The OECD has through the BEPS initiative, proposed a global tax reform that significantly favours rich countries. The hopes and expectations were that the reform could lead to an increase in tax bases for all countries, but it turned out to be the opposite. By not apportioning profits based on where they make sales and have employees, the OECD has once again proven that it does not provide equal opportunities for all countries.
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When the OECD/G20 initiated the Base Erosion and Profit Shifting (BEPS) project, a major criticism was that the OECD was an organization of about 36 countries and hence did not have the mandate to reform a global tax governance architecture that would represent the needs of all countries. Some sceptics were of the view that they are a group of rich countries proposing solutions to a problem largely perpetrated by multinational companies from these same OECD countries, and therefore likely to be influenced by the various positions of multinational companies and influential members of the group. Many Tax Justice campaigners called for a UN led proposal to address global tax governance.
One would have thought that the OECD/G20 inclusive framework initiative, that allows the participation of more countries (currently 130 countries) in the fight against BEPS, would have provided an equal opportunity for both developed and developing countries to get their proposals across. Critics didn’t think so. That shows in the criticisms they faced in some of the policy proposals they put forward. The Multilateral Framework Convention of the OECD in 2017 was criticised as a document developed significantly by rich countries, that developing countries only had been called to sign onto. The concern was that ultimately, an OECD reform would benefit mostly rich countries and may be influenced by multinational companies.
It is therefore no surprise that a reform proposal put forward by the OECD under the BEPS 2.0 initiative, to address the challenges of taxing multinational corporations in the digital era, favours significantly rich countries. The proposal, analysed by the Independent Commission for the Reformation of International Corporate Taxation (ICRICT), makes the shift to favour rich countries so glaring (find the report here). The expectations were that the reforms could lead relatively, to an increase in tax bases for all countries, reduce corporate profits in tax havens, and apportion multinational profits according to where they make sales and where they have employees. That was not the case.
Daniel Bertossa PSI Assistant General Secretary
“If it is good enough for multinational corporations to locate their production facilities in the developing countries, then they should at least pay the workers a decent wage and pay taxes in the countries they are benefitting from."
Unfortunately, the OECD ditched developing countries on this very important agenda. For developing countries who derive significant amount of tax revenue from corporate income tax, this is a further indication that the OECD/G20 initiative does not provide equal opportunities for all countries. In an analysis of the OECD reform proposal, in comparison with that proposed by Tax Justice campaigners (Tax Justice Network, Public Services International, ICRICT etc) and the IMF, it was discovered that:
The OECD proposal will reduce corporate profits in tax havens by 5%. Of the savings made, 80% will go to mostly OECD or rich countries; middle income countries get nothing, and low-income countries get their gains shrunk by 3%. An IMF proposal will reduce corporate profits in tax havens by 43% while tax justice campaigners’ proposal will reduce it by 60%.
The OECD proposal will grow the tax base of rich countries by $5billion, G24 countries by $0.7billion and G77 countries by $0.3billion. Compared with the proposal put forward by the IMF and tax justice campaigners, rich countries tax base will increase by $27billion, G24 countries will increase by $29billion and G77 countries will increase by $19billion.
When the OECD could make a bold step in dealing with the arm’s length principle and how to tax multinational companies as single entities, it left much to be desired. The OECD and IMF proposal would tax a corporation and its subsidiaries as one entity and share tax liabilities according to the countries they operate in. The problem lies in how the profits are apportioned. The OECD proposes that the profits are apportioned according to where a multinational makes sales, against a proposal by tax justice campaigners and G24 countries which apportions profits based on sales and employees in a country. On the OECD proposal developing countries and their workers stand to lose. This is because developed countries have relatively small markets and so sales in these countries would be small as compared to developed countries with large markets and significant consumption levels; and have a significant part of their economy dependent on the exports of natural resources. The G24 countries propose apportioning profits based on a balanced formula that involves sales, employment and natural resources. This provides a fair deal for developing countries and their workers. By including employees, the taxing rights of marketing economies and producer countries are taken care of. The OECD must make the benefits of its tax reform proposal inclusive to reflect the demands of all parties, including G24 and G77 countries.