Yves here. My tax maven friend has mentioned off and on that OECD countries have been working on how to stop or at least reduce multinational tax avoidance via artful transfer pricing and other scheme, via their Base Erosion and Profit Shifting initiative, or BEPS. The wee problem is it was launched in 2013 and it’s now 2021. Will the US showing more support make a difference?
By Anis Chowdhury, Adjunct Professor at Western Sydney University and University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at Inter Press Service
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.
Tax reforms
Developing country governments undertook reforms reducing often progressive direct income tax systems in favour of supposedly neutral, but actually regressive indirect taxation on consumption.
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”.
Tax avoidance
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
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.
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In my opinion the best way of addressing that and the super-normal profits is to tackle IP-rights.
Transfer-pricing using difficult to price IP is the easiest way to avoid taxes.
If governments were serious about supporting innovation and competition then they’d reduce the protection of IP as the current IP-regime is stifling innovation and stifling competition. Look at what a short-term focused CEO does, cutting research and trying to get monopoly-pricing power.
Cutting back on research and development might cause problems for the successor of the CEO but that is only a concern for the (mythical?) CEO with long-term thinking. Crushing smaller competitors by using courts in IP-fights is only good for lawyers.
IP-rights is legislation written by legislators and enforced (or not) by governments, if there was a will to change them then IP-laws could most certainly be changed.
Arguing for global agreements on minimum level of corporate taxes isn’t going to work, the only thing accomplished by trying to get global agreement is that nothing but talk will be done for years, decades or even ever. A conspiracy theorist might even believe that what Yellen did is just that – an attempt to delay or even stop legislators from legislating in such a way that corporations are taxed.
Along with IP-rights there are lots of other “rights” that could be taxed by the jurisdictions that issue and protect them. How about broadcast licenses, drilling rights, rights of way, landing rights, banking charters, patents… all the way down to local liquor licenses? Taxes on such rights cannot be “passed on” and hence don’t create local, national or international “tax competition.”
I hear that taxes are an instrument of policy, not just a revenue source. Since the supranational corporations have learned how to buy the sovereignty of all these nations via various corruptions or military interventions carried out by captured nations, what possible chance is there for an agreement by these raddled sovereigns on reducing, let alone eliminating, the arbitrage of tax scams?
Doesn’t something similar(without military) happen among US states already? I like the idea of the post but I don’t see the US being effective in the supra-national effort until it is better on the intra-national effort.
I’m not even qualified to be an armchair economist/commentator but doesn’t the same principle apply on both scales? I can understand supra/intra are different concepts/legalities/etc, but if the will isn’t there on the national level then how can we be effective on larger level?
Do other nations have the same level of intra- state competition that the US has?
Of course. State governments in the Imperium are corrupt and corruptible, and many are already pure captives of the Rentier Class. https://www.frbsf.org/economic-research/files/wp08-03bk.pdf
And there’s been the race to the bottom for generations now, as the bosses in state government work to boost their popularity while taking backhanders from corporate types who sell their subjects’ birthrights for a mess of porridge. The Koch Machine has been writing state (and federal) laws and regulations to suit “business interests” and their libertarian/thieving ideology since the old man got started in business. https://www.rollingstone.com/politics/politics-news/inside-the-koch-brothers-toxic-empire-164403/
It’s not just U.S. states, it’s our cities that use tax incentives and sometimes just pure subsidies to lure corporations. Just ask Amazon.
Take money out of capitalists that build businesses(business owners) and let social manipulators(politicians) give it to their friends doesn’t strike me as a good bargain.
The government does such a poor job of spending money that they really have to earn the trust back. Meanwhile how bad would covid have been without, Amazon, Zoom, Instacart, Door dash, Pfeizer etc. The government does get some credit, it printed a ton of money and distributed it.
However, It would be good to shift how much money capital makes vs labor toward the labor side.
The tax structure right charges a payroll tax on corporations for hiring people, then they have to pay the health insurance tax to some insurance companies so that they can deny claims effectively. The incentive are to hire minimally(unless you are Uber and can get around most of stuff that makes hiring expensive).
