By Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR, Aug 20 2019 – Recently, Christine Lagarde, outgoing Managing Director of the International Monetary Fund (IMF), argued that developing ‘countries need a seat at the table’ to design rules governing international corporate taxation.
This acknowledges recent IMF findings that developing countries lose approximately USD200 billion in potential tax revenue yearly, about 1.3 per cent of their GDP, due to companies shifting profits to low-tax locations. Oxfam estimated in 2018 that extreme poverty could be eradicated for USD107 billion annually, i.e., about half the lost revenue.
This comes on top of ‘beggar thy neighbour’ tax competition, encouraged by past policy advice from international financial institutions, such as the IMF and the World Bank, purportedly to entice investments by transnational corporations (TNCs).
Corporate tax rates in developing countries have fallen by about 20 per cent since 1980 with uncertain impacts on ‘greenfield’ foreign direct investment (FDI) outside resource sectors. In most cases, there have been net revenue losses as developing countries heavily depend on corporate taxation.
Low and middle income countries have lost USD167-200 billion annually, around 1-1.5 per cent of a country’s GDP, due to corporate tax competition. As a share of GDP, Sub‐Saharan African countries have suffered the most revenue losses, followed by Latin America and the Caribbean, and South Asia.
Developing countries’ complaints about tax losses due to TNC profit shifting and tax evasion have long fallen on deaf ears. Designed by developed countries, international corporate tax rules have generally favoured ‘residence’, mainly developed countries, over ‘source’, primarily developing countries, where TNCs operate and secure profits.
Developed countries also lose revenues, as TNCs ‘game’ the rules to minimize their tax liability globally. Estimated annual revenue losses to high-income OECD countries range from 0.15 to 0.7 per cent of GDP, now of greater concern with their heightening fiscal predicaments following the 2008-2009 global financial crisis.
Mandated by the G20, the OECD Base Erosion and Profit Shifting (BEPS) project since 2013 has provided countries with tools needed to tackle ‘transfer pricing’, harmful tax regimes, treaty abuse, etc.
Developing countries still not at table
BEPS actions were decided on, and approved by 44 countries, including OECD, OECD accession countries and other G20 members. Recognizing the different needs of developing countries in its 2014 Report (Part 1 and Part 2), the OECD sought to address some of their concerns with two initiatives in 2016.
The first was the BEPS Inclusive Framework (IF) to include developing countries as BEPS associates; as of August 2019, 134 countries were members. Second, a Multilateral Instrument (MLI), involving more than 100 developed and developing countries, was negotiated to deal with, among others, tax treaty abuses.
Almost all countries are now in the IF. Yet, it has not improved on the original BEPS actions. While developing country BEPS associates supposedly participate on an ‘equal footing’, they have no decision-making role. Apparently, ‘equal footing’ only refers to implementation of the BEPS 4 Minimum Standards. MLI largely addresses OECD member concerns and is not intended to protect the tax rights of source developing countries.
Unsurprisingly, although raised during IF consultations, developing country concerns — such as allocation of taxing rights between source and residence states, taxation of informal economy and their differential needs — remain largely unaddressed and unresolved.
With such failures implying legitimacy deficits, BEPS measures are unlikely to benefit developing countries very much. In fact, the BEPS Project and the BEPS Inclusive Framework were never intended to deal with challenges faced by developing countries.
BEPS has developed in line with OECD international model tax treaties, reflecting developed countries’ norms. Its technical assistance programmes — such as Tax Inspector without Borders (TIWB), by the OECD with the UNDP, and the Platform for Collaboration on Tax, by the IMF, WB, UNDP and OECD — help developing countries to achieve BEPS Minimum Standards, disadvantaging developing countries in several respects:
• Accelerates harmful tax competition: While most developing countries have committed to implement BEPS Minimum Standards by joining the IF, developed countries are still taking unilateral actions fuelling tax competition, e.g., the USA’s Tax Cuts and Jobs Act, and the EU’s Anti-Tax Avoidance Directive, disadvantaging developing countries.
• No level playing field: Developed countries’ unilateral actions reflect their continued jockeying for advantage regardless of their ostensible BEPS consensus. Australia and the UK have introduced their own rules to address profit shifting by TNCs, while the US Congress declared that, regardless of BEPS, it would craft tax rules favouring US companies. Developed countries can also opt out of MLI provisions for developing countries. The one-size-fits-all approach thus also penalizes developing countries.
• Too onerous and complex: Most developing countries lack the technical resources, personnel, capacity, technical knowledge and economic means to implement the typically complex and costly BEPS actions. Even with foreign assistance, BEPS implementation burdens their tax administrations. While BEPS implementation may not generate extra revenue, they typically need to spend scarce fiscal resources to comply.
• Distorts priorities: They also divert scare resources from improving tax administration and reforming taxation to tackling tax evasion by individuals. The BEPS ‘one-size-fits-all’ approach is problematic as developing countries have different and varied needs.
• Shrinks policy space: Policy discretion in developing countries is also constrained by BEPS. The minimum tax rule, proposed in the OECD public consultation document of February 2019, limits the right of countries to set their own rules. Developing countries risk being blacklisted by the EU for failing to implement BEPS minimum standards.
Hence, developing countries must examine both the costs and benefits of the IF for implementing BEPS minimum standards while continuing to demand meaningful seats at the BEPS negotiating table, which should be truly inclusive and multilateral, e.g., at the United Nations itself, and not just through a donor-dominated UN fund or program, where accountability to developing countries is limited.