A tracker for the new UK government’s tax commitments

The new UK government comes to power with what is probably the most ambitious package of international tax commitments of any elected party, anywhere, ever.

And Prime Minister David Cameron has been absolutely explicit that they will deliver on their promises.

So, in the spirit of public service, and of this blog in making sure things don’t go uncounted, here’s a cut-out-and-keep guide to each of the three main commitments on international tax and transparency, and some proposed measures of progress.

Commitment 1: We will lead international efforts to ensure global companies pay their fair share of tax

  1. External analysis of UK positions in OECD BEPS initiative
  2. Evaluation of UK policies in BEPS areas
  3. Evaluation of BEPS outcomes (BEPS Monitoring Group)
  4. Progress in reducing BEPS (tracked by BEPS 11 or alternatives if this Action Point itself fails)

Commitment 2: We will review the implementation of the new international country-by-country tax reporting rules and consider the case for making this information publicly available on a multilateral basis

  1. Review takes place
  2. Review engages seriously with views of multilateral partners, especially EU where discussion is currently ahead of UK
  3. Review findings are well supported by evidence on costs and benefits of publication

Commitment 3: We will ensure developing countries have full access to global automatic tax information exchange systems

  1. UK provides full access to developing countries
  2. UK ensures its territories and dependencies provide full access to developing countries
  3. UK works to ensure other leading economies and financial centres provide full access to developing countries
  4. Extent to which each developing country ultimately has access to automatic tax information exchange (e.g. % of world GDP, or share of global financial services exports, of those providing information to each country)

cons manifesto-tax 2015

The politics of country-by-country reporting

Since the OECD approved a decent country-by-country reporting standard, the lobbying to undermine it in practice has really kicked on. Here’s an update on some of the politics of country-by-country, including the manoeuvring in OECD, US, EU and UN processes; and on what may follow…

OECD

First, the OECD standard for country-by-country reporting is pretty good – probably all that could have been hoped for in the context of a process designed to defend arm’s length pricing.

As I wrote last week, though, and the Financial Times (£) picked up, the standard has been strangled at birth by the changes to BEPS Action Point 13. Lobbying on implementation has very substantially eroded the potential value of the measure, because data:

  • will only be provided directly to home country tax authorities;
  • will only be shared with other tax authorities under slow and uncertain information exchange processes; and
  • will never be made public.

I miss the old days, when country-by-country reporting was a transparency measure…

These deliberately inserted weaknesses mean that most tax authorities (especially but not only those of developing countries) will not receive timely data (i.e. within the tax year under investigation) for most of the MNE affiliates in their jurisdiction; and there will be no greater possibility of civil society holding tax authorities or MNEs to account.

In addition, the erosions of the standard mean there will be no central repository or access mechanism for the data. This means that the OECD has, in effect, agreed to fail to meet its commitment under BEPS Action Point 11 – which requires the establishment of a baseline for the extent of profit-shifting, and the tracking of progress over time. The very good team working on BEPS 11, who have comprehensively shown how no existing data can do the job, appear to have been completely undermined.

US

US MNEs have been highly effective in their lobbying, but evidence of serious, remaining concerns emerged last week. In a joint letter to Treasury Secretary Jack Lew, the chairs of the Senate Finance Committee and the House Ways and Means Committee (Republicans Orrin Hatch and Paul Ryan, respectively) set out a range of concerns about the BEPS process – and make a fairly explicit threat to take a different path from the administration:

Regardless of what the Treasury Department agrees to as part of the BEPS project, Congress will craft the tax rules that it believes work best for U.S. companies and the U.S. economy… We expect that as we move forward on U.S. tax reform, U.S. tax policy will not be constrained by any concessions to other nations in the BEPS project to which Congress has not agreed.

It is the specifics which are most revealing. While there are passing references to rules on permanent establishment and controlled foreign companies, the bulk of the text refers to concerns over country-by-country reporting.

[W]e are concerned about the country-by-country (CbC) reporting standards that will contain sensitive information related to a U.S. multinational’s group operations.  We are also concerned that Treasury has appeared to agree that foreign governments will be able to collect the so-called “master file” information directly from U.S. multinationals without any assurances of confidentiality or that the information collection is needed. The master file contains information well beyond what could be obtained in public filings and that is even more sensitive for privately-held multinational companies.  […]

Some recent press reports have indicated that the Treasury Department believes it currently has the authority under the Internal Revenue Code to require CbC reporting by certain U.S. companies and that Internal Revenue Service (IRS) guidance on this reporting will be released later this year. We believe the authority to request, collect, and share this information with foreign governments is questionable. In addition, the benefits to the U.S. government from agreeing to these new reporting requirements are unclear, particularly since the IRS already has access to much of this information to administer U.S. tax laws. Therefore, we request that, before finalizing any decisions, the Treasury Department and IRS provide the tax-writing committees with a legal memorandum detailing its authority for requesting and collecting this CbC information from certain U.S. multinationals and master file information from U.S. subsidiaries of foreign multinationals.  We also request that you provide a document: (i) identifying how the CbC reporting and other transfer pricing documentation obtained by the IRS on foreign multinationals operating in the United States will be utilized, and; (ii) providing the justification for agreeing that sensitive master file information on U.S. multinationals can be collected directly by foreign governments.  In the event we do not receive such information, Congress will consider whether to take action to prevent the collection of the CbC and master file information.

The push is on to prevent even the OECD’s now limited, and probably unworkable mechanism to provide CbC information to non-US tax authorities.