So we want to shift more money to labor, rather than capital, but why is nobody talking about capital gains.
The incentives are there so that capital gains will be taxed less than labor.
When Trump lowered the corp tax rate businesses stopped moving out of the United States, this happening regularly before that. If we raise the capital gains tax to just be income tax, are we going to loose some investment bankers(fine by me)?
I’d say it is conflating a lot of cause and effect to give credit to Trump/Republican/Democrat cooperative cuts to business taxes for any reduction in outsourcing and relocating of bidness. There’s a lot going on in the world, including increasing wages in prior destination countries where something has resulted in “upward wage pressure” and now relocation of businesses to still weaker and more corrupt countries where the arbitrage still works. As just one driver. It helps that wages have pretty much remained in decline (real dollars) in America, and now the pandemic is showing some of the deficits in the Krugman globalist pitch, along with corks getting jammed in Absolutely Essential Waterways (Suez Canal) and the idiocy (if one accepts that technification of everything is a Good Idea) of incentivizing monopolies of things like “chip” manufacture.
I don’t think Trump’s tax cuts have much to do with the individuals who run corporations (credit agency where it belongs) slowing the relocation of business and taxable activities to other “friendlier” places…
How about globally coordinating laws so that patents, trademarks, and copyrights are unenforceable unless the entity that owns this intellectual property, and collects its royalties, will register all its relevant taxable income in every jurisdiction where this IP is protected. Corporations then get to choose, patent protection or tax avoidance.
But they can’t have both.
But of course corruption being what it is, and people being as gullible and greedy as they are, that might be a great notion but it ain’t got a prayer of happening. The Owners will not stand for it, and it seems to me that the mopes are too disorganized and depressed and even stoic to band together effectively to force a change in the System that might favor the mopery for a change.
I would also suggest that a tax on IP transfers would be a good way to fight this, and it would also have the effect of making patent and copyright trolls less popular.
If we humans were really into a “balanced” budget we would long ago have had circular economies. We are still primitive thieves with only a veneer of technological sophistication. I don’t buy neoliberal profiteering for a minute. What we and the world need is balance. We chose long ago to commodify and financialize everything just to take our skim – and now with nothing really left to skim it is time to give back whatever is necessary to make civilization sustainable. Ideologies are just a distraction.
Right idea, would that it might come about. A though experiment: what would a Rentier pay for the right to kill the very last whale, lion, elephant, water buffalo, you pick the endangered-to-the-point-of-extinction creature? Where will any incentive toward “balance” arise, when these are the kinds of people who own pretty much everything and drive pretty much all policy?
Recall the mythical story of the Soylent Corporation, where the corporate bosses have managed to use up everything in the natural world, maximizing entropy, to the point that all that’s left to skim is the reprocessing (with inevitable losses) of human carcasses into “food” for the residual mopes?
Only Multilateral Cooperation Can Stop Harmful Tax Competition.
I beg to differ. A strong program to “make” it at home” behind tariff barriers would be better.
Multilateral action when one nations consider itself to be “exceptional” (not bound by the rules) does not work.
Only Multilateral Cooperation Can Stop Harmful Tax Competition.
Not really, in fact it would be extremely easy to impose a high tax on multinational corporations.
Simply apply the same sanctions on them, we apply to nations like Iran, Syria, Russia, Venezuela: Deny them all access to USD and SWIFT.
For example, if Apple or Google or Amazon had it’s access to USD frozen, seized, confiscated by the Feds, and was completely shut of SWIFT and any access to banks and it’s currency and property seized by the government, the same way we’ve done to above mentioned nations, they would perish and cease to exist.
If any attempted was made to use the legal system and courts to stop that, the President could – iunder the Patriot Act and other totally legal and totally constitutional laws – declare any lawyer of firm who assist in such legal actions as terrorists and invoke Indefinite Detention to forever imprison torture assassinate and silence them. Or, the President could drone bomb them.
All of these actions would be totally legal and constitutional according to the Ivy League educated folks on the Supreme Court.