corporate tax – Page 2

12/07/201513/07/2015

Taxing multinationals: A research agenda for #FFD3

There have been substantial advances over recent years in both policy and research on taxing multinationals, especially in developing countries, so with the Financing for Development conference gearing up in Addis, it’s a good time to step back and think what current priorities for the research agenda might include.

Arguably, we understand more now than we have ever done about the revenue losses of developing countries in particular; but there’s much more to be done in relation to not only the scale but also the distribution and impact of those losses, and more besides. Here are a few ideas in three areas that stand out: scale; practical success; and national-level data.

Scale and impact

There have been important new contributions to the literature which estimates revenue lost due to profit being recorded elsewhere than the location of the economic activity giving rise to it. But there remains a great deal more to do, both to identify the scale and pattern of revenue losses, and to prioritise policy responses for individual African countries and at regional and continental level.

The aim of the Base Erosion and Profit Shifting (BEPS) initiative – the major international effort led by the OECD over 2013-2015, at the behest of the G8 and G20 groups of countries – is to reduce the ‘misalignment’ between profits and real activity, in order to ensure tax is paid in the right place.

A significant problem for the BEPS process relates to Action Point 11, which requires the collation of data in order to establish a baseline for the extent of profit ‘misalignment’, and the tracking of progress over time. As the most recent BEPS 11 output highlights, currently available data – whether from corporate balance sheet databases (see e.g. Cobham & Loretz, 2014), or from FDI data – is not sufficient for the purpose.

Within the limitations of existing data, however, this year has seen two important new studies of the extent of profit ‘misalignment’. First, UNCTAD’s World Investment Report 2015 includes a study on the effect on reported taxable profits in developing countries of investments being channelled through ‘tax haven’ or ‘SPE’ jurisdictions. They put the total revenue loss at around $100 billion a year (see also the critique which suggests this may be substantially understated). Second, researchers in the IMF’s Fiscal Affairs Department have looked at the broader issue of BEPS and find a long-run annual revenue loss for developing countries of $212 billion.

POSSIBLE RESEARCH PROPOSALS: SCALE AND IMPACT

Extending current work. In neither case have the estimated revenue losses for individual countries been published. As such, a valuable piece of policy research would be to take the two studies, replicate the results and strengthen them where possible, and then to assess the country-level findings in order to support the potential prioritisation of counter-efforts. Further extension could involve strengthening the current, tentative results on the linkages between tax revenues (of different types), and important development outcome (e.g. health).
FDI surveys. An additional approach using existing data would be to use the national-level survey data compiled by a number of countries (including the USA, Germany and Japan). One such study with US data is currently underway at the Tax Justice Network.

Practical success

A second area in which there is substantial scope for research with clear policy value is in the analysis of practical success in taxing multinational companies. Research on the scale of the problem, as discussed in the previous section, has the potential to identify the relative intensity of revenue losses and therefore the countries which should prioritise some form of response – but may not point more precisely at solutions than, for example, to blacklist certain jurisdictions as inward investment conduits.

Three types of study offer the potential for more specific policy recommendations.

POSSIBLE RESEARCH PROPOSALS: PRACTICAL SUCCESS

Identification study. A useful first step would be to take the ICTD Government Revenue Dataset (the ICTD GRD, the best available international source), and to identify those country-periods in which significant progress has occurred in raising corporate income tax revenues; along with any major common features.
Survey. The second step would then be to conduct a survey of revenue authorities, exploring the differences in tax policy, political support and administrative approaches, to identify systematic differences – or their absence – between those cases where significant progress was seen, and not.
Event study. A further step would be to identify major policy changes – most obviously the introduction of a large taxpayer unit at the national revenue authority, or the provision of technical capacity-building measures from bilateral or multilateral donors, and any other features to emerge from the first two steps – and to explore whether there were systematic benefits in revenue-raising across the broad panel of GRD data.

National-level data

The third area in which research proposals could be taken forward can be grouped loosely according to the involvement of national-level data. Two specific proposals can be identified. In each case, such research might be best led by, or conducted in collaboration with, a regional tax body such as ATAF.

POSSIBLE RESEARCH PROPOSALS: NATIONAL-LEVEL DATA

Transaction-level trade analysis. Leading estimates of illicit financial flows (e.g. those of Ndikumana & Boyce, GFI and ECA) include a major component related to trade mispricing. However, these rely on national-level, or commodity-level trade data. Among other potential methodological issues, the bulk of estimated IFF are likely to relate not to multinational companies but others; although the exact proportions cannot be identified.

