OECD tax reform attacked as ‘intensifying inequalities’

Campaigning groups are warning that OECD proposals designed to ensure multinationals pay the tax due in the territories in which they operate, will reduce profits booked in corporate tax havens by only 5%, and are likely to intensify global inequalities

The analysis comes ahead of this week’s planned announcement by the OECD on the latest developments in its base erosion and profit shifting (BEPS) project, which is committed to overhauling the way the international tax regime operates.

The research, carried out by Alex Cobham (Tax Justice Network), Tommaso Faccio (University of Nottingham) and Valpy Fitzgerald (University of Oxford) and commissioned by the Independent Commission for the Reform of International Corporate Taxation (ICRICT), compares what is currently known about the OECD proposal with two other options, one developed by the group itself and one used by the IMF.

The findings indicate that while there will be a 5% fall in profits booked in tax havens, around 80% of the redistributed profits will go to high income countries. While upper-middle income countries are expected to see some benefit,  lower-middle income countries are projected to see their tax bases shrink by 3%.

The analysis also found that the tax base of OECD countries would collectively grow by nearly $5bn under the OECD reform, while the tax base of G24 countries would collectively grow by $0.7bn and the tax base of the G77 group of countries by only $0.3bn.

The campaigning groups are advocating a different approach, which they say will result in the tax base of OECD countries collectively growing by nearly $27bn, while the tax base of G24 countries would collectively grow by $29bn and the tax base of G77 by $19bn.

While the OECD and IMF proposals apportion profits to countries based on the location of a multinationals’ sales, the tax justice campaigners’ proposal apportions profit based on the location of multinationals’ sales and employees.

The report says the OECD and IMF have limited the scope of their unitary tax reform to apply to multinational groups’ residual profit, and have proposed apportioning multinationals’ residual profit to the countries where multinationals sell their goods and services. The researchers argue that by excluding employment as a factor for apportionment and prioritising intangible assets which are often parked in corporate tax havens, the OECD and IMF proposals give greater taxing rights to richer countries at the end of the sales process, rather than to lower-income countries at the start of the process, where products are made.

According to the report, adopting the IMF proposal is predicted to result in a drop of 43% in tax lost to corporate tax havens, while the tax justice campaigners’ proposal is predicted to result in a 60% decrease.

Alex Cobham, chief executive at the Tax Justice Network and a co-author of the study, 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 Tax Justice Network is calling for an urgent reconsideration of the OECD approach and for the OECD to publish its full country-by-country reporting dataset so as to open up the proposals to wider analysis.

Digital tax

The Association of International Certified Professional Accountants (AICPA) and CIMA in the UK (jointly known as the Association) have also raised objections to the OECD’s focus on income allocation in its recent comments on the OECD’s work on developing a consensus solution to the tax challenges arising from the digitalisation of the economy. Regarding the digital tax proposals, the association says income allocated should include a routine return to jurisdictions where valuable functions and activities occur, as this treatment provides jurisdictions the right to tax the output of activities that generate value within their borders.

Minimum threshold exceptions to economic nexus are necessary to protect businesses, and such minimum thresholds should be agreed to globally. The Association identifies developing and obtaining a consensus on workable and practical enforcement mechanisms as a priority, and says new rules to tax value should utilise aspects of existing tax law and consider the impact on individuals operating cross-border. 

It also cautions that before considering a fractional apportionment approach, OECD should take steps to recognise the importance of intangible assets.

Edward Karl, AICPA vice president of taxation, said: ‘As the global digital economy continues to evolve and expand, so does the need for a global consensus on the taxation of the digital economy.

‘The international corporate tax rules must be updated for the digital age; however, unilateral, cross-border taxation actions can lead to double taxation, business uncertainty and lengthy and expensive controversy for businesses and governments.’

The OECD Centre for Tax Policy and Administration is hosting a live webinar on Wednesday 9 October to provide an update on recent and upcoming developments in the OECD's international tax work. Details are here.

Global inequalities in taxing rights: An early evaluation of the OECD tax reform proposals

By Pat Sweet

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