SYDNEY and KUALA LUMPUR, June 21 (IPS) – After decades of refusing to cooperate with international taxes under multilateral auspices, the rich countries have finally agreed. However, by insisting on their own terms, progressive corporate tax is still far away.
Tax avoidance and evasion by transnational corporations (TNCs) aided by ‘taxes’ heaven‘- jurisdictions with very low ‘effective’ tax rates. Fierce competition among developing countries to attract foreign direct investment (FDI) makes things worse.
Minimum Minimum Rate
TNCs exploit legal loopholes to avoid or minimize tax liabilities. Such practices are known as ‘base erosion and profit shifting’ (BEPS).
Tax havens put the government at the expense of the public 500–600 billion US dollars year in lost revenue. Low-income countries (LICs) will lose about $200 billion, more than the roughly $150 billion in foreign aid they receive annually.
Representative corporate income tax 15% of total tax revenue in Africa and Latin America, compared with 9% in OECD countries. Developed countries’ more dependent on this tax means they suffer incommensurate more from BEPS.
GMCTR requires TNCs to pay taxes on their worldwide income. This discourages hiding of profits in tax havens. Independent Commission on International Corporate Tax Reform (ICRICT) recommend GMCTR 25%.
This 25% rate is about current Average statutory corporate tax rate by GDP for 180 countries. Slightly below the OECD average, much lower than the developing country average. So, a GMCTR of less than 25% means that most developing countries suffer a loss in revenue.
To reverse President Trump’s 2017 tax cuts, in April 2021 the Biden administration proposed taxing foreign corporate income at 21%. In June, G7 agreed to GMCTR 15%, confirmed by G20 Finance Minister in July. This poor G7 ratio is now sold as “overate“Tax deal.
The OECD also wants to allocate taxing and revenue powers according to their revenue, not where their goods and services are produced. Critics, including The Economist, have shown that the big rich economies will gain the most. Small and poor developing economies, especially those that preside over TNC production, will lose out.
OECD proposals can reduce small developing economies’ (SDEs) 3% tax base, while four-fifths of revenue will likely go to high-income countries (HICs). Therefore, developing countries prefer to distribute revenues according to their contribution to production, for example, employees, rather than sales.
Developing countries have never had a meaningful say in international tax matters. G20 members should have asked multilateral organisations, such as the UN and IMF, which the OECD-dominated G7 had long blocked.
Instead, the G20 BEPS initiative asked the OECD to come up with its rules. After decades of keeping developing countries from administering taxes, its compromise Comprehensive framework on BEPS (IF) to promote international cooperation on tariffs.
Developed countries participate only “after the agenda has been established, the action points have been agreed, the content of the initiatives has been decided, and the final reports have been delivered”.
Developing countries have been allowed to join with OECD and G20 members, supposedly ““on the basis of equality, to develop several BEPS standards. Arrive become an IF membera country or jurisdiction must first commit to implementing BEPS results.
As a result, non-OECD, non-G20 countries must implement a policy framework that they have had little role in designing. Not surprisingly, with little choice or real voice, the 15% GMCTR was agreed to by 136 out of 141 IF members by October 2021.
FDI vs tax
The OECD’s tax reform proposals are expected to be implemented from 2023 or 2024. The Investment Division of the United Nations Conference on Trade and Development (UNCTAD) recognized that it would have main meaning on international investment and investment policies affecting developing countries.
UNCTAD’s World Investment Report 2022, on International Tax Reform and Sustainable Investmentprovides guidance for developing country policymakers to navigate complex new rules and tailor their fiscal and investment strategies.
Committed to promoting investment in the real economy, especially FDI, UNCTAD acknowledges that most developing countries lack the technical capacity to deal with complex tax proposals. Implementing BEPS reports and related documents through legislation will be difficult, especially for LICs.
Existing investment treaty commitments also limit fiscal policy reform. “The impact of tax revenues on developing countries due to constraints imposed by international investment agreements (IIAs) is a major cause for concern.” Report Note.
Although tax regimes influence investment decisions, tax incentives are not the most important factor. Other factors – such as political stability, legal and regulatory environment, skills and quality of infrastructure – are more significant.
However, tax incentives play an important role in promoting FDI. Such incentives between countries include tax exemptions, accelerated depreciation and ‘forward loss‘contingency – reduces tax liability by allowing past losses to offset current profits.
With GMCTR, many tax incentives will be less attractive for many FDI. Tax incentives will be affected to varying degrees, depending on their features. UNCTAD estimates effective cross-border investments could fall by 2%.
As a result, policymakers will need to rethink their incentives for both existing and new investors. The GMCTR can prevent developing countries from providing financial incentives to promote desirable investments, including local, sectoral, industry incentives or even job creation.
With rates usually lower, ‘input tax‘can significantly increase the revenue of SDEs’. The additional tax will apply to profits in any jurisdiction where the effective tax rate falls below the 15% minimum. This ensures large TNCs pay minimum income taxes in every jurisdiction where they operate.
However, host countries may have IIAs – in particular the Investment State Dispute Settlement (ISDS) provisions – preventing the imposition of ‘additional taxes’. If so, they will be imposed by ‘mostly rich countries’ TNCs.
Therefore, FDI recipient countries will lose tax revenue without benefiting by attracting more FDI. Existing IIAs – the type found in most developing countries – can be problematic.
Therefore, the impact of GMCTR is very important for FDI promotion policies. Reduced competition from low-tax locations may benefit developing economies, but other effects may be more relevant.
As FDI competition relies less on tax incentives, developing countries will need to focus on other determinants, such as a supply of skilled labor, reliable energy, and good infrastructure. However, many are unable to pay the substantial financial commitments required to do so.
Many of the key reform details required remain to be clarified. Therefore, developing countries must strengthen their technical and technical capabilities to negotiate more effectively on the details of GMCTR reform. This is crucial to ‘cutting losses’, to mitigate the regressive consequences of this supposedly progressive tax reform.
IPS UN Office
© Inter Press Service (2022) – All rights reservedOrigin: Inter Press Service