At the crossroads of the most fundamental global corporate tax reform since the 1920s, the United Nations will hold a special meeting on Monday 29 April on outlining fair tax rules fit for the modern digital economy. The meeting, to be attended by over 50 country delegates and over a hundred tax experts, academics and activists, comes on the heels of the OECD’s recent proposals for root and branch reform of the international tax system to meet the challenges of an increasingly digital world – effectively marking the OECD’s last chance to retain its reign as a global rule-setter on international tax.
$500 billion is lost in corporate tax each year globally, according to research by the Tax Justice Network, due to systemic tax abuse by multinational corporations enabled by current international tax rules, particularly by the ‘arm’s length’ approach to taxing multinationals which has been the bedrock of international taxation for nearly a century.1 Compared to the economic outputs of the world’s economies, the $500 billion in tax dodged by multinationals each year would rank in as the world’s 26th largest economy – larger than the economic output of the United Arab Emirates, Ireland or Singapore.2 The IMF’s own estimates puts these tax losses at $600 billion a year.3
The OECD now faces the challenge of moving beyond the ‘arm’s length’ approach. However, in a new critique published today, the Tax Justice Network has raised the alarm on the various ways in which the OECD’s richer member countries may rig new tax rules against lower income nations. The organisation is calling for the UN to push for ambitious reform that makes sure tax contributions are paid in the countries where real economic activity takes place.
Alex Cobham, chief executive of the Tax Justice Network, said:
“There is now international consensus that multinational companies are avoiding hundreds of billions of dollars a year in tax, as a direct result of the OECD’s failed tax rules. With OECD member countries finally accepting that the arm’s length principle is not fit for purpose, and that the race to the bottom on tax rates must be stopped, this is the greatest opportunity for reform in decades.
“ All eyes are now on the UN to seize this moment for radical change and to lay down a marker for transparent tax rules fit for the 21st century – and fair for countries at all income levels.”
Liz Nelson, a director of the Tax Justice Network, said:
“This a watershed moment for securing the human rights of billions of people across the world. To build the sustainable world that the UN envisioned for 2030, where human rights are realised and inequalities, including gender inequalities, are minimised, we need to build a fair tax system that protects low income countries’ taxpayers and fosters economic sustainability.”
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The OECD’s consultation on addressing the tax challenges of digitalisation
The Tax Justice Network welcomes the OECD’s international corporate tax reform proposals. Designed to address the challenges of Digitalisation of the Economy, the reforms more importantly ask critical questions about how and where trans national companies pay tax and look to address the current unequal distribution of how taxing rights across countries, especially developing countries. The OECD’s reform proposals go far beyond digitalisation, and now potentially extend to the entire economy of multinational companies. They effectively mark the OECD’s last chance to show itself capable of delivering international tax rules that address tax avoidance and the resulting global inequalities in nations’ taxing rights.
The International Monetary Fund report of March 2019 made an important contribution to the corporate tax debate recognising that the current international tax system is under stress. Also in March, the European Commission’s new measures to combat tax abuses in the digital economy were announced – in particular, these measures intend to ensure taxes are paid in the places where business is done, and where profits are really made.
What is significant about the consultation?
The OECD consultation reflects three great shifts in the tax justice debate. First, a recognition that the so called ‘arm’s length principle’ of taxing multinational companies has led to systemic tax abuse by multinationals and is not fit for purpose. Second, the explosion of both profit shifting and the growing high-quality research on the associated revenue losses variously estimated at US$600 billion annually (IMF researchers) or US$500 billion (Tax Justice Network), has emphasised that double non-taxation is the real concern, and not the double taxation that been heavily emphasised by multinationals and their advisers and lobbyists. The third shift is that the ‘race to the bottom’ has lost all intellectual credibility.
The first ‘pillar’ of reform discussed in the OECD proposals outlines a range of alternatives to the current arm’s length principle, including unitary taxation. Rather than assessing the profit in each entity within a multinational group, this approach evaluates the global profit of the entire multinational group, and then apportions it as tax base between countries of operation according to the share of the group’s real economic activity in each. The second pillar, a minimum tax rate, is equally warmly welcomed. Simply put a minimum tax could empower the individual states where multinationals’ real economic activity takes place.
Why do we need reform?
The distribution of taxing rights between states has direct consequences for the realisation of human rights within states, because lower-income countries suffer disproportionately high losses compared to their actual tax revenues. The current distribution of taxing rights escalates and amplifies social inequalities, especially gender inequalities, and in doing so engineers a range of discriminatory outcomes for women. The undermining of progressive direct taxation including corporate tax not only leaves higher inequalities in place on the revenue-raising side, but also reduces the funds available for redistribution through public expenditures.
How likely is it to happen?
A global minimum tax rate can be a powerful progressive tool, curtailing the race to the bottom – but to achieve this, it must be combined with a comprehensive tax base reform under pillar one. That will be politically difficult to achieve.
The two pillars of the reform throw up a range of issues or risks that are political, more than technical. Chief among them is that that major OECD members, at the behest of their multinationals and related lobbyists, will seek to collapse progress back towards the status quo – just as happened in the BEPS process.
The proof of this concern will only be revealed over time. On Friday 26th April the United Nations’ 25-member Committee of Experts on International Cooperation in Tax Matters meets and more than 150 tax experts from member states, academia, business and civil society will participate in weeks series of meetings. A clear OECD failure to deliver for lower-income countries is likely to see momentum move rapidly to a globally representative UN forum instead.
Notes to Editor
- Tax Justice Network, Tax avoidance and evasion – The scale of the problem, http://taxjustice.wpengine.com/wp-content/uploads/2017/11/Tax-dodging-the-scale-of-the-problem-TJN-Briefing.pdf
- According to the International Monetary Fund, in 2018 the United Arab Emirates had a GDP of $424.6 billion, Ireland had a GDP of $372.7 billion and Singapore had a GDP of $361.1 billion.
- IMF, 2019, Corporate Taxation in the Global Economy, https://www.imf.org/en/Publications/Policy-Papers/Issues/2019/03/08/Corporate-Taxation-in-the-Global-Economy-46650.
- The UN’s Economic and Social Council will hold a special meeting on international cooperation in tax matters on 29 April 2019: https://www.un.org/esa/ffd/wp-content/uploads/2019/04/2019-ECOSOC-Tax-meeting_Tentative-Programme.pdf
About the Tax Justice Network
The Tax Justice Network is an independent international network, launched in 2003. It is dedicated to high-level research, analysis and advocacy in the area of international tax and financial regulation, including the role of tax havens. The Tax Justice Network maps, analyses and explains the harmful impacts of tax evasion, tax avoidance and tax competition; and supports the engagement of citizens, civil society organisations and policymakers with the aim of a more just tax system.