EU

Meanwhile… the European Commission’s repeatedly trumpeted new package on tax avoidance has been leaked, and falls substantially this side of impressive. On CbC in particular, prevarication around public data continues – now with a proposed consultation.

Similarly, the UK government reiterated at a conference on Friday its manifesto commitment to consider the possibility of public CbC.

The European Parliament will debate the issue again on 7 July, with a possible vote to follow, and so this now becomes a major test.

UN process

Finally, it seems that public CbC has been excised from the latest draft of the draft Financing for Development text for the UN conference to be held in Addis, in July, leaving a line on CbC for tax authorities which adds nothing to the OECD position. Sigh.

Where does this leave us?

Is this the end for hopes for CbC as a meaningful international transparency and accountability measure? I don’t think so.

What has already been achieved, lest we forget, is the overcoming of what was always presented as the greatest obstacle: compliance costs. Aside from the possibility of US withdrawal, the OECD standard pretty much locks in the collation of the necessary data, by more or less all MNEs worldwide.

The claims around costs were always inflated (who remembers one of the big four accounting firms suggesting it could add 25% to their bill?), and so once the political tide turned the objection did not hold much water.

And this is why, of course, the US letter reflects a shift towards the real underlying issue: an objection to transparency itself. An interesting though unexpressed implication of the concern is that US MNEs are apparently willing to operate in multiple jurisdictions where they would not trust the authorities with even quite basic data about their global operations.

An alternative view, of course, is that US MNEs are aware of the potential for such data to lead to material changes in their effective taxation rate, in multiple jurisdictions and perhaps at the global level too.

(In fact ongoing research suggests that the US is such a big loser from the profit-shifting of its own MNEs, that BEPS success in reducing profit ‘misalignment’ would produce substantial additional revenues there – as well as in many other jurisdictions. It’s arguably a real mark of lobbying success that there hasn’t yet emerged an all-conquering coalition of countries in favour of much deeper change.)

What happens next in the politics of country-by-country?

Are we approaching that point where the anti-transparency lobbying has been so successful that supporters should give up? Or once this becomes clear in practice, might one or more host countries simply demand CbC data directly, starting the crucial leak in the dam?

Such a move might well circumvent the OECD caveat around not using the data for formulary apportionment, which would open up all sorts of interesting further possibilities.

Or will the EU resist the lobbying and go for public CbC? This would not only set a standard for others, demonstrating the absence of armageddon-level side-effects and also undermining any ‘competitive’ arguments for opacity.

It would also, on its own, provide a great deal of the globally relevant data for other tax authorities and civil society to use. Expect 3 weeks of (more) intense lobbying…

One way or another, the current period is likely to mark an important turning point in international tax transparency.

The weakening of the OECD standard in practice has been a resounding counter-strike against transparency. The question is whether that remains the story – or if it is overturned at the European level, or incrementally by individual countries.

A final thought: not too much has been heard in these moments from the private sector  advocates of transparency. Whether the likes of Paul Polman, head of Unilever, who has called explicitly for MNEs to pay tax where they do their business; or from investors and analysts who have identified the risks of tax opacity increasingly clearly; or from professional services firms including some of the big four accounting firms, who seemed to have identified the advantages of country-by-country. Now would seem like a good time…

OECD country-by-country reporting: Strangled at birth

Update: this post featured in passing in a Financial Times interview with OECD tax chief Pascal St-Amans. (Spoiler: he’s more optimistic than I am.)

This is a bad day for international tax transparency, and for those who steered the great G8 agreement through in 2013.

The OECD has released details of how the standard for country-by-country reporting by multinationals will be implemented. The short answer is: to the minimum possible benefit of developing countries.

The slightly longer answer, drawing on the details of the package, is that the agreement on this important measure to provide transparency and limit the extent of unashamed profit shifting, has been diluted in such important ways that, as Richard Murphy has blogged, means that it will not meet the remit given to the OECD by the G8 group of countries in 2013.

Major issues include the large exclusions (a threshold of EUR 750m in annual turnover), but most importantly the hamstringing of effective transparency. Data will only be collected by host countries, and then exchanged through bureaucratic, formal processes where the necessary inter-state instruments exist.

The effect is to exclude many developing countries which will not have such instruments in place with home countries of the multinationals they host; and to ensure the impossibility of timely information provision in the other cases, meaning that tax authorities will not have the data during the tax year they might wish to investigate.

While this clearly increases uncertainty for multinationals, the lobbying for this outcome may reflect a belief that in many case tax authorities simply won’t bother to ask for, or to use belatedly, any information that is eventually provided.

In addition, there will be no sharing of the data in a common database or IATI-type registry, so it will be impossible for OECD or other international experts to use the data – as I’ve written would be required for BEPS 11, for example – in order to track progress in reducing multinational tax avoidance.

And, ironically or otherwise, the US and UK are apparently behind the high exclusion threshold – because of a claim to be worried about the administrative costs, as home countries for many multinationals. So: exclude any good mechanism for info-sharing, and then use the costs that result as a justification to limit the amount of data actually available. Well done chaps.

So, what is almost certainly the greatest multinational corporate transparency measure to be agreed by international policymakers in recent decades, has been strangled at birth.

The OECD’s country-by-country reporting mechanism, unless there is a dramatic late change, will not provide the information for developing countries (and many others) to reduce multinational corporate tax-dodging effectively. Nor will it allow national or global progress to be monitored or evaluated.

But – the lobbyists against effective tax transparency may want to hold off a while on their celebrations. Such is the extent of their success that in most developing countries, from a transparency point of view, it will simply be business as usual.

