The mishmash of overlapping and incoherent national tax policies and systems, which together comprise the global tax architecture, used to be a niche topic relegated to the fringes of global policy debates and the domain of a small number of technical experts. But the leak of the “Panama Papers” in April thrust these issues into the spotlight anew.
This added fuel to the fire that was started by the 2012 Amazon and Google cases and subsequent initial high-profile leaks that first brought international tax policy under public and legislative scrutiny. The technicalities of issues such as transfer pricing, offshore financial centers, aggressive tax planning and tax minimization, and illicit financial flows involving public officials have gained the attention of the media and taxpayers around the world.
Demands for greater transparency and fairness have already led to some tangible changes, like elimination of the “double Irish” in 2014. Some countries, such as Australia and the UK, have recently unleashed new taxes (known euphemistically as Google taxes) designed very specifically to address the problem of getting taxes out of multinational companies with large operations.
Satisfactory resolution of the “global tax wars” could fundamentally reshape the international tax system with major consequences for multinational enterprises, governments, wealthy individuals, and politicians. The implications for developing countries and average citizens are less straightforward, and this is of concern.
Although there is no precise figure, as it involves leakages which by definition are hard to measure, global corporate income tax revenue losses due to profit shifting and other tax maneuvers are in the range of $100 to $240 billion each year. This means the amount of money at stake is roughly on par with--or larger than--the total annual volume of development aid flows.
The concerns associated with the global tax wars may have had less resonance in developing countries, even though this is where the largest consequences are, and where countries often lack the policies and procedures to be able to detect and adjudicate misuse of the domestic tax system. Taxes in developing countries represent a smaller share of GDP (10-20% of GDP vs. 30-40% in OECD countries), and tax policy discussions have focused on broadening and deepening the tax base in general.
However, it may be that tax avoidance has a disproportionately large impact on non-OECD countries given that corporate tax generally represents a larger share of total tax revenue than in wealthy countries.
When the interests of developing countries (which are often primarily the recipients of capital inflows) are at odds with those of the countries where multinational countries are based, the former are likely to be at a disadvantage. Taking unilateral domestic steps to curb tax avoidance can be effective in protecting the corporate tax base, but may have the unwanted effect of making a country less attractive to foreign investment.
Of course, developing countries also lose wealth and tax revenues when wealthy nationals or political elites take advantage of offshore tax havens or engage in tax evasion and money laundering schemes.
The OECD has coordinated the primary international response to the growing concerns about the international tax system through the Base Erosion and Profit Shifting (BEPS) action plan, with the addition of a recently announced “inclusive framework” to make sure that BEPS issues are addressed more widely than in OECD countries alone. To strengthen the voice of developing countries in the global debate on tax issues, the World Bank Group/IMF Joint Initiative for Strengthening Tax Systems in Developing Countries was launched in 2015.
Through this initiative, the Bank and the IMF are assembling a set of tools and guidance aimed at addressing developing economy needs, working to push the concerns of developing countries to the fore, and boosting regional cooperation as a counteraction to destructive tax competition.
Last week, the Bank sponsored a conference that brought together international experts, academics, civil society and other tax practitioners around the topic of the ‘global tax wars’. Several opportunities for tax cooperation were described as possible alternatives to end these tax wars.
The loopholes and structures (including tax incentives) that enable tax minimization, even when legal, undermine the concept of progressive taxation and ultimately represent diminished public resources for development. Much of this has happened with the full knowledge and even complicity of some national authorities, who have bowed to or lobbied for the interests of powerful stakeholders.
Within the current framework, there are significant short-term gains to be made from helping countries improve rulemaking and enforcement. A challenge for many developing countries that is bigger than tweaking domestic rules and processes, though, may be dealing with old and outdated treaties that are either unhelpful or cannot be implemented. Negotiating or renegotiating tax treaties, especially with OECD countries, can be a daunting prospect.
Now that tax issues are part of the mainstream policy discussion, it is time to work toward a new consensus of what constitutes a fair and equitable international tax system for the global 21st century economy. This is a steep hill to climb - the domestic politics blocking any meaningful tax reform in the US alone seem nearly insurmountable.
But we are looking for ways to balance the pursuit of quick wins at the country level with support for a coordinated global solution. Next on the agenda is a major launch of the OECD’s “inclusive framework” in Kyoto this month—stay tuned.