Only Multilateral Cooperation Can Stop Harmful Tax Competition
Anis Chowdhury and Jomo Kwame Sundaram
SYDNEY and KUALA LUMPUR. US Treasury Secretary Janet Yellen has urged all governments to support a global minimum corporate tax rate of at least 21%. The US is working with other G20 nations to get other countries to end the “thirty-year race to the bottom on corporate tax rates”.
Corporate tax vital
For Yellen, “governments [should] have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government”.
The Biden administration has unveiled a plan to reverse Trump’s tax cuts and raise US corporate tax rates from 21% to 28%. Crucially, it wants to increase tax rates on US firms’ overseas profits – global intangible low-tax income (GILTI) – from 10.5% to at least 21%. This should be calculated on a country-by-country basis including all tax havens, i.e., low- or no-tax locations, to minimise evasion.
The US Treasury is also keen to reach international agreement over a digital tax for online giants such as Amazon and Facebook. This sharply contrasts with Trump’s threat of retaliation against countries attempting to tax US-based tech giants.
The Economist estimates that in the past decade, the ‘big five’ – Facebook, Amazon, Apple, Microsoft, Google – paid only 16% of their profits in tax.
Race to the bottom
The Bretton Woods institutions (BWIs) – the International Monetary Fund (IMF) and the World Bank – promoted Reaganite ‘supply side economics’ from the 1980s, claiming excessive tax rates discourage labour supply and entrepreneurship.
However, contrary to proponents’ claims, most tax cuts have resulted in net revenue losses, with Trump’s cuts resulting in a shortfall of US$275 billion, or 7.6% of previously expected revenue.
As countries raced to the bottom, offering increasingly generous tax incentives to attract investments by transnational corporations (TNCs), the average worldwide statutory corporate tax rate fell from 40% in 1980 to 24% in 2020.
Countries also lose revenue as TNCs use legal loopholes to minimise tax payments, e.g., by abusing differences between national tax rules and bilateral double taxation agreements. They strive for ‘double non-taxation’ to avoid paying tax in all jurisdictions.
Thus, US$500–600bn, or around 10–15% of annual global corporate tax revenue, is lost yearly to TNCs shifting profits to tax havens, using base erosion and profit shifting (BEPS) book-keeping.
Harming developing countries
Corporate income taxation is much more important for developing countries, e.g., comprising 18.6% of tax revenue in Africa, 15.5% in Latin America and Caribbean, and 9.3% in OECD countries in 2017. Clearly, tax competition and TNC tax avoidance hurt developing countries more. As share of GDP, Sub‐Saharan Africa has lost most, followed by Latin America and the Caribbean, and South Asia.
Developing country governments undertook reforms reducing often progressive direct income tax systems in favour of supposedly neutral, but actually regressive indirect taxation on consumption.
Senior IMF Fiscal Affairs Department staff recommended taxing labour instead of capital, considered too mobile to tax. An IMF paper even endorsed complete abolition of corporate income tax!
Encouraged by the World Bank’s now discredited Doing Business Report, developing countries competed to cut corporate tax rates, falling by a fifth from 1980. Consequently, low and middle-income countries have lost US$167–200bn annually, around 1–1.5% of GDP.
The Economist observed weak links between tax rates and investment as well as growth rates. OECD research showed that tax incentives hardly attracted foreign direct investment, while IMF research found ‘beggar-thy-neighbour’ tax competition cost unnecessary revenue losses to many developing countries.
A G20 report found the fiscal cost of tax incentives in low-income countries “can be high, reducing opportunities for much-needed public spending …, or requiring higher taxes on other activities”.
Estimated annual revenue losses to rich OECD countries due to tax havens range from 0.15% to 0.7% of GDP. Low-income countries (LICs) and even lower middle-income countries lose relatively more corporate tax revenue than high-income countries (HICs).
LICs account for some US$200bn of such lost revenue, typically a higher GDP share than for HICs. This is much more than the US$150bn or so that LICs receive annually in official development assistance.
Digitisation and changing business models are making it more difficult to determine the actual location of economic activities. Thus, digitisation enables BEPS, reducing revenue due to under-reported taxable income.
Consequently, in 2017, developing countries lost US$10bn in revenue from e-commerce compared to HICs’ US$289 million loss. Least developed countries lost US$1.5bn while sub-Saharan African countries lost US$2.6bn.
UNCTAD’s Trade and Development Report 2019 noted, “Foregone fiscal revenues from digitisation are particularly high for developing countries because they are less likely to host digital businesses but tend to be net importers of digital goods and services”.
Developing countries’ voice
Supported by the G20, the OECD has been working on BEPS since 2013. The OECD BEPS initiative seeks to check tax base erosion by setting a global minimum corporate income tax rate and taxing TNCs selling cross-border digital services. OECD and G20 countries now aim to reach consensus on both by mid-2021.
However, despite being hurt more, developing countries have long been shut out from discussions of international tax norms, policy and regulatory design. The OECD BEPS Inclusive Framework (IF) now includes developing countries which agree to enforce it despite being excluded from its design.
Thus, while IF developing country associates supposedly participate on an ‘equal footing’, they have no decision-making role, reminiscent of their earlier colonial status! Apparently, ‘equal footing’ only refers to BEPS 4 Minimum Standards enforcement.
Unsurprisingly, although raised during IF consultations, developing country concerns – such as allocating tax rights between ‘source’ and ‘residence’ states, taxing the informal economy and taking account of their different needs and circumstances – remain largely unaddressed and unresolved.
With such failures implying legitimacy deficits, BEPS measures are unlikely to benefit developing countries very much. It is increasingly clear that the BEPS project and IF were never intended to help developing countries.
UN must act now
So far, the European Commission (EC) and other powerful countries have responded positively to Yellen. Her proposal has also been endorsed by the IMF and the UN High-Level Panel for International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI).
Corporate tax rules currently favour rich countries where most TNCs are based, regardless of domicile for tax purposes. Countries must work together to accelerate more inclusive, equitable and progressive multilateral tax coordination.
The OECD’s tenuous monopoly on international tax cooperation discussions has so far failed the world. Creating fairer international tax arrangements requires inclusive multilateral consultations well beyond current processes. These should be led by the UN, the only forum where all countries are represented fairly.
A UN Tax Convention, with universal participation and IMF technical support, can help countries come together to find lasting comprehensive solutions. This must happen soon to pre-empt the OECD from further abusing its exclusive approach, inadvertently jeopardising lasting progress.
Related IPS commentaries
“UN Leadership Necessary for Fairer Tax Cooperation”. 1 Apr. 2021. https://www.ipsnews.net/2021/04/un-leadership-necessary-fairer-tax-cooperation/
“Will the New Fiscal Crises Improve International Tax Cooperation?”. 1 December 2020. https://www.ipsnews.net/2020/12/will-new-fiscal-crises-improve-international-tax-cooperation/
“South Must Also Set International Tax Rules”. 20 August 2019. http://www.ipsnews.net/2019/08/south-must-also-set-international-tax-rules/
“Ensuring Fairer International Corporate Taxation”. 3 September 2019. http://www.ipsnews.net/2019/09/ensuring-fairer-international-corporate-taxation/
“OECD Tax Reform Proposal Could Be Better”. 15 October 2019. http://www.ipsnews.net/2019/10/oecd-tax-reform-proposal-better/
“‘Beggar Thy Neighbour’ Policy Advice”. 12 August 2019. http://www.ipsnews.net/2019/08/beggar-thy-neighbour-policy-advice/