By which I mean, the transparency will be minimal and so too will many of the MNE tax payments. So this doesn’t seem likely to be the end.

It’s not hard to imagine that some developing countries at least will simply cut out the middle man, by demanding the country-by-country information directly from the MNEs they host. And perhaps even publishing it, who knows? Not to mention thinking about using it for formulary apportionment approaches. All these things which were safely excluded from the OECD approach by successful lobbying, might come back on the table at the national level…

International commission calls for corporate tax reform

When we look back, might today be the day that momentum swung decisively against current international tax rules? An independent commission made up of leading international economists, development thinkers and tax experts (see graphic) has called for a radical overhaul of international rules for corporate taxation.   ICRICT declaration commissioner stirip

There are six main recommendations, set out below. Taken together, it’s possible that they will provide the basis for the kind of comprehensive reworking of tax rules that the G20 and G8 signally failed to deliver when they allowed the OECD mandate on BEPS (corporate tax Base Erosion and Profit-Shifting) to be watered down to a tweaking of the current system. Here’s the start of the Commission’s press release:

Trento, IT – Today, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) launched a global declaration calling for an overhaul of the outdated international corporate tax system and demanding broad, sweeping changes in the current rules and governing institutions. The declaration will be discussed later today by a panel of ICRICT commissioners at the Trento Festival of Economics in Trento, Italy beginning at 5pm CET.

“Multinational corporations act and therefore should be taxed as single and unified firms – It is time for our leaders to be bold and recognize the legal fiction of the separate entity principle,” said Joseph Stiglitz, professor and Nobel Prize winning economist. “During the transition, leading developed nations should impose a global minimum corporate tax rate to stop the race to the bottom.”

So far, the media coverage has been impressive – from Handelsblatt, La Repubblica and Le Monde, to Reuters, CNN and the Wall St Journal. With the launch event about to get underway, more is likely to follow. [Update: more in the Guardian – thanks Rhiannon, and a cracking write-up in the Financial Times.]

Drawing on expert consultations held in New York in March this year, the ICRICT Declaration (pdf) contains recommendations for reform in six areas:

  1. Tax multinationals as single firms
  2. Curb tax competition
  3. Strengthen enforcement
  4. Increase transparency
  5. Reform tax treaties
  6. Build inclusivity into international tax cooperation

I can only recommend reading the full piece, but a few points stand out.

  • Unitary taxation: States should ‘reject the artifice’ of current separate accounting, and tax MNEs as a single unit, apportioning profit among the jurisdictions in which they operate according to the relative scale of their economic activity in each.
  • Public country-by-country reporting: States should make country-by-country reports (of MNEs’ economic activity, profits and tax) available to the public within 30 days of filing.
  • Public beneficial ownership: states should include the names of ultimate beneficial owners (the warm-blooded type) in public corporate registries.

Following the IMF paper showing how developing countries appear to lose around three times as much revenue as OECD members (1.7% of GDP, or more than $200 billion), the pressure is really on the BEPS process to deliver wider progress.

At present, despite the best efforts of OECD staff working on Action Point 11, it remains unclear if the final BEPS recommendations will include even sufficient transparency measures to allow the tracking of progress.

Politically, it seems that there was a victory before BEPS began for those who did not wish to see the rules opened up more widely; and some further success within the process, not least in terms of preventing (thus far) public reporting of country-by-country disclosures.

But if leading opinion continues to sway towards seeing the current approach as part of the problem, and the resulting process opens up the entire basis of international tax rules, it may turn out to have been a pyrrhic victory indeed.

Full disclosure: TJN is one of the organisations that helped to establish ICRICT, and I’m a member of the preparatory group – but nobody should imagine the commissioners have anything but carefully developed personal views on these issues. 

Tax Justice Research Bulletin 1(5)

May 2015. Welcome to the fifth Tax Justice Research Bulletin, a monthly series dedicated to tracking the latest developments in policy-relevant research on national and international taxation. (Full version coming over at TJN, naturally!)

BEPS 13 comment letters - Corlin Christensen fig16This issue looks at a fascinating thesis on the different people and organisations that influence the OECD revision of corporate tax rules; and a new analysis from the IMF on the scale of corporate profit-shifting, with particular attention to developing countries’ revenue losses. The Spotlight falls on the Financial Secrecy Index, which has just been published in Economic Geography.

This month’s backing track, suggested by Nick Shaxson, goes out to free-riders everywhere: ‘Paid in Full’:

Just one thing to flag this month – the imminent launch of the report of the Independent Commission on Reform of International Corporate Taxation (ICRICT).

I can’t say for sure what Joe Stiglitz and colleagues (economists, tax folks and others) from around the world will have made of their analysis of current tax rules, but it can only be useful to have a high-level, critical expert intervention. Those closed circles of tax professionals may be useful for channeling a certain policy convergence, but perhaps less so for the kind of wider thinking that may be needed.

As ever, submissions for the Bulletin, including musical offerings, are most welcome.

Tax professionals: Who makes the international rules?

From the Tax Justice Research Bulletin 1(5).

Last month, TJRB 1(4) looked at the OECD’s review of research on base erosion and profit-shifting (BEPS) by multinational enterprises (MNEs). That review revealed a dearth of findings in a number of areas, as well as broad consensus on the importance of the problem. Untouched in that review, and little researched in generally, is the process by which policy on BEPS is made.

