One of the biggest agendas worldwide, featuring in numerous international summits, is the prevention of aggressive tax avoidance. Though, developing countries are being excluded from the decision-making process.
Meetings were held discussing measures to combat what is known as base erosion and profit shifting (BEPS) by multinational corporations.
BEPS schemes can be very complex, but the aim is simple: companies shift profits across borders to low or no-tax jurisdictions to avoid paying higher tax rates in the country where the profit is made. A number of multinational corporations have been accused of using these methods, which are permissible within existing national laws.
An Action Plan – which aims to provide governments with global solutions for addressing BEPS, in order to create a more progressive international tax system that requires multinationals to pay their fair share of tax – was proposed. Profit-shifting and tax abuse by multinational corporations deprives developing countries of the resources needed to combat poverty. The international corporate tax system is outdated, unfair and will continue to cost developing countries tens of billions of dollars in lost revenues each year unless it is completely overhauled, a coalition of charities and civil society organisations have warned. Tax abuse by multinational corporations increases the tax burden on other taxpayers, violates the corporations’ civic obligations, robs developed and developing countries of critical resources to fight poverty and fund public services, exacerbates income inequality and increases developing country reliance on foreign assistance, the CSO argues.
On a more basic level, it adds, the tax policies of one country can have a dire effect on other countries’ ability to raise taxes that could be spent on education, healthcare and safe roads.
The report calls for the abolition of the separate entity principle, arguing that it allows huge multinational companies to dodge their tax obligations by presenting their operations in different countries as completely independent of one another. The principle permits them to shift their profits to countries with low or zero tax rates – and to move their losses into countries where taxes are higher.
The primary enabler of international corporate tax abuse is the separate entity principle – a legal fiction that enables the flow of vast amounts of taxable income away from the underlying business operations.
It is believed the only effective way to stop this abuse is to treat multinational corporations as single and unified firms and divide the taxable profits between the countries where the income generating activities are located. If multinational corporations were taxed as single and unified firms, there would be no transfer pricing because global corporate profits would be consolidated, and thus no profits would be gained or lost through intra-company transactions.
While each country is responsible for its own tax system, no country is unaffected by the tax system of others. In addition to evaluation of the effectiveness of tax preferences, countries should also examine spill overs caused by their tax preferences for multinational corporations.
A recent report by the United Nations Conference on Trade & Development (UNCTAD) estimated that profit-shifting by multinational companies costs developing countries 100 billion dollars a year, with Ethiopia among those that have lost corporate income tax. Another report, by IMF researchers, estimated that developing countries may be losing as much as 213 billion dollars a year to tax avoidance.
To fund the fight against poverty and to tackle worsening extreme inequality, we need action to ensure big companies pay their fair share in the world’s poorest nations.
Ethiopia has recorded a growth in tax revenues in recent years. Meanwhile, reports indicate that it continues to lose revenue to tax fraud, with tax contributions to its GDP standing at around 13pc. This is below the sub-Saharan average of close to 16pc.
“Our tax collection has not yet reached the level it should be based on what our economy is currently generating; it needs a special effort,” the premier said, some time back.
Developing countries tend to be the hardest hit by tax avoidance by multinational corporations. The main reason being that developing countries are more reliant on corporate tax than developed countries.
According to anti-poverty organisation Action Aid, corporate income tax comprises a significant share of tax receipts in low and lower-middle income countries.
Many of these countries also rely on foreign aid and grapple with poverty. But despite being the hardest hit by tax avoidance, there are concerns that the poorest countries do not have an equal say on the BEPS process.
To prevent secrecy, we need transparent systems so tax authorities can ensure that all the tax due is paid. In line with this, the Organisation for Economic Cooperation and Development (OECD) is working intensively to establish robust international standards of transparency for financial transactions. Through the Global Forum on transparency and exchange of information for tax purposes, which now has 134 members, all member countries – both developed and developing – access the huge benefit of greater transparency. For example in 2013, the South African Revenue Service collected 62 million dollars through a settlement from one taxpayer based on information obtained through this standard. Panama, on the other hand, together with a few other countries, is reluctant to commit to the same rules as the rest of the international community.
But openness only on request is not always good enough. Two years ago, the G20 group agreed on the automatic exchange and transfer of information on bank deposits and other financial accounts. Almost 100 countries and jurisdictions have now promised that they will not only give out banking information if someone asks, but will do it automatically. While international financial centres have agreed to do this, Ethiopia needs to step forward to benefit from this progress in tax transparency.
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