Owing to the current international tax system being obsolete and ineffective in preventing the heinous and glaring tax evasion of the world’s multinational firms, the Organisation for Economic Cooperation and Development (OECD) rose to the challenge of creating a corporate tax system that will fit the 21st century and that can do well both to developing and developed countries.
The radical solutions package published by the OECD showed a change of course in the strategy to fight against tax avoidance. The Independent Commission for the Reform of International Corporate Taxation (ICRICT) welcomes the strategy change. The move evidently showed that the OECD is finally ready to engage on real reforms that ICRICT has constantly advocated for.
José Antonio Ocampo, Chair of ICRICT was quoted as saying, “We believe that the BEPS process has achieved what it could, given the political muscle of big corporations and the army of lawyers and accountants who have a vested interest in maintaining the status quo. It is time to repudiate transfer pricing and move toward a fairer and more effective system.”
Similarly, Magdalena Sepulveda, a member of ICRICT and former United Nations Special Rapporteur on Extreme Poverty and Human Rights, emphasized that “When multinationals do not pay the taxes that they owe, this means that States have fewer resources to invest in public services, such as education, health care, childcare services, access to efficient justice systems and access to public drinking water and sanitation systems. This dynamic exacerbates gender equality, because women are overrepresented among the poor and among the demographic group with precarious or low-paid jobs.”
On this note, Joseph Stiglitz, Professor at Columbia University and ICRICT Commissioner added, “It is time for countries to agree on a global minimum effective tax, no matter where you are producing, no matter what you do, you have to pay 15-20% of global profits in taxes. That would stop the race to the bottom.”
Agreeing with what the other commissioners have asserted, Wayne Swan, former Treasurer and Deputy Prime Minister of Australia and a member of ICRICT concluded by saying, “As the digital economy is fast becoming the economy itself, any solution should be comprehensive and deliver a sustainable international tax architecture fit for the 21st century. It means a re-discussion of taxing rights to deliver a fairer allocation of tax revenue than the current system, which has been stripping critical revenue from both developed and developing countries.”
Among the reforms strongly advocated by ICRICT are:
- A move beyond the arm’s length principle, the principle underpinning the current international tax architecture which is taboo until now;
- A reallocation of taxing rights to market countries that ensure all countries, including developing, get their fair share of multinationals profits;
- A move towards a more balanced and simplified system of allocation of income and taxes of multinationals, which is the right direction of travel towards ICRICT formulary apportionment position;
- A minimum global tax, which should ensure minimum effective taxation everywhere;
- Developing countries are finally been given a voice and have tabled their own proposal, which has been incorporated in the final OECD text.
The BEPS (Base Erosion and Profit Shifting)
Back in 2012, when the uproar regarding Apple’s, Amazon’s, and Google’s tax-avoidance schemes reverberated, it unlocked public anger and compelled the G20 to act, the OECD was summoned to rectify and modify the international corporate tax system. That led to a package of reforms known as the “Base Erosion and Profit Shifting” Project, or BEPS. The reform process was led by OECD countries and opened up to developing countries only after the initial package was unveiled.
BEPS was without question a significant move towards dealing with some of the most scandalous tax-avoidance strategies employed by multinationals. It initiated, for example, the sharing among tax authorities of country-by-country reports on these companies’ profits and tax payments. However, this standard will apply only to very huge MNCs, and the reports are not available publicly, depriving civil society of an essential tool of transparency.
Furthermore, BEPS failed to unravel the core of the issue as companies are still allowed to move their profits wherever they want and to take advantage of very-low-tax jurisdictions. Google, for instance, moved €19.9 billion ($22.7 billion) through a Dutch shell company to Bermuda in 2017, and in the same year Facebook paid just £7.4 million($9.6 million) in corporation tax in the United Kingdom, despite generating £1.3 billion in revenue in that country.
How MNCs do it
Multinationals can “legally” evade taxes by employing so-called transfer pricing. In this scheme, a parent company sets the prices of transactions among its subsidiaries to guarantee that profits are registered in low-tax countries, rather than where the economic activity that generated the profits actually take place. For example, Vodafone, the first big multinational to publish country-by-country data voluntarily, revealed that nearly 40% of its profits for 2016-17 were allocated to tax havens, with €1.4 billion declared in Luxembourg, where the company is taxed at an effective rate of 0.3%.
In reality, tax avoidance can be found in all economic sectors, but digital companies best demonstrate how obsolete the current international tax system is. Because these companies’ marginal cost of production is zero, the revenue accruing to them is equal to a rent, and it is therefore important to tax this rent effectively. And, contrary to what these companies’ leaders claim, this taxation would not negatively affect the supply of digital services.
As far as the ICRICT is concerned, the overriding priority now is to establish an international corporate tax system fit for the digital economy and make that system work effectively.