The historical record, back to the League of Nations and beyond, has been laid out by Prof. Sol Picciotto. Sol, one of our senior advisers, now leads the BEPS Monitoring Group, the hub for technical submissions to BEPS from civil society.  And the BEPS process itself has now been subject to a detailed process analysis, in a seriously impressive Copenhagen Business School Master’s thesis by Rasmus Corlin Christensen.

The main focus is on BEPS 13, which deals with transfer pricing documentation including country-by-country reporting (CBCR), and the findings reflect many interviews as well as analysis of submissions and consultations. The summary of literature, and detail of the methods, are well worth the time.
BEPS 13 comment letters - Corlin Christensen figs1-2Figures 1 and 2 show the simple range of submissions to BEPS 13, in terms of organisation type and geographical origin. There’s little surprise to find that less than 10% of submissions came from academia and civil society; and even less from South America, Africa and Asia combined.

Similarly, figures 3 and 4 confirm that business groups and professional services firms expressed preference for much more restricted transfer pricing documentation than did academia or civil society. Figure 5 shows tax practitioners with the greatest intra-group variation of views expressed, compared to other private sector groupings, with business lobbies the least; while academia provided the most varied range of views, and civil society the least. The latter point is perhaps unsurprising given the technical nature of the process (hence relatively limited engagement); and that BEPS 13 addresses an area in which civil society consensus has emerged over a decade or so. {Indeed, the content of BEPS 13 is in good part a product of successful influence by civil society in non-specialist, political processes, not least in the UK – but that would be a whole other study.}

BEPS 13 comment letters - Corlin Christensen figs3-5The analysis goes to a much more detailed level, tracing the paths of leading individuals in the process, identifying ‘professional competition’ as a key factor, where “influence in highly technical policy discussions is contingent upon expertise (being able to speak authoritatively) and networks (being listened to)… I distinguish two types of influential professional: career diverse professionals (“octopuses”) and well-connected specialists (“arrows”). The former are influential because of their varied expertise, the latter because they are respected through key tax/transfer pricing networks.”  In figure 16 (click to expand, as ever), the red dots indicate organisations with a ‘managing professional’ who is influential in the process.

BEPS 13 comment letters - Corlin Christensen fig16The full thesis contains a great deal more, including on the career paths of influentials. These are just some of the broad conclusions:

[A]nalysis of the BEPS Action 13 consultation shows that it was dominated by Western tax advisers and business representatives, that there was a general preference for a limited [transfer pricing documentation] package, and that there was significant variation in attitudes between similar participating organisations. Furthermore, the discussions were highly complex, requiring substantial technical expertise, and thus limiting the range of participating organisations… Looking at the pool of BEPS Action 13 professionals’ expertises, I find that while legal and private sector views are important in the reform, several other expertises are also relevant, signifying the need for varied expertise in order to obtain policy influence…

Finally, the significance of access to the right expertise and networks is visible in another articulation of professional competition in BEPS Action 13: lobby centres. Lobby centres are specific interest groups where different professionals and organisations collectively engage the policy process, spearheaded by one particular professional, who most often is influential. Peripheral professionals and groups without access will use this lobbying strategy to leverage the expertise and networks of influential professionals. This strategy highlights the importance of being able to access the right professional expertise and networks in order to make engage successfully in policy debates. However, this importance is not sufficiently recognised by the interest group literature, which emphasises organisational finances or issue attributes.

IMF: developing countries’ BEPS revenue losses exceed $200 billion

Update 1 October 2015: A revised version of the IMF paper has now been posted – see additional discussion at the bottom of this piece.

From the Tax Justice Research Bulletin 1(5).

For as long as there has been civil society attention to issues of tax justice, there have been calls for the international financial institutions to provide analyses of the scale of various aspects of the problem. Raymond Baker has been particularly heroic in pursuing the World Bank and IMF to produce estimates of illicit flows to complement or challenge those of Global Financial Integrity. Long-term leader among bilateral donors, Norway even managed to seal a deal with Robert Zoellick to pay for his World Bank to produce such an estimate – only for a senior Bank staff revolt led him to reverse course and deliver only a volume of work by outside authors.

While there are still no takers for estimates of the full breadth of illicit financial flows, the last year has seen a growing willingness to come up with big numbers for the scale of revenue losses due to the tax behaviour of MNEs. In addition to unpublished estimates by OECD researchers (I could tell you but…), UNCTAD have prepared an estimate that one type of tax dodge (thin capitalisation via a small number of opaque jurisdictions) resulted in the manipulation of declared returns in developing countries, producing a revenue loss of around $100 billion p.a. (see also the critique suggesting the estimate should perhaps be nearer $300 billion).

The IMF – where the sole leadership of the OECD in the BEPS process still rankles – has been increasingly active in this area. Its 2014 spillover analysis began by emphasising “the IMF’s experience on international tax issues with its wide membership”, and concluded with the finding that developing countries (i.e. those within the IMF’s remit but not the OECD’s) suffer from spillovers (i.e. tax losses due to behaiour of other jursidictions, and in particular revenue losses due to profit-shifting) that are “especially marked and important.”

In terms of the prospects for BEPS, the IMF was unequivocal: “At issue here are deeper notions as to the ‘fair’ international allocation of tax revenues and powers across countries (which current initiatives do not address)” (p.12); and “Current initiatives, which operate within the present international tax architecture, will not eliminate spillovers” (p.35).