The gold standard is to use transaction-level data (e.g. the pioneering work of Simon Pak), and as a recent study for the Banque de France reveals, with identifying data on whether transactions are between related parties (i.e. they occur within a multinational group) or not, it is possible to identify the scale of mispricing attributable to multinationals (in the French case, causing an estimated $8 billion of ~~revenue~~ tax base loss each year).

Accessing such data from customs authorities would allow the equivalent assessment to be made for a range of countries, also allowing comparison across countries and potentially the combination of data to identify fraudulent mis-invoicing at each end of the same transactions. The Tax Justice Network, with Professor Pak, is currently in the initial process of such an analysis with one African revenue authority.

Country-by-country reporting (CBCR). Since the fanfare of the G8 and G20 groups of countries calling for the OECD to develop a standard for CBCR by multinationals in 2013, the optimism about its value has faded. Sustained lobbying has removed not only the explicit intention of the original Tax Justice Network that the data be made public, but even that it be provided to host country tax authorities. Instead, it will be provided – if requested – to home country tax authorities, which may then provide it under information exchange agreements to host country authorities. However, the latest draft of the Financing for Development outcome document (7 July 2015) is explicit about the provision of this information directly to tax authorities in the locations where multinationals operate.

A requirement for publication is one possibility; another is for tax authorities to share the data privately amongst themselves, for example through an equivalent mechanism to the IATI registry of aid (a proposal developed in Cobham, 2014) in order to allow broader analysis and identification of revenue risks. This could happen at a regional level; but the latest noises from the OECD suggest that there will be no international collation, and hence it will be impossible to meet BEPS Action Point 11 and either to construct a broadly accurate baseline or to demonstrate the extent of progress.

Working with tax authorities, however, researchers could deliver basic results equivalent to those from CBCR. This would involve combining data reported to tax authorities through national accounts for members of a multinational group, with the global consolidated accounts of that group, in order to compare the relative shares of activity and taxable profit and hence to identify potential high revenue-risk operations.

Investment data and vulnerabilities. There is substantial scope to improve both the reporting and use of bilateral investment stock and flow data, in order to pursue a range of types of studies. One particular opportunity, pioneered in the Mbeki report, is for the creation of measures of vulnerability to ‘tax haven’ secrecy in countries’ bilateral economic and financial relationships. Per the findings in the Mbeki report, present data are sufficient to allow significant analysis to be done, and it would be valuable to extend this to explore whether particular costs or benefits – in particular, in terms of tax revenues from multinational companies – are associated with the recorded vulnerabilities. (NB. This also points to a possible extension of the UNCTAD and IMF results in proposal 1 above.)

08/07/2015

#Budget2015 UK corporate tax cuts: No benefits expected?

Documents published with the UK’s budget today suggest that the proposed corporate tax cuts are not expected to produce any increase in (taxable) activity – so represent a significant revenue loss with no apparent compensatory benefits.

1. The rationale for corporate tax cuts

The first document to note is that of HM Revenue and Customs, summarising the revenue effect and intended impacts of the proposed further reduction in the headline rate, to 18% by the 2020.

The rationale is clear: the aim of the cuts is to attract businesses to locate activity.

Additionally, it is recognised that the measure will also increase the incentive for multinationals to shift profits generated from activity located elsewhere into the UK – a phenomenon the UK had committed to fight, in the OECD Base Erosion and Profit Shifting process (albeit there has recently been open criticism from the US Treasury of the UK’s obstructiveness).

2. The projected impact

So the central aim is the attraction of new activity. Success in either this aspect, or the attraction of profits from activity located elsewhere, will increase the base. A sufficient increase in the base size will trigger those semi-mythical Laffer-type effects, with a rate cut leading to a revenue increase.

The second document, from the authoritative Office for Budget Responsibility, addresses just this point. The figure below, a reworking of the OBR’s figure C4.3, distinguishes between the rate effects and base effects of the various tax changes in the budget. (An aside: while the UK in the previous parliament was the only leading economy not to raise taxes as part of its austerity measures – in fact, the reverse, so that spending cuts exceeded progress in deficit reduction – the plan for this parliament sees a tax increase overall of 0.9% of GDP.)

The figure shows that the planned corporate tax (‘Onshore CT’) rate cuts produce the largest revenue loss of any measure.

More surprisingly, perhaps, the OBR also project a 0% change in the tax base: that is, a best guess of zero behavioural change (increases in either UK location of business activity, or profit-shifting into the UK). Still, many companies are already considering hiring firms like GeekBooks to ensure that they are handling their tax situation correctly in these circumstances in order to prevent mistakes.

