I was invited to speak yesterday at the World Economic Forum’s seminar on
“Digitalization and International Economic Policy: Tax, Competition, Trade and Investment”. Also invited to speak were Director of Global Tax Policy at IBM Linda Evans, Head of Tax Policy at KPMG Chris Morgan and Fellow at the Council on Economic Policies Agustin Redonda. We spoke about tax policies in a globalised and digitalised economy, specifically on a white paper to be prepared by a working group within the World Economic Forum that the Tax Justice Network is currently integrating. A few days ago, Open Democracy published a worrying piece about the creeping capture of the United Nations system by corporations, after the World Economic Forum signed an agreement with the UN. This relationship is one to watch closely, and likely one to work towards undoing as soon as possible in order to safeguard the UN from becoming a corporate puppet.
Here is the full speech I presented yesterday:
Thank you for the invitation to present. There is now consensus that multinationals are avoiding hundreds of billions of dollars a year in taxes and this affects especially lower-income countries, amplifying social inequalities, including gender inequalities.
The BEPS process has failed to solve the problem of tax avoidance, creating instead patches and complex rules based on the same old system.
Now, with the new OECD consultation, there is an opportunity for real change based on the long-standing tax justice positions: that taxing rights should be aligned with the location of real economic activity; that jurisdictions should not engage in a race to the bottom; and that the resulting redistribution of taxing rights should benefit lower-income countries in particular.
What would effective reform look like?
1) The decision process should include all countries, especially low income ones. Asking countries to implement rules decided by others isn’t really “inclusive”, no matter what you call yourself.
2) The new taxing rules should apply to all industries, not only to the digital economy.
3) The longstanding tax justice proposal for unitary taxation should apply, that is, assessing profits at the level of the multinational group rather than as separate entities within the group.
4) The formulary apportionment of the tax base should include not just sales, but also employment (at headcount, rather than at payroll level) to truly benefit low-income countries.
5) Unitary taxation based on real economic activity should apply to the whole tax base of multinationals, not just to “residual” profits. The application to all profits (both routine and residual) would not only address tax avoidance, but would also reduce the “complexity” and “uncertainty” that so many multinationals and accountancy firms seem to be worried about.
6) A minimum tax rate will be helpful to counteract the race to the bottom. However, such minimum tax rate should apply at each-jurisdiction level, and not as a global average. In other words, multinationals should not be able to claim that they need not pay taxes in country X because their overall average taxation already reached the required minimum, for example because they paid higher taxes in rich countries. Instead, every country, especially low-income ones, should be allowed and required to apply the minimum tax rate to every multinational that operates there. This isn’t a matter of affecting their tax sovereignty, but rather giving them the chance to obtain the required tax revenues. In any case, tax sovereignty should not be construed so as to allow beggar thy neighbour policies. Just as the Financial Action Task Force prevents countries from facilitating or benefiting from money laundering, so should countries be prevented from facilitating or benefiting from profit shifting and tax avoidance.
To be clear, these tax reforms will involve important technical aspects, but the key choices will be fundamentally political.
Even if the new rules will require new consensus, such as what elements the formulary apportionment should include, it is worth the effort. The new system will at least get closer to taxing multinationals based on how they actually operate.
If the process fails to deliver truly useful reforms, the UN should try to find better rules. If these also fail, countries will – and should – establish unilateral measures, and hopefully countries in the global south will coordinate to do so.
Lastly, no matter what decision is taken, it will be necessary to define criteria and give civil society organisations and journalists, access to data to see if the system is actually working. As for the criteria, the Tax Justice Network has published the “Corporate Tax Haven Index” which could be used to track countries’ progress. As for access to information, an obvious first step would be to get public access to country by country reports, as the Tax Justice Network has been asking for years.