Now researchers at the IMF’s Fiscal Affairs Dept (FAD) have published a new study. Where the 2014 paper relied primarily on data on US MNEs, the currrent analysis uses the internal FAD dataset on tax revenues (unpublished, but thought to be not a million miles, at least in the approach used, from the ICTD Government Revenue Dataset).  Figure 2 shows we’re on course for a near-halving of corporate income tax rates over 35 years.

imf may15 fig2The aim of the analysis is to understand the impact of CIT rates (domestic and foreign) on individual countries’ corporate tax base. The authors use the difference between ‘tax havens’ and non-havens to shed a little light on the relative importance of base effects that stem from shifting of real economic activity, as against profit-shifting. An interesting additional result, a ‘horse-race’ between the base effects of GDP-weighted and ‘haven-weighted’ tax rates of other jurisdictions, sees only the latter emerge as significant – suggesting “the primacy of avoidance over real effects” (p.18).

The authors also consider the question of the relative scale of effects between developing countries and OECD members (make of that choice of comparator groups what you will). Results for developing countries only suggest that both real effects and profit-shifting “matter at least as much”. And finally, a “simple, albeit highly speculative” revenue assessment produces table 6.

imf may15 tab6In line, as the authors note, with Gravelle’s (2013) study of US losses, they find a long-run revenue loss for OECD countries of toward 0.6% of GDP (some $500 billion). For developing countries however, the losses are nearly three times as high in GDP terms, exceeding $200 billion. This doesn’t immediately seem inconsistent with the UNCTAD findings of $100 billion lost through thin capitalisation alone – although would certainly seem conservative if there is merit to the critique mentioned that revises this number towards $300 billion.

I’m hoping the authors will be happy to share the code, and to be able to consider a couple of extensions. One could be to use actual effective rates from the US MNE data (which tend to show a sharper fall than other sources find); another to complement the tax haven list approach using the – ahem – Financial Secrecy Index.

Update 15 June 2015: the authors have very kindly shared the code – I’ll update if we get anywhere in extending the approach.

Update 1 October 2015: having been the withdrawn since June, a revised version of the paper has now been posted (hat-tip to Petr Janský). In terms of the summary here, the main changes relate to the calculation of revenue loss estimates. These are now somewhat lower, and expressed with substantially more caution – figure 3 here (click for full size version) effectively replaces table 6 above. Subject to caveats, c.$200 billion revenue losses for developing countries remains the spot estimate.

Revised Crivelli et al 2015-v2

Uncounted: has the post-2015 data revolution failed already?

This was originally posted at the Development Leadership Program. I’m grateful to Cheryl Stonehouse for patient(!) editing.

Counting matters. As the Stiglitz-Sen-Fitoussi report puts it:

What we measure affects what we do; and if our measurements are flawed, decisions may be distorted…. [I]f metrics of performance are flawed, so too may be inferences we draw.

The UN Secretary General was told two years ago by the 2012–13 High Level Panel of Eminent Persons on the Post-2015 Development Agenda that any follow-up to the Millennium Development Goals (MDGs) had to include adata revolution.

In common with the UN global thematic consultation on inequality earlier in 2013, the High Level Panel recognised that challenging inequalities and better data collection are inextricably linked – because better data make it clear which goals are and are not being met, and because with better data we can all demand answers and action.

So the data revolution can only be about changing the balance of power. Yet much of the current discussion emphasises purely technical reforms instead.

I use the term ‘Uncounted’ to describe a politically motivated failure to count that reflects power. It ignores people and groups at the bottom of distributions whose ‘uncounting’ adds another level to their marginalisation. It ignores people at the top whose uncounting hands them even greater power.

Kenya enrolment series - justin-amandaWhy do we fail to count well at the bottom? This figure shows three different series for primary school enrolment in Kenya. One comes from the Kenyan National Bureau of Statistics (KNBS); one from the Demographic and Household Surveys (DHS); and one from the Ministry of Education (MOE). MOE data come directly from schools and are used as the basis for funding decisions.

Now, MOE trends tell you that progress is rapid and unsustained, while surveys look static. Which do you believe? If your children are in Kenyan state education, how well counted do you feel?

Not that survey data are perfect either. Six groups are systematically excluded from most household survey and census returns. Excluded by design are the homeless, those in institutions and nomadic populations. Ignored by undersampling are those living in fragile, disjointed households, in areas facing security risks and in informal settlements. These groups, thought to amount to around 250 million uncounted people – roughly 3.5% of today’s global population – obviously contain a disproportionate share of the world’s poorest people. They are being systematically failed even in the ‘best’ counting approaches we have.

It’s no coincidence that people in poverty are excluded. Nor is it because of technical problems that Sudan’s government in Khartoum suppresses publication of data on regional development outcomes. Or that the deaths of those living with disabilities in the UK go uncounted.

As for counting at the top, it’s equally no coincidence that high-income households are undersampled in surveys. Or that even when tax data are used to adjust the picture, major wealth – $8 trillion? $32 trillion? – remains uncounted. Or that the OECD, charged with measuring the ‘misalignment’globally between the profits of multinational companies and the actual location of their economic activity, has so far been unable to lay its hands on the necessary data.

UK wealth inequalityOur choice of measure is also important – and also political. Take a look at this chart which shows how two measures, the Gini coefficient and the Palma ratio, come up with radically different answers to the same question about income distribution. Has UK wealth inequality been flat across the crisis? Or did it fall sharply, then immediately rebound even more dramatically?

The Gini coefficient embodies such strong normative views (pp. 129–144) that it doesn’t capture well changes in the top 10%, or in the bottom 40% where most poverty lies. It is very encouraging (to me!) that instead the Palma ratio has featured in recent drafts of the post-2015 indicators.

