The UN Economic and Social Council (ECOSOC) met on 8 April 2022 to consider international cooperation in tax matters. The discussions covered tax and the digital economy and illicit financial flows.
Tax and the Digital Economy
The meeting considered that the Inclusive Framework’s proposed two-pillar international tax reform needs to be less complex so the provisions can be administered without placing an undue burden on the tax administrations of developing countries. The general direction of the tax reform is positive as it shifts the nexus; considers the taxation of sales made by multinationals in market countries; and addresses harmful tax competition through the proposal for a global minimum tax.
The general view of the meeting was that the two-pillar approach ignores some practical challenges of developing countries. The proposed rules are too complex; the administration costs would be too high; and the provisions would be difficult to administer effectively. The majority of the additional tax revenue from the reforms from both Pillar 1 and Pillar 2 would go to developed countries.
The meeting considered that the process of implementation of the proposed rules is still not sufficiently inclusive of developing countries. The speed of work in the Inclusive Framework allows too little time for tax administrations with few resources to study proposals and form an opinion. Developing countries will need technical assistance to implement the reforms.
The need for countries signing up to the Inclusive Framework’s solution to withdraw their unilateral digital service taxes (DSTs) is a problem for developing countries. Pillar 1 would only apply to the largest multinationals while the DSTs introduced by some developing countries are wider in scope and would allow them to collect tax from all multinationals providing digital services across their borders, including the main regional multinationals.
Illicit Financial Flows
The keynote speech by the CEO of the African Union Development Agency – New Partnership for Africa’s Development (AUDA – NEPAD) noted that the pandemic was a crisis for government finances and a setback in the path to achieving the sustainable development goals. Financial integrity is required to combat illicit financial flows (IFFs) and to promote sustainable development. Global action is needed to provide the capacity building for governments to implement new responses to the challenges.
The meeting considered that a common standard of transparency is needed to combat secrecy. The implementation of digital solutions can improve fairness and accountability. Political commitment is required to support initiatives and ensure that funds are available to finance them.
There are two types of IFF: those related to criminal activities; and those related to tax avoidance and evasion. Tax officials are generally not trained in tax crime, and specialised tax crime units are needed to investigate illicit flows arising from tax evasion. There must be specialised teams in developing countries to look at different sectors of the economy. In most developing countries there is a large informal sector and high tax evasion, and it is difficult for governments to combat the problem because of resource constraints.
The available technology must be better used to identify IFFs. Opportunities are arising from new tools to detect IFFs and for sharing of real time information by tax administrations. Tax evasion can be detected by the use of third-party data. The reduction in the cash economy and the growth of digital payment methods helps as there will be digital information trails, enabling auditors to follow the money.
Mining plays a large role in developing countries so tax administrations need information on mining and extractives. Corporate tax avoidance is a problem in the mining sector. Country by country (CbC) reporting must be expanded to more countries and more public CbC reporting could be considered.