Overall, this means the budget is projected to raise individual income tax (yes, including NICs) substantially, while reducing the contribution of corporate income tax to no apparent benefit. When a business runs the payroll for its employees, often, they will deduct income tax which can be a time-consuming process – choosing the best payroll company with effective software to make use of can streamline this process and take a load off those in charge of HR.

The previous parliament had already cut corporate tax revenues by around 20%, or around £7.5 billion a year by 2015/16, with unclear benefits. The cuts announced today will cost a further £2.5 billion a year by 2020/21, so it will be disappointing if there is not at least some further scrutiny of this policy choice.

Postscript: tangentially related good news is that the European Parliament has voted in support of serious, public country-by-country reporting. Bring it on.

03/07/2015

Addis #FFD: An intergovernmental tax body?

A major obstacle to early agreement on the text for the upcoming Financing for Development conference in Addis is the fate of the mooted intergovernmental tax body.

Could this work? Is it a good idea? And regardless of the answers to those questions, what will actually happen? This post explores the three main possibilities, and the likely outcome for Addis.

1. OECD retains leadership

The OECD has long had the leadership on international tax issues, despite being representative of only a fraction of the world’s countries, or population. This, and the relative wealth and power of its member states, has allowed it to build a leading position in terms of technical capacity. Now, to be fair, the OECD has tried quite hard to include developing countries in the latest Base Erosion and Profit Shifting initiative, for which it received the mandate from the G20 group (including major non-OECD countries).

But ultimately, major aspects of the BEPS Action Plan have come down to political negotiation – and of course OECD members have the most power, so developing country voices have barely been heard at the sharp end of these negotiations.

The most likely outcome of all is that the OECD retains leadership, at least over the medium term, even though BEPS comes to be seen largely as a failure. But this is hardly a good outcome.

2. A challenge from the IMF?

That leaves two main alternatives. One is the IMF, where there has been clear frustration at the OECD being handed the leadership on tax since the financial crisis. The IMF rightly claims to be much closer to a globally representative membership; and to have a tax expertise that’s much more focused on national policymaking in developing countries.

But there are two big issues. If anything, there is a greater sense with the IMF than the OECD of domination by a few major economies, the US in particular. And while the IMF’s Fiscal Affairs Dept includes respected researchers, the organisation’s policy recommendations at country level have consistently failed to reflect even their own research evidence. So it’s hard to see strong support emerging for the IMF to lead here, even though there’s a growing sense that BEPS has already failed to deliver on its promise.

3. An intergovernmental tax body

Dear governments, Please Adopt Me! #FFD3 #TaxJustice #StopTaxDodging

— Global Tax Body (@GlobalTaxBody) June 20, 2015

The other alternative is the type of intergovernmental body that many developing country governments, along with national and international NGOs, are now calling for. This short briefing, put together by a range of TJN partners, sets out ten reasons an intergovernmental body is a good idea.

The short, short version is this: it could be a significant step towards a coherent global system, compared to the complexity of current arrangements which are clearly failing everyone – and especially developing countries who are outside the main power grouping of the OECD.

While this should sit at the UN, in order to provide a broad representation and political accountability, it’s unlikely to be simply an extension of the current UN tax committee – which has about one and a half full time staff as a secretariat, and is a technical body rather than a political one. The pressure for an intergovernmental body will only be worth it if the resulting body has at least equivalent resources to the OECD’s current tax work (which is significantly wider than BEPS); ideally, scaled up from OECD to global level.

{Aside: the most recent OECD accounts seem to be for 2013, before BEPS got fully underway, and I can’t work out what share of the €600m+ budget went on tax and related areas. Any info on this most welcome.}

Realpolitik?

The argument some make to defend the status quo, that the US would pay no heed to such a body, is not an unreasonable one, and it confronts the fundamental politics here.

The US is able to exert power over important decisions at the OECD, and hence the OECD (largely) retains US support, and its own role. (Although it’s worth noting that there is a significant lobbying attempt underway by US multinationals to obtain Republican support for rejection of the entire BEPS outcome, and more besides.)

A genuinely intergovernmental body might be more representative but powerless, because it would be starved of resources like the UN tax committee; or it might become powerful only if the US and a few other major powers are able to dominate it, in which case it might not offer much of an improvement from the OECD.

Realer politik

But think about where we are today. The latest IMF research suggests developing countries lose