The Palma – which expresses the ratio of income shares of the top 10% to the bottom 40% – also embodies a normative view, but it’s absolutely explicit about it. The chart of UK wealth distribution across the financial crisis shows why the Gini gave rise to so many congratulatory headlines about stable inequality, and why they’re wrong.

What might an actual ‘data revolution’ look like? If there’s no recognition of the political nature of the problem, then we’d be fooling ourselves to expect any great change: the same people and the same things will continue to go uncounted.

What’s noticeable in the discussion so far is that there has been a great deal more attention paid to the uncounted at the bottom than at the top. There’s been precious little mention of Piketty’s proposal for a global wealth register, for instance, or of specific measures that would eliminate anonymous company ownership, require states to exchange tax information with each other (think SwissLeaks), or multinational companies to publish country-by-country reporting (think LuxLeaks). Yet if we don’t start counting things that make elites uncomfortable, then we’re not doing it right.

Data reforms are, broadly, welcome; but a revolution remains far off.  People and things go uncounted largely for political, not technical reasons.

That’s why a data revolution is so badly needed. And revolutions aren’t technical: they’re political.

Measuring tax avoidance: What data for BEPS 11?

Update 13/5/15: OECD has released all the public comments on BEPS 11. See end for encouraging business support for use of country-by-country reporting data…

Don’t look now, but the OECD may just have realised that public country-by-country reporting is necessary to meet their Base Erosion and Profit Shifting commitments… 

The OECD has a mandate from the G8 and G20 to measure and track the extent to which the profits of multinational enterprises (MNEs) are ‘misaligned’ with the location of their real economic activity – Action Point 11, out of 15, of the Base Erosion and Profit Shifting initiative, or BEPS 11 if you will.

Why this is exciting – no, really

Now BEPS 11 is not only the top action point for geeks. It may also be the most important overall. Other BEPS measures can change the dynamic in a particular part of the problem of applying international tax rules. Some of those changes will reduce avoidance over the medium-term. And some may even benefit lower-income countries outside of the OECD, to some extent at least.

But BEPS 11 could change the whole landscape in which tax rules are applied. BEPS can, and should, deliver public data, on an annual basis, which shows the following:

  • The current degree of profit misalignment globally (which the whole BEPS initiative is aimed at reducing);
  • Trends over time, i.e. how well the BEPS initiative is performing on its sole aim; and
  • Regional and national BEPS patterns, i.e. which countries receive disproportionately large or small shares of the MNE tax base – and how this is changing over time.

This is Uncounted‘s type of data – not transparency for its own sake, but transparency that shifts the balance of power. In this case, OECD country tax authorities can, and quite often do, demand sufficient data to see their piece of the story.

The biggest shifts in power if this data was made available would be (i) from MNEs to tax authorities in lower-income countries, that have not hitherto been able to make such demands; and (ii) towards civil society, who have not to this point been able to hold MNEs or tax authorities fully responsible, because of a lack of public information.

Additional benefits would be for all tax authorities (and national civil society) to compare their own performance with others globally; and for MNEs to do the same.

Where are we now?

The new OECD discussion draft on BEPS 11 covers a lot of ground. It surveys the academic literature (as reviewed here), including kind treatment of some of our work. It sets out some potential BEPS indicators. In both cases, the results are somewhat hamstrung by currently available data.

The most exciting discussion is of course on the data itself. And as the response of the BEPS Monitoring Group (to which I contributed) shows, the OECD document really has only one logical conclusion: country-by-country reporting data offers the only serious prospect of creating a baseline on the extent of BEPS, and of tracking it consistently over time. 

These are the key points from the BEPS Monitoring Group response – well worth reading in full:

Thorough, timely or comprehensive analysis of BEPS is currently not possible due to data limitations. The discussion draft provides a very useful discussion of data sources and methodologies and rightly concludes that availability of comprehensive and reliable micro data is a major constraint. Additional disclosure requirements for MNEs are crucial to ensure that such data become available. The same applies to bilateral macro data; these require primarily an effort by governments to collect and report better statistics.

Enhancing possibilities for analysis of BEPS requires revisiting the implementation of country-by-country reporting requirements under Action 13. We understand that the OECD is committed to ensure that the final set of BEPS Actions, to be presented towards the end of the year, will be a coherent package. There is an urgent need to enhance coherence between Action 13 and Action 11 in the final package. We discuss this in more detail below.

Now there is a possible halfway house. If policymakers are committed to progress against BEPS, but for whatever lobbying reason cannot accept public country-by-country reporting, then this is the get-out.

In our previous submission we already mentioned second-best alternatives, such as storing all country-by-country reporting data in a secured central data system. Staff from the OECD CTPA, IMF FAD, UN Tax Committee, regional tax forums and external researchers could then have full access to all micro data, bound by confidentiality agreements, and be able to publish partially aggregated statistics. It is worrying that the February 2015 guidance on implementation does not even provide for second-best approaches to make the data available to researchers. If some countries continue to block the OECD and G20 from endorsing public country-by-country reporting, the OECD should urgently work on a second-best approach.

Absent immediate agreement on public CbC, there must be – at a minimum – some process in place to collate all the data, to analyse it, and to publish results of that analysis along with partially aggregated statistics to allow further analysis by others. (There’s some discussion of the likely very high benefit-cost ratio involved, in my Copenhagen Consensus piece on post-2015.)

Otherwise we’d be accepting the failure of BEPS 11 – and with it the failure to demonstrate any progress of the whole BEPS initiative. Not to mention that all the CbC compliance costs still be incurred, while we leave all sorts of potential benefits on the table.

