Ensuring Fairer International Corporate Taxation

By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Sep 3 2019 – 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.

Anis Chowdhury

The rise of digital giants, such as Google, Facebook, Amazon and Apple, is an additional concern for all countries. Digitalization 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, 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 marginalized, 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 marginalized.

Jomo Kwame Sundaram

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 digitized’, ‘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% 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 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 recognizing the interests of emerging and developing countries.

However, as the UN Committee of Experts emphasized, “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 recognize 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 Organization, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

Central Asia Has Always Been Important for Europe

By Peter Burian
BRUSSELS, Sep 3 2019 – The EU has presented a new strategy for Central Asia. The first one has been adopted in 2007 and revised in 2015. Where do you see improvements?

Our new Strategy will aim to focus future EU action in the region on two key priorities. Firstly, we want to be partners for resilience. We want to strengthen the capacity of Central Asian states and societies to overcome internal and external shocks and enhance their ability to embrace reform.

This should translate into closer cooperation on human rights and the rule of law. This will also imply closer cooperation in security, including counter-radicalisation and counterterrorism, but also new areas such as hybrid threats and cyber-security. We also want to cooperate with the countries of the region to turn environmental challenges into opportunities.

Secondly, we want to step up our cooperation to support economic modernisation, and there is a lot the EU can do to support the development of a stronger and competitive job-generating private sector in the region.

We should also cooperate more closely to improve the climate for investment and the EU remains a leading supporter of the accession of Central Asian states to the WTO.

Peter Burian

Where do the EU’s interests lie when it comes to Central Asia?

Central Asia has always been important for Europe: for its history, for its culture and for its role in connecting East and West. Now Central Asia is regaining its historic role as a gateway between Europe and Asia.

Central Asia is a young and growing market with untapped potential for trade and transport, but it also represents an important element of our energy security. EU has a strong interest that Central Asia develops as a peaceful, resilient and more closely interconnected economic and political space.

The region is of significant importance for the EU also in terms of security. Neighbouring with Afghanistan, the region shares many challenges starting from illicit drug trafficking and irregular migration and ending with threats of violent extremism and terrorism.

When facing these threats, we are in one boat. And from this point of view, Central Asia is even a closer neighbour of the EU than it seems. In case of any major security crisis in the region, the EU will be one of the first to face the consequences.

Besides Brexit and domestic conflicts, we see that the eroding transatlantic relationship remains high on the EU’s agenda. How much attention can Central Asia therefore expect in the upcoming years?

I believe our member states and EU institutions helped me to answer your question by adopting the new EU Strategy on Central Asia, reconfirming the long-term commitment to security and stability of the region.

I dare to say that also thanks to EU’s contribution and support for sustainable development in the past quarter of a century the region managed to preserve a large degree of stability and countries of Central Asia strengthened their statehood, identity and sovereignty.

In the light of existing challenges, the region is facing this support will be needed in the foreseeable future. It is in our interest to keep the attention to Central Asia and help to strengthen its resilience.

I believe that with our rather modest investments into human capacity building, education, job creation and strengthening the rule of law and good governance it is possible to create conditions for utilizing the potential of the region and prevent negative tendencies to materialize into major threats to stability of Central Asia.

Even when you look to the recent past when the EU member states were deciding on budgetary allocations for Central Asia’s regional MIP for 2014-2020 seven years ago you would see that the EU managed to increase the funding for implementation of various regional and bilateral projects in Central Asia by more than 50 per cent.

A meeting of Central Asian states. Credit: UN

With Russia and China two geopolitical heavyweights are very active in Central Asia. In contrast, how’s the EU perceived as an actor in the region?

One of the reasons the Central Asian countries are seeking a closer partnership with the EU is their natural interest to diversify their choices and options. Being located between such big political, economic and security players as China and Russia, our Central Asian partners see the EU as a balancing power in the regional equation.

From our part, we want to forge a stronger, modern and non-exclusive partnership with the region so that it develops as an area of cooperation and connectivity rather than competition and rivalry.

The EU’s partnership with the region is not directed against anyone. The Central Asians appreciate our ability to engage on a non-exclusive basis without imposing binary choices. The EU does not aim to be a “Great Game” player on a “Grand Chessboard” but rather a reliable and committed partner for the region.

We remain open for cooperation and synergies with everyone, including China and Russia, based on full transparency and fully respecting the Central Asian states’ ownership and sovereignty.

The increasing indebtedness of countries like Kyrgyzstan and Tajikistan to Chinese creditors makes the population more and more concerned about their countries’ sovereignty. What can the EU do concretely to offer less developed countries a real alternative?

The EU is providing to the countries of Central Asia a real alternative. EU cooperation with the region already amounts to over €1bn through both bilateral and regional envelopes. Together with other instruments this amount is even higher – around €2bn.

To fulfil the economic potential, there is the need for something more than big infrastructure projects or trains delivering goods that only run through these countries. There is a need to have real, long-term investments that bring benefits to local communities, based on sustainable and long-standing solutions.

We also share a mutual interest in developing and strengthening connections between Europe and Central Asia, whether that is transport links, digital infrastructure, energy networks, or contacts between people. This could create new jobs, promote innovation and modernisation, which allows Central Asia avoiding the debt trap and the trap of poor quality projects.

But at the same time the connectivity for us is not and should never be about creating spheres of influence. For us, connectivity always will be rather focussed on creating opportunities for everyone.

This interview was conducted by Joanna Itzek, Friedrich Ebert Stiftung (FES)