Leaders from across the developed world have been talking tough about corporate tax dodging since the financial crisis and a spate of high profile tax scandals pushed the issue onto the front pages. In a reassuring move, the G20 stepped up and initiated the Base Erosion Profit Shifting (BEPS) project, led by the Organization for Economic Cooperation and Development (OECD). Sadly, the BEPS action plan endorsed by G20 Finance Ministers today in Lima, looks set only to apply a sticking plaster to a gaping wound.
On the positive side, the BEPS package of measures could signify a start on the path to creating a coherent and fairer international corporate tax system. They do strengthen some existing rules and provide tax authorities with better tools to identify corporate tax cheats; if they have the capacity to use them. More disappointingly the package of measures patches up the existing rules, making them more complex and in many cases contradictory.
Nonetheless, BEPS was flawed from the outset. Its scope was too parochial, largely representing – and serving - the interests of the world’s richest economies. It is no surprise that G20 and OECD countries craft tax reforms to achieve national objectives – governments are wired to negotiate to safeguard their economic interests. The stakes are high when negotiations are to settle how to share valuable corporate tax revenues; while at the same time protecting profit margins for influential multinational companies.
But the international corporate tax system has global coverage and determines the allocation of tax corporate tax revenues to all countries. Yet the majority of developing countries – representing two thirds of the world’s governments - had no formal role in the negotiating process. As a result the OECD’s agenda fails to address many issues of critical importance to developing countries. BEPS will not stop the use of tax havens, which cost developing countries an estimated US$100 billion in tax revenues each year. And will not force companies to pay tax where they do business – tackling this issue would enable a country like Honduras to quadruple its corporate tax base.
Revenue loss from businesses dodging their tax payments harms poorer economies most, as corporate tax revenues comprise a higher proportion of their national income. Yet their tax administrations have limited capacity to track down and reclaim the taxes owed to them, and – significantly - the skewed international tax rules require corporates to pay the bulk of their taxes in rich countries. On average, it is estimated that Latin American countries are losing half of their potential corporate tax revenues because of corporate tax avoidance.
The package of reforms will not prevent another Lux Leaks type scandal. A number of harmful tax regimes that contributed to the Lux leaks and other well-known scandals are allowed to remain in place until 2021. This includes the provision of overly generous and unproductive tax incentives such as the innovation box - a form of unfair tax relief for companies basing intangible assets (patents, copyrights, trademarks etc) in a low-tax country. These types of schemes create a race to the bottom between nations that compete for business by offering low tax incentives, which are often nonetheless unproductive. Tax incentives cost the Sierra Leone government 59 percent of its entire budget in 2012.
Oxfam is calling for a second generation of tax reform which includes all countries on an equal footing and all relevant international organizations, such as UN agencies, IMF, and World Bank, to urgently address the key problems that have not been tackled or adequately responded to by the G20 and its members through the OECD process. Only then will we have an international tax system which works in the interests of the majority – not the few.