Proposals by the Organisation for Economic Cooperation and Development for reforming the way technology companies and other multinationals are taxed by taking into account their sales destinations are likely to benefit rich countries most, an analysis by campaign group Tax Justice Network has found.
Developing countries, on the other hand, would see their tax base eroded under the suggested rules, unless employment is included as a factor determining the allocation of taxable profits.
The OECD is currently investigating different forms of reallocating tax assessment rights. The initiative primarily addresses digital companies, which can have significant market share in countries without a physical presence and as a result escape corporate taxation.
In addition, the proposals for global corporate tax reform are more broadly aimed at lowering and redistributing the amount of profits that is allocated to low-tax jurisdictions.
The reform plan proposed by the OECD would reward consumer economies over producer economies, the tax campaign group said in a press release.
“The OECD’s reform plan is expected to reduce profits booked in corporate tax havens by just 5 per cent, and redistribute the proceeds largely to the richest countries – despite the fact that lower-income countries currently lose a higher share of their tax revenues to corporate tax abuse.”
The analysis, carried out by Alex Cobham, chief executive at the Tax Justice Network; Tommaso Faccio, accounting lecturer at the University of Nottingham; and Valpy Fitzgerald, economist from the University of Oxford, compared models proposed by the OECD, the International Monetary Fund and tax justice campaigners.
The different scenarios would reduce the amount of taxable profits that can be allocated in ‘tax havens’ by between 5% and 60%. The analysis defined tax havens based on a list of 30 jurisdictions, which included offshore financial centres like the Cayman Islands but also onshore countries like the Netherlands, Ireland and Switzerland.
Study co-author Cobham said, “We’re concerned the OECD may be fumbling a golden opportunity to lead the world into a new era of equitable international tax rights. After promising the radical shift in international rules that is urgently necessary, the OECD seems to be lapsing back into tinkering at the margins – doing little to redistribute profits from tax havens, and even less for the lower-income countries that lose the most to corporate tax abuse.”
The analysis, which relied solely on US multinationals’ corporate data broken down on a country-by-country basis, was published on the same day a group of academics – the Independent Commission for the Reform of International Corporate Taxation – released a technical critique of the OECD’s proposals.
The commission, composed of economists like Joseph Stiglitz and Thomas Piketty, academics and tax advisors, criticised the OECD for falling short of adopting a unitary enterprise principle.
The group said a new approach to corporate taxation should “reject the artifice that a corporation’s subsidiaries and branches are separate entities entitled to separate treatment under tax law, and instead recognise that multinational corporations act as single firms conducting business activities across international borders”.
The commission calls for “a system of taxing multinational corporations as single and unified firms, using formulary apportionment based upon objective factors, such as sales and employment”.
Which factors are chosen and the extent to which they are applied could be adapted for different sectors such as manufacturing, services or extractive industries, the ICRICT report said. However, exemptions should be limited to reduce tax complexity.
Both groups of tax campaigners also call for a minimum corporate tax rate applied globally to stem tax competition and a race to the bottom of international tax rates. The ICRICT said this rate should be 25%.
The OECD is proposing its own version of a minimum corporate tax rate. Under OECD plans, if a company’s operations abroad are taxed below the minimum rate in a low-tax jurisdiction, the difference could be taxed where the firm is physically based.
The Paris-based organisation will release reform plans before the next meeting of G-20 finance ministers and central bankers set for 17 Oct. in Washington, DC. In June, the 129 members of the OECD/G 20 Inclusive Framework on Base Erosion and Profit Shifting agreed to devise a new global agreement for taxing multinational enterprises by the end of 2020.
The tight timeline is a concern for the Tax Justice Network, which argues the OECD should make the country-by-country data of multinationals public before “key elements of the reform proposals have been pushed through”.
Cobham said, “It’s crucial that G24 and G77 countries in the Inclusive Framework are able to scrutinise the proposals fully, and they should demand the OECD release its full country-by-country data so that governments can make informed decisions on the likely impacts on their economies and their citizens.”