT) argues that BEPS has achieved all it can. Instead, it proposes new tasks, dubbed 'BEPS 2.0', urging the OECD to reject transfer pricing.
DIGITAL ECONOMY CHALLENGE: Recent, highly profitable, 'highly digitised', 'technology-driven' business models - which rely heavily on intangible assets, such as patents or software, that are hard to value - are another reason for rethinking international corporate taxation.
Assuming links between income, profits and physical presence now seems irrelevant, triggering new concerns. Countries with many users or consumers of digital services have little or no tax revenue from these companies which insist they have no physical presence there.
Current tax systems are unable to prevent egregious tax avoidance by digital TNCs. With their marginal cost of production at zero, all revenue can be taxed effectively without negatively affecting the supply of digital services.
The OECD has been addressing this issue within the BEPS Framework over the past half-decade without reaching consensus. "With no consensus on taxation of the digital economy, some countries have resorted to unilateral measures", notes the UN Committee of Experts on International Cooperation in Tax Matters.
The recent unilateral action by France to tax tech giants invoked the US threat of new tariffs on French exports. Clearly, the overriding priority now is to establish an international corporate tax system for the digital economy benefiting both developing and developed countries.
UNITARY TAXATION: The ICRICT has proposed that the international taxation system should move toward unitary taxation of multinationals, which would deter their abuse of transfer pricing as global income would need to be consolidated.
Global profits and taxes could then be allocated geographically according to objective criteria such as sales, employment, resources, even digital users in each country. A global minimum effective corporate tax rate of 20-25 per cent of all profits earned by TNCs would be an advance.
The ICRCT also recommended four measures to tackle harmful international tax competition, namely putting a floor under tax competition, eliminating all tax breaks on profits, establishing a level playing field and ensuring participation.
Recent IMF (International Monetary Fund) research has proposed various options and three criteria for consideration: better addressing profit-shifting and tax competition; overcoming legal and administrative obstacles to reform; and fully recognising the interests of emerging and developing countries.
However, as the UN Committee of Experts emphasised, "the solution should be simple to administer … and easy to comply with" as "developing countries often neither have the capacity to administer complex solutions nor are they equipped to handle costly international dispute settlement processes."
IMF AND UN ROLES: The IMF claims near-universal membership, which enables better understanding of developing countries' problems. It also provides technical support on tax issues to over a hundred countries yearly. But as Fund governance is stacked against developing countries, only the UN can better ensure that developing country interests receive due recognition.
The Platform for Collaboration on Tax (PCT), a joint effort by the IMF, World Bank, OECD and UN, has tried to enhance co-operation on tax issues. As the PCT is not a political body, there is need to recognise the UN Tax Committee as the principal PCT decision-making body to ensure its decisions fairly serve both developed and developing countries.
Countries must work together so that more inclusive, equitable and progressive multilateral coordination can accelerate progress. Clearly, a new approach to international corporate taxation is urgently needed.
Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.
Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development, Food and Agriculture Organisation, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.
—Inter Press Service
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