Global tax reform was on development leaders’ minds as they met last week in New York City to check on progress toward financing the sustainable development goals through the so-called Addis agenda, drafted at the Financing for Development Conference in July 2015.
Pressure is mounting on development and political leaders to confront tax evasion in the aftermath of the recent “Panama Papers” leaks, which exposed more than 2,000 clients engaged in tax avoidance at the hands of the world’s fourth largest overseas finance consulting firm, Mossack-Fonseca. Oxfam estimates that developing countries lose $200 billion annually through similar tax avoidance.
Yet how — and where — world leaders should address tax reform remains contentious. Many of the controversial tax practices remain legal and commonplace, particularly among Western citizens and Western corporations operating on the global market. And one question that haunted the discussions in Addis, and reappeared in negotiations last week in New York, is where a global tax facility should be based.
Civil society organizations mostly agree that the United Nations offers the most inclusive forum for universal tax reform. Yet others point to the ongoing work of regional and specialized multilateral organizations including the European Union, the Organization for Economic Cooperation and Development, the World Bank and the International Finance Corp. Such bodies may wield greater political influence — vital for the passage and implementation of future regulations, proponents say.
A taxing prospect
Momentum seems to be on the side of specific multilaterals following last week’s meetings, when a coalition including the United Nations, the OECD, the World Bank and the International Monetary Fund announced a formal “Platform for Collaboration on Tax”.
The platform builds on earlier efforts to bring other multilaterals into the OECD’s Base Erosion and Profit Shifting Framework, a collection of 15 actions meant to give governments the tools to fight “tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.” OECD member countries defined and agreed to adhere to the BEPS Framework in 2015.
The new platform announced at last week’s meetings will make the BEPS package more accessible, through technical assistance and on-the-ground consultation, to developing countries lacking the resources or tax infrastructure to implement BEPS.
BEPS is now due to enter its “implementation” phase in coming months. Developing, non-OECD member countries will be involved “on an equal footing,” according to the head of the OECD’s Tax Policy Center and architect of BEPS, Pascal Saint-Amans.
“Developing countries need assistance to implement BEPS, and [OECD] had a team doing some of it, but I think we need to train the trainers, and be more involved in training the people from the IMF and [World Bank] and U.N. who will have to deliver massive technical assistance on the ground,” Saint-Amans told Devex.
“That’s why we created a platform of international organizations, to work together on how this will translate on the ground in the developing countries,” he said.
A top-down approach?
Some civil society organizations have criticized the platform, arguing that bringing in the U.N. and developing countries now at the implementation phase — when OECD members have already agreed on the standards — isn’t good enough.
“This is repackaging old news,” Tove Maria Ryding, tax coordinator at the European Network on Debt and Development said of the platform.
“We knew before that the U.N. would have ‘observer status’ on the framework and would be involved in a platform to work with developing countries, but it remains that the OECD, whose members are the richest countries in the world, are the real decision-makers for the framework, and they simply cannot have the interests of the poorest countries at heart,” she told Devex.
Ryding pointed out that while the OECD has pledged to include interested developing countries “on an equal footing” in the implementation phase of BEPS, developing countries must first agree to the framework before they’re allowed involvement, limiting their ability to shape policy.
A ‘blitzkrieg’ on multinational corporations
The OECD’s Saint-Amans, argued that beginning the process with a small — but powerful — group of global players gave the BEPS project the agility and leverage needed to move quickly. The OECD packs the power of “85 percent of the world’s economy,” he said.
The majority of companies or individuals engaged in tax avoidance exposed in the Panama leaks can be traced back to OECD member countries, meaning that closing the loopholes there could aid significantly in stemming the corporate practice of tax avoidance.
“In an ideal world, you would say we need all countries on an equal footing so let’s use the U.N., and then you take three or four years to put in place the framework and you start working and by then, the momentum behind reforming corporate income tax has died,” he told Devex.
“But when you have Obama, Putin, Modi, Xi Jinping agreeing on something and ready to give instructions to their team, then you can move fast,” he added.
Ryding insisted that because the measures were developed by wealthier countries, “they don’t go nearly far enough in curbing the practices that are beneficial to developed countries, and damaging to developing ones.”
But Saint-Amans said that because nations are sovereign, each jurisdiction will adjust and fine-tune the measures during implementation. Even if developing economies didn’t have as great a voice in the formation of the framework, he said, they will help “fill in these gaps” during implementation.
Saint-Amans said that the media has wrongly pitted developing countries against developed countries in the global tax reform debate, when actually the pushback comes from the multinational corporations.
“In reality, developed countries are largely for reform, for making the rules fairer to developing countries,” he said. “The tension is actually between those countries, developed and developing countries together, against the multinational corporations.”
Saint-Amans insists that any developing country that wants to join the BEPS project and access the BEPS package will have the opportunity to do so granted they agree to the measures. He added there is still much to be ironed out during implementation.
“There is another debate which is extremely important and which will have to take place, which is the balance of taxation between the source and the residence, and that’s a debate between the developed and developing countries,” he said.
For example, if a U.K. company bases a subsidiary presence in Ghana, the income could be taxed at source, by the Ghanaian tax authority, or back in the U.K., where the parent company resides.
Developing countries, on the whole, want income to be taxed “at source,” while many developed countries would prefer taxes levied “at residence.” For now, this decision is often made by bilateral tax treaties, which largely favor developed countries, especially the U.K., which ActionAid International recently ranked worst among developed countries for executing unfair tax treaties.
Eric Lecompte, who serves working groups for the United Nations Conference on Trade and Development and is the executive director of the Jubilee Network, said while an OECD-based tax facility “doesn’t rise to what was called for in Addis,” the BEPS platform signifies “a huge step in the right direction.”
“It makes sense to get everyone in the same room who’s been working on these issues,” Lecompte told Devex after departing from the New York meetings. “And it’s important to have everyone cooperating, rather than competing.”
Still, Lecompte said, there is much work to be done before efforts — however united on the surface — are completely inclusive of the interests of the world’s poorest.
“This platform, as they’re calling it, is just beginning, so we don’t have a sense of how comprehensive it’s going to be.”
The first meeting of the BEPS Framework will take place on June 30-July 1 in Kyoto, Japan.
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