An international panel including Nobel Prize winning economist Joseph Stiglitz and other development experts has called for greater developing country participation in the OECD project on base erosion and profit shifting (BEPS). The Independent Commission for the Reform of International Corporate Taxation (ICRICT) was set up by trade unions, development charities and other campaigners. It has called for a major shake-up of the global tax rules including the introduction of a global minimum corporate tax rate.
The recommendations put forward by ICRICT are:
• Impose tax on multinationals as single firms, by developing model agreements allowing countries to apportion the revenues and costs of multinationals among the jurisdictions in which they are operating;
• Curb tax competition by agreement on a minimum corporate tax rate and examining the spillover effects of national tax policies;
• Strengthen enforcement by imposing criminal penalties where necessary and by imposing withholding tax on payments between entities within multinational concerns;
• Increase transparency in the system;
• Reform tax treaties to strengthen the fight against tax avoidance; and
• Build inclusivity into international tax cooperation, for example by upgrading the role of the UN committee of international experts on taxation matters.
In the opinion of ICRICT world leaders should be more ambitious in their approach to the reform of the international tax system in view of the public concern about tax avoidance.
Global formulary apportionment
ICRICT recommended the adoption of a system of global formulary apportionment whereby global profits of multinational companies would be allocated to the countries in which they operate by means of a formula reflecting the level of activities and economic substance in each country. The criteria normally used for such formulae are for example assets, total payroll or employee numbers. Systems involving formulary apportionment of profits are already used in the US, Canada and Switzerland. Also the European Commission has recently re-launched a plan for the common consolidated corporate tax base in the European Union which would also use a system of formulary apportionment for allocating group profits among EU member states.
In the opinion of ICRICT multinational groups operate as a single entity and should therefore be taxed on that basis, rather than being taxed on the basis of the separate entity principle which is considered to be merely a legal fiction. ICRICT concedes that there would be difficulty involved in obtaining agreement of all countries on a system of formulary apportionment but emphasized the need for strengthened international cooperation to arrive at a unified approach. The imposition of a global minimum corporate tax rate would prevent competition between countries to reduce corporate tax rates.
The OECD/ G20 project on base erosion and profit shifting is currently devising improvements to the international tax system based on strengthening the operation of the arm’s length principle combined with special measures to combat profit shifting. OECD officials have pointed out the difficulty of reaching agreement on global formulary apportionment and are pursuing reform based on pragmatic changes to the current international tax system.
BEPS and developing countries
ICRICT concluded that the BEPS project should be made more inclusive and that the views of developing countries should be taken into account. This is accepted by the OECD which has already taken steps to involve developing countries and to listen to views from various regions of the world. The interest of developing countries in BEPS was recently emphasized by a working paper published by the International Monetary Fund (IMF). This estimated that the cost of base erosion and profit shifting for developing countries amounted to around 2% of GDP, compared to around 0.6% of GDP for developed countries. This would amount to an annual loss of revenue of around USD 213 billion for all developing countries combined.
The call for inclusivity in international cooperation therefore includes a number of measures to strengthen the involvement of developing countries in BEPS. ICRICT considers that the UN Committee of Experts on International Cooperation in Tax Matters should be upgraded to the status of an Intergovernmental Commission and given adequate resources for the task. International organizations should provide more resources for capacity building in the tax administrations of developing countries and South-South cooperation should be strengthened. ICRICT also calls for negotiations to draft a UN convention to combat abusive tax practices.