SYDNEY AND KUALA LUMPUR, June 21 (IPS) – After decades of rejecting international tax cooperation under multilateral auspices, rich countries have finally agreed. But, insisting on their own terms, the progressive corporate tax remains far away.
Tax avoidance and evasion by transnational corporations (TNCs) is facilitated by a “tax shelters“- very low jurisdictions” effective tax rates. Intense competition between developing countries to attract foreign direct investment (FDI) is making matters worse.
Minimum minimum rate
TNCs use loopholes to avoid or minimize tax liabilities. Such practices are called “base erosion and profit shifting” (BEPS).
Tax havens together cost governments $ 500-600 billion annually in lost income. Low-income countries (LICs) will lose about $ 200 billion more than the foreign aid of about $ 150 billion they receive annually.
Corporate tax represents 15% of total tax revenues in Africa and Latin America, compared to 9% in OECD countries. Developing countries’ greater reliance on this tax means they suffer disproportionately more from BEPS.
The GMCTR requires TNCs to pay tax on their global income. This discourages the concealment of profits in tax havens. The Independent Commission for the Reform of International Corporate Taxation (ICRICT) recommends 25% GMCTR.
This percentage of 25% was around the current one Average corporate tax rate, weighted by GDP for 180 countries. Slightly below the OECD average, much lower than the average for developing countries. So a GMCTR below 25% implies large revenue losses for most developing countries.
To undo President Trump’s 2017 tax cuts, the Biden administration proposed in April 2021 to tax foreign corporate income by 21%. In June, The G7 agreed up to 15% GMCTR approved by G20 finance ministers in July. This bad percentage of the G7 is now sold as “innovative“Tax deal.
The OECD also wants to distribute tax rights and sales revenue rather than where their goods and services are produced. Critics, including The economist, pointed out that the big rich economies will gain the most. Small and poor emerging economies, especially those that host TNC production, will lose.
The OECD’s proposals could decrease small emerging economies (SDEs) tax bases by 3%while four-fifths of revenue is likely to go to high-income countries (HICs). Therefore, developing countries prefer the distribution of income by contributing to production, such as employees, rather than sales.
Developing countries have never had a significant say in international tax matters. G20 members had to ask multilateral organizations, such as the United Nations and the IMF, which the G7-dominated OECD has long blocked.
Instead, the G20 BEPS initiative asked the OECD to develop its own rules. After decades of keeping developing countries out of tax administration, his compromise Including frame for BEPS (IF) promotes unilateral international tax cooperation.
Developing countries were included only “after the agenda was set, the action points were agreed, the content of the initiatives was decided and the final reports were presented”.
Developing countries are allowed to engage with OECD and G20 members, ostensibly “on an equal footing“To develop some BEPS standards. To become a member of IFa state or jurisdiction must first commit to the outcome of the BEPS.
Thus, non-OECD non-G20 countries need to impose a policy framework in which they have played a small role in development. Not surprisingly, with little real choice or vote, the 15% GMCTR was agreed in October 2021 by 136 of the 141 IF members.
FDI against taxes
The proposed OECD tax reforms are expected to be implemented by 2023 or 2024. The Investment Division of the United Nations Conference on Trade and Development (UNCTAD) acknowledges that there will be main consequences for international investment and investment policies affecting developing countries.
of UNCTAD World Investment Report 2022 on International Tax Reform and Sustainable Investmentoffers guidance for politicians in developing countries to navigate complex new rules and adjust their investment and fiscal strategies.
Committed to fostering investment in the real economy, especially through FDI, UNCTAD recognizes that most developing countries do not have the technical capacity to deal with the complex tax proposal. Implementing BEPS reports and related documents through legislation will be difficult, especially for LICs.
Existing commitments under investment contracts also limit fiscal policy reform. “The effects on tax revenues for developing countries of restrictions imposed by international investment agreements (IIAs) are a major cause for concern,” Report notes.
Although tax regimes influence investment decisions, tax incentives are far from the most important factor. Other factors – such as political stability, legal and regulatory environment, skills and quality of infrastructure – are more important.
However, tax incentives are important for promoting FDI. Such incentives include, inter alia, tax holidays, accelerated depreciation and “loss carry-forward‘provisions – reducing tax liabilities by allowing past losses to offset current gains.
With the GMCTR, many tax incentives will be less attractive to many FDI. Tax incentives will be affected to varying degrees depending on their characteristics. UNCTAD estimates that productive cross-border investment could fall by 2%.
Therefore, politicians will need to reconsider their incentives for both existing and new investors. The GMCTR may prevent developing countries from offering fiscal incentives to encourage desired investment, including incentives for location, sector, industry, or even job creation.
With usually lower rates,supplementary taxes“Can significantly increase the revenue of SDEs.” Supplementary taxes will apply to profits in any jurisdiction where the effective tax rate falls below the minimum rate of 15%. This ensures that large TNCs pay a minimum income tax in each jurisdiction in which they operate.
However, host countries may be prevented by the IIA – in particular the Investor State Dispute Settlement (ISDS) provisions – from imposing “additional taxes”. If so, they will be imposed by the predominantly rich “countries of origin” of TNCs.
In this way, FDI host countries will lose tax revenue without benefiting from attracting more FDI. Existing CIS – the type found in most developing countries – is likely to be problematic.
Therefore, the implications of the GMCTR are very important for FDI promotion policies. Reduced competition from low-tax areas may benefit emerging economies, but other consequences may be more appropriate.
As FDI competition relies less on tax incentives, developing countries will need to focus on other determinants, such as a skilled labor supply, reliable energy and good infrastructure. However, many cannot afford the significant advance financial commitments needed to do so.
Many important details of the necessary reforms still need to be clarified. In this way, developing countries need to strengthen their cooperation and technical capabilities in order to negotiate more effectively the details of the GMCTR reform. This is crucial for “loss reduction” in order to minimize the regressive consequences of this supposedly progressive tax reform.
IPS UN Bureau
© Inter Press Service (2022) – All rights reservedOriginal source: Inter press service