Watch this space

So it’s very welcome indeed to see the OECD draft appear to point to the inescapable logic of using CbC data.

But it’s also noticeable that they stop short of an explicit demand of this type. So we may assume the politics remain tricky, even if the logic is clear.

Watch this space.

Update 13/05/15: the public comments on BEPS 11 have been published. Many, including from business, raise interesting questions about specific possible BEPS indicators – a subject to which further attention will be given, not least when some new work on misalignment is ready in a month or two. 

For now, note this interesting feature of the comments: there is broad business support, where data availability is addressed, for the use of country-by-country reporting data to monitor BEPS. This includes:

British business group, the CBI:

These documents should provide tax authorities with significantly more information that they currently possess and therefore we would suggest that analysis is also carried out on the new information that tax authorities will have to monitor BEPS before any additional burden is created for business under this Action.

Big 4 accountants EY: 

The country-by-country report will require that MNEs gather information of a type and in a manner that it are not required for any other accounting or tax purpose.  The master file/local file framework for transfer pricing documentation will require extensive quantitative and qualitative information about the MNE group and about the individual entities in the group.  We would urge that the OECD look first to the data that will be collected through this new information reporting before considering any new reporting requirements.

TD Bank sum up the general view, which seems to be that CbC data should be used for BEPS rather than imposing any additional compliance requirements:

‘Moreover, the compliance burden on multinational corporations will increase significantly with the new country-by-country reporting and master file transfer pricing documentation contemplated under BEPS Action 13.  We do not believe further additions to the reporting requirements for corporate taxpayers should be the answer.  Rather, we believe it is important for tax authorities to work together to share the information that already is provided and, as the Discussion Draft notes, to use the available data more effectively.  One key use of the available data is to better measure the incidence of BEPS.

 

UNCTAD’s big number: A critique

Update 2: 8 May 2015, a slightly tweaked version of the blog is now back up, and the UNCTAD study authors will provide a comment which I’ll add at the start of next week.

A critique of the UNCTAD analysis of corporate tax avoidance suggests things may be (even) less rosy for developing countries. 

It is a mark of the importance of UNCTAD’s study on corporate tax avoidance in developing countries that it is provides the first numbers mentioned by the World Bank’s MD and COO Sri Mulyani in a major speech last month:

A recent UNCTAD study indicates that about $100 billion in annual tax revenue is lost to developing countries in transactions directly linked to offshore hubs. The total “development finance” loss – counting both revenue and reinvested earnings – is estimated in the range of $250 to $300 billion. This prevents developing countries from stopping the outflow of money – which thus bleeds them of essential resources.

For the schoolchild in Haiti, the new mother in Malawi, or the farmer in Bangladesh, these losses have a real impact: They result in classrooms that are overcrowded, health clinics that are never built, and water that is never delivered. People’s opportunities are being stolen from them – because tax revenues are not collected.

But there is a critique of the UNCTAD report, which also found that multinational enterprises (MNEs) may be paying developing countries around $700bn in revenues.
The import of the critique is that, rather than multinationals in developing countries avoiding a dollar of tax for every seven they contribute, they may by one form of avoidance alone be avoiding a dollar of tax for every three or four they contribute. Total revenue losses to avoidance might even stack up against the total contribution made… but I’m getting ahead of myself.
There are two main elements to the critique being advanced, one conceptual, the other practical. I should repeat my disclosure from the earlier blog that I’m part of the expert group that has fed in views about drafts of the study, so I’m probably not neutral.

The role of investment

The conceptual critique concerns whether the UNCTAD study appropriately captures the role of investment in development.

One risk is that a policy of avoidance might somehow be seen as an acceptable tool to encourage investment, that a tradeoff might exist (p.5):

The dilemma is clear: how can policymakers take action against tax avoidance to ensure that MNEs pay “the right amount of tax, at the right time, and in the right place” while avoiding excessive tightening of the fiscal regime for MNEs which might have a negative impact on investment.

Three main criticisms are made.

First, the study concentrates on FDI rather than the total of investment. But it’s conceivable that reducing multinational tax avoidance could (i) increase revenues for public investment, (ii) reduce the unfair competitive disadvantage faced by domestic firms (and more compliant multinationals), and through the combination of (i) and (ii) actually increase overall investment.

Second, any possible tradeoff hinges on assumptions of the importance of tax for investment (that is, for FDI). Namely (p.5, emphasis in original):

Tax is a key investment determinant influencing the attractiveness of a location or an economy for international investors.

Taxation, tax reliefs and other fiscal incentives are a key policy tool to attract investors.

The criticism is that these statements are undercut by the evidence – for example, TJN research (PDF) drawing on the IMF and McKinsey’s inter alia has long highlighted the non-importance of tax in locational decisions. [Such overall findings do not necessarily rule out any potential role of well-administered tax incentives as a possible lever of industrial policy, however.]

The third element of the conceptual critique is that while FDI inflows might fall in the event of targeted reduction in MNE tax avoidance, it is unlikely that a fall in FDI stock would occur – and highly unlikely that such a fall would be of sufficient scale to reduce overall revenues. The strongest impact of the financial crisis came in 2009, which saw positive inflows continue, albeit with a 20% fall in volume.

My take on this, for what it’s worth: the suggestion of a tradeoff is far from prominent in the paper, and UNCTAD exist in part to promote FDI (benefits), so the framing is not particularly surprising.

