Today the OECD identified 15 policy action points and created a two-year timeline that it hopes will restore trust and fairness in what it concedes has become a flawed and discredited international tax system. The report, Action Plan on Base Erosion and Profit Shifting, recognises what the Financial Transparency Coalition (FTC) has known for years: That the integrity of the current global tax system has been undermined by multinational companies and their tax planners exploiting the boundaries of acceptable tax planning.
The OECD today clearly stated that multinational companies’ artificial shifting of revenues and profits to low or no tax jurisdictions harms governments, businesses and citizens throughout the world. The FTC heartily welcomes the OECD’s specific acknowledgment that “in developing countries the lack of tax revenue leads to critical under-funding of public investment that could help promote economic growth”.
“For too long poor nations have had their tax revenue undermined by multi-national corporations that have artificially siphoned away profits that could be harnessed to improve health, education and economic opportunity for billions of people”, said Porter McConnell, Manager of the Financial Transparency Coalition.
Developing Countries Marginalized
But it is simply unacceptable that developing countries, who have suffered proportionately more tax abuse than any other actor, are marginalised in this new OECD policy reform process.
Alvin Mosioma, director of Tax Justice Network Africa and Africa regional advocate for the Financial Transparency Coalition, said: “Comprehensive reform of the international tax system is urgently required because it is outdated, not fit for purpose, and it fails rich and poor nations alike. So it is welcome that today, the OECD has initiated a much needed reform agenda.”
But the OECD has done little to dispel its reputation as the “rich men’s club” by effectively ruling out the active participation of developing countries in shaping the tax reform agenda. Developing countries’ communication channels with the OECD process are restricted to the UN, the Task Force on Tax and Development, and the OECD Global Relations Programme, which the OECD says will provide “useful insights” and a “useful platform” for “the particular concerns of developing countries”.
Restricting developing country participation to these separate venues should not be confused for equal participation in the OECD’s decision-making process. The UN Tax Committee in particular needs to be strengthened to participate more fully as representative of a broader group of countries. It should operate on a par with the OECD and G20, to counter not just the influence of rich nations but lobbyists representing powerful corporations.
“In poor nations we are largely failing to capture tax revenue from major international corporations which should be harnessed to ensure better social and economic opportunities for citizens”, said Mosioma. “This is why the current OECD reform process needs to include at its heart serious representation from developing nations rather than keeping them to the margins. That developing countries are kept out of this key process runs the real risk of further entrenching global inequality.”
Loopholes and Technicalities
The OECD has correctly identified the myriad loopholes and technicalities that allow multinationals to avoid taxation in developing countries and rich nations alike.
Indeed, the international system is so full of loopholes that the problem of base erosion and profit shifting has become systemic. Multinationals’ separate entity arrangements allow global companies to use their subsidiaries to seamlessly book their profits through secrecy jurisdictions, instead of being taxed where revenues and economic activity accrue. This is why it is disappointing that the OECD has ruled out exploring alternatives to the current arm’s length principle of international taxation.
That said, we are encouraged by the OECD’s suggestion that “special measures, either within or beyond the arm’s length principle, may be required with respect to intangible assets, risk and over-capitalisation to address…flaws.”
Lack of Independent Research
The FTC, along with journalists and other campaigners, has been for many years drawing attention to the broken international tax system, and calling for independent research into viable alternatives that would more effectively prevent tax evasion and aggressive tax avoidance. We are researching alternative models, but the OECD must stop outsourcing its responsibility to research alternatives. The OECD itself concedes the need for more research in the report, noting that it is “unclear that the behavioural changes companies might adopt in response to the use of a formula would lead to investment decisions that are more efficient and tax-neutral than under a separate entity approach”.
“It is disconcerting that the OECD is sticking to papering over the cracks of an old, failed tax model. In all likelihood, this will continue to allow multinational businesses to shift profits though their complicated network of tax haven based subsidiaries, rather than actively explore alternative systems,” said Mr. Mosioma.
United States: Dietlind Lerner: +1 202 577 3455
Europe: Nick Mathiason: +44 (0) 77 99 348 619