Arresting tax avoidance by MNCs

José Antonio Ocampo | Updated on November 13, 2019

Developing countries must weigh in on the OECD’s proposed international tax system to ensure their interests are not overlooked

In the face of global outrage at the little or no tax paid by some of the world’s largest multinationals, the G20 appointed the Organisation for Economic Co-operation and Development (OECD) a few years ago to design alternatives to end these abuses. In response, on October 9, 2019, the OECD put forward proposals for a new international tax system that may be imposed on the world in the coming decades.

We are talking about a major issue. In the US, for example, 60 of the 500 largest firms — including Amazon, Netflix and General Motors — paid no taxes in 2018 despite a cumulative profit of $79 billion.

These misappropriations, often legal, are based on complex arrangements but derived from a simple principle. The multinational only pays the taxes in the subsidiary it declares profits. This way, it shows low profits or deficits where taxes are relatively high — even if it is in those countries that the firm undertakes the bulk of its activities — and reports high profits in jurisdictions where taxes are very low, or even zero (even if the firm has no customers there). As a result, every year, developing countries lose at least $100 billion, hidden by multinationals in tax havens. Globally, this diverts 40 per cent of foreign profits, according to economist Gabriel Zucman.

With the accelerated digitalisation of the economy, the diverted funds are rising constantly. This is highlighted by institutions such as the IMF and the UNCTAD. But the OECD has started the reform process.

After decades of inaction, the process could move forward very quickly. After the recent publication of its proposal, the OECD will make a final one in 2020, laying the base for a new international tax system. Subsequently, it will be practically impossible to influence the process.

That is why we need to raise the alarm for developing countries. They can no longer say they have no voice in the process. The OECD has given them a place at the negotiating table by creating an ‘Inclusive Framework’.

Unfortunately, despite its name, we do not play on equal terms within this group. Rich countries have more human, political and financial resources to make their views heard. With the largest concentration of multinational headquarters, they are also the most influenced by the pressures of the corporate world. But by refusing to realise what is at stake, developing countries are also failing in their responsibilities.

Proposed norms

The OECD reform proposal is based on two “pillars”. The first is to establish clearly where corporate profits are generated for tax purposes. The ideal, for which tax reform commission ICRICT has been fighting for years, would be to consider multinationals as single firms whose total profit should be taxed where they operate according to objective factors, such as employment, sales, digital customers, and resources used.

In this field, however, the OECD’s proposals are neither ambitious nor fair enough. The share of taxable profits, which would be redistributed internationally, would be limited to the so-called “residual” share of the multinationals’ total profits. Worse still, this principle would only apply to very large multinationals, and the allocation of these profits would depend solely on the volume of sales, excluding employment and other factors that would favour developing countries.

The second pillar is the establishment of an effective minimum corporate tax at the global level. Some developing countries fear that by abandoning the weapon of tax incentives, they will no longer be able to attract investment from multinationals. Yet, the evidence that these incentives attract investment is controversial, according to IMF research.

Even more importantly, if the international community agrees on a sufficiently high rate (the ICRICT recommends at least 25 per cent, the average rate in developed countries), this would put an end to the race to the bottom, with the only winners being the multinationals.

This measure would, however, remove the raison d’être of tax havens, while ensuring that all states have access to resources essential for development.

In the absence of an international consensus, some countries have chosen to find alternative solutions. France will tax 3 per cent of the turnover of firms in the digital sector. Others, such as Mexico, are considering forcing platforms such as Uber or Netflix to pay VAT on services provided in the country.

While these are good initiatives, it is impossible to compartmentalise the digital economy and take it as the sole objective of the reform, as more firms are using digital technologies for commercial activities. It is not with these one-off measures that states will emerge from deficits and repeated austerity cures.

It is time for developing countries to mobilise. Increasing their fiscal resources is the only way they can improve access to health, education, gender equality or the fight against climate change. If they continue to underestimate the importance of these debates, they will soon be forced to accept a new international tax system that will not suit them. By then, it will be too late to complain.

The writer is a professor at Columbia University and President of the Independent Commission for the Reform of International Corporate Taxation

Published on November 13, 2019

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