TJN is pleased to publish a new briefing paper looking at the implications for developing countries of the OECD’s widely referenced Base Erosion and Profit Shifting (BEPS) project, which is designed to find ways to tackle the deficiencies in the international tax system. It is available in English and Spanish.
The report, by Prof. Sol Picciotto, a Senior Adviser to TJN, begins:
“Many commentators have long recognized that the international tax system is broken, especially in relation to corporate taxation. A major effort has begun to try to fix it. This is led by developed countries, but it has major implications for developing countries:
they are generally more reliant on corporate tax revenues (on average close to 20% of tax revenues, compared to 8-10% for developed countries);
it is harder for them to devote scarce resources, especially of skilled specialists, to administer complex international tax rules;
their desire to attract foreign investment makes it hard to enact and enforce strict tax rules;
in addition to the revenue losses, international corporate tax avoidance sustains the offshore tax haven and secrecy system, which also facilitates capital flight and money-laundering.”
And it concludes that the OECD’s Action Plan aims only to try to repair the current system, and cannot remedy its fundamental, fatal flaws. The grand alternative to the OECD-dominated approach, which the report calls ‘formulary apportionment’ (and whose strongest version we call ‘unitary taxation‘, or ‘unitary taxation with profit apportionment,’ if you like) is dismissed by the OECD as being politically impractical, even if it is far stronger, technically speaking. But as the report continues:
“The attempt to strengthen the existing system in the Action Plan is also fraught with political difficulties, indeed in many respects it is a recipe for generating conflicts between states, as each tries to modify or interpret the rules to grab a larger share of the tax base. The difference is that the [OECD’s] reform plan defers the political conflicts.
. . .
No doubt there are many who will hope that over time the political spotlight will move on, perhaps even the fiscal crises will dissipate, and the pressures for effective solutions will relax.”
And it finishes:
“Developing countries could now take a lead in opening up policy space for debates on such more radical reforms which are more likely to establish the international tax system on a fairer and sounder foundation.”
This will be stored permanently in our briefing papers section, at the top of this page.