New Oxfam report highlights flaws in Tax Reform Led by OECD

May 6th, 2014

oxfamOxfam released a new report last Thursday claiming there are a number of flaws with the Organization for Economic Co-Operation and Development‘s (OECD) plan to implement global tax reforms. The project, known as the Action Plan on Base Erosion and Profit Shifting (BEPS), attempts to address profit shifting, a process in which corporations move profits to subsidiaries in low-tax jurisdictions to avoid paying taxes where the profits were actually generated.

Often, the countries in which the real profits were made are developing countries with higher corporate tax rates. Many of these countries desperately need the tax revenue, which is rightfully theirs, to fund infrastructure, education, and health initiatives.

The report levies a number of grievances with the OECD’s process, including a charge that developing countries have not been consulted enough, and aren’t being given a fair seat at the negotiating table, though they are, perhaps, among those most adversely affected by profit shifting schemes.

From the report:

While G20 action to address corporate profit shifting and base erosion is a step in the right direction, the BEPS Action Plan has an inherent and fundamental flaw: countries that are not members of the OECD and G20 are effectively barred from the process of deciding the new rules. Excluding at least four-fifths of the world’s governments from the process of developing a new ‘multilateral instrument’ not only runs the risk of remaining mired in the same power dynamics that have produced the current unfair system, but is also deeply iniquitous. Despite strong evidence that profit shifting occurs more in non-OECD countries than in OECD countries, they will not be represented at the negotiating table. As a result, any agreement will inevitably continue to serve the interests of the most powerful and engaged countries.

While the OECD did hold regional consultations with developing countries, Oxfam says that these meetings may not impact the overall direction of the BEPS action plan:

It is not clear how the conclusions from these consultations will be taken on board. Clearly, these regional consultations should not be one-off events. Moreover, these meetings were not representative enough: there were more participants from OECD/G20 countries than non-members at the consultation in Seoul. Poor participation was not due to lack of interest, but limited capacity in terms of human and economic resources and limited budget for travel costs, for example. In a country such as El Salvador, the international tax department is still in its infancy and only has one full member of staff, who is fully occupied with administering new legislation on transfer pricing.

But in addition to simply pointing out flaws in the OECD process, Oxfam also cites forthcoming research from Alex Cobham, a tax expert with the Center for Global Development, and economist Petr Janský, that attempts to estimate new tax revenue that would be generated if multinational corporations were taxed in the countries where their profits were actually earned:

If multinationals were taxed in countries where real economic activity takes place, then corporate tax revenues in some developing countries could increase by more than 100%.

Cobham and Janský’s figures, which look at misalignment between US multinational activity and profits and the potential impact for development, reveal that under more progressive corporate taxation rules the Philippines would see a 75% increase in their multinational corporate tax base, Ecuador a 99% increase, South Africa a 106% increase and India’s tax base would go up by over 180%. Honduras would see their tax base boosted by a massive 400%.

For poorer countries it is impossible to calculate the potential levels of tax income increases, which shows how poor the systems are for data collection and how high the levels of tax secrecy. But it is likely they would also stand to gain by significant margins.

Through a more inclusive decision making process, the global BEPS reform could work for all countries, those in the developing world and those in places like Europe and the US. 

Written by Christian Freymeyer

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