And nor need it be particularly damaging, if the dominant discourse is reflected by the kind of remarks that James Zhan (Director of the relevant UNCTAD department) made at the UNECE Financing for Development consultation about the importance of MNE tax avoidance, and the need to maximise not investment per se but the broader sustainable development benefits thereof – so that there’s no immediate, actionable avoidance/investment tradeoff as such, but a more holistic conception of the potential for FDI to influence multiple channels of a (much wider again) development strategy.
I don’t think anyone would argue – and the UNCTAD study does not – for promoting avoidance as an investment attraction mechanism (although that is in a sense the game for those jurisdictions that seek to capture the tax base of others.)

Methodological critique: Varying the assumptions

The methodological critique is multifaceted, and I will set aside much of it. Suffice to say, I think there are reasonable criticisms to be made – as with any regression analyses, and any attempt to estimate hidden financial flows on the basis of limited public data – but that the central approach is quite reasonable, and represents a valuable innovation to add to existing work.

A broad point is that the revenue loss number for one form of avoidance alone has been presented as the number for all avoidance – ignoring, for example, transfer pricing abuses of the sort that a Banque de France researcher has estimated to cost France alone tax base of around $8 billion a year. We certainly need to find ways to construct broader numbers of that type, but it’s not what the authors were about here.

The more specific criticisms of the UNCTAD study calculation are interesting, however, and worth showing in order to think about where one should imagine the probable range of MNE revenue contributions, and so the relative scale of avoidance – for the ‘contribution method’ and the ‘FDI-income method’, which are the two complementary approaches proposed and used in the UNCTAD study.

Contribution method

This approach uses countries’ revenue values from the new ICTD dataset, and allocates a proportion of each revenue type from 0-100% to MNEs in order to assess their total contribution.

The critics highlight a range of decisions as potentially difficult to justify (e.g. that MNEs contribute 50% of tax paid on property, or 100% of taxes on imports), and make some different proposals (‘Alternative 1′ in the table). This additionally includes a relaxation of the UNCTAD study’s assumption that MNEs’ share of taxable profit will be equivalent to their share of operating surplus, which will be violated when methods like thin capitalisation are used for profit-shifting. There is also a somewhat arbitrary reduction (by the critics) of the MNEs’ share of corporate tax revenues, apparently to reflect the original study’s recognition that ‘generous discounts on tax rates’ may lead to bias here.

This reduces the total estimated MNE contribution from $723 billion to $391 billion. In addition, the critics point out that the UNCTAD study uses a reference year from the crisis period. Choosing a different reference year (‘Alternative 1b’) leads to a total contribution of $399 billion, but where the share due to corporate income tax is now 43% of revenue contribution, as opposed to 30% in the original.

Here I have to put my hands up – the UNCTAD study (very wisely) uses the ICTD Government Revenue Dataset, as a better source of tax data, and until the upcoming release, the present edition contains only data to 2009/10.

UNCTAD critics table1

FDI-income method

In this method, the UNCTAD study takes balance of payments data on FDI income, and applies an average effective tax rate to estimate a revenue outcome. Good data on MNEs’ foreign tax payments, never mind effective tax rates, is notoriously difficult to come by – and especially so for lower-income countries.

The critics re-engineer the data in the UNCTAD study to show that an effective rate of 11% is not unreasonable, but more generously apply 15% (compared to nearer 20% and 25% in the original).

The overall effect, combined with the above finding that income tax produces a higher share of the total contribution, is to reduce the estimated total contribution to $291 billion.

Implications?

It is true that the UNCTAD study considers only one form of avoidance – so as they themselves say, one might reasonably add to their $100 billion an estimate of transfer pricing avoidance (for example).
[The reason not to, I imagine, is that there isn’t as rigorous an estimate of this as their estimate of the thin capitalisation avoidance, due to the failure to make available more widely the type of trade data used in the Banque de France study which explicitly contrasts real arm’s length pricing with related party trade prices.]

This is not a criticism of the UNCTAD study – just a caution against presenting the $100 billion as if it were an assessment of all avoidance.

A genuine, but as yet untested criticism relates to the potential sensitivity of the assessment of the revenue contribution of MNEs in developing countries, to the necessary set of assumptions made.

Is MNEs’ revenue contribution $300 billion or $700 billion?

You wouldn’t stand full square behind either, it seems to me, but that feels a more or less inevitable result of current data problems (yet one more that would be solved, of course, by public country-by-country reporting).

The UNCTAD study provides justification for the various choices it makes. It would be useful to have a broader discussion of these, and to onsider the range of movement in the estimate level of contributions.

What does this all mean for policy? One response to the UNCTAD study would be to acknowledge that it provides confirmation, at a minimum, of the ‘scale-reasonableness’ of NGO estimates of revenue losses of this scale. Another would be to note, as I did in the previous post on this report, that $100bn is small in relation to total revenues.

If the critics were right, and the total MNE contribution is half of what we thought, perhaps this whole area of tax should be even less of a priority. Alternatively, if the MNE contribution could be doubled from what it is – without any unreasonable impositions – that would suggest a much bigger prize…

The one form of avoidance (thin capitalisation) in the UNCTAD study seems likely to be joined by several significantly sized other mechanisms – as the evidence for Europe suggests fairly strongly may be the case; and see also the new OECD survey paper on evidence on an even broader range of BEPS channels.

So the total developing country revenue losses to MNE avoidance could be several times that $100 billion – which could be half of, or the same as MNEs’ total contribution, if the original or the critics’ assumptions are used.

The authors of the study have very kindly agreed to provide a response to some of the points raised, which I’ll post here when I have it. I think it will help the rest of us to understand more about the range of possible revenue contributions we should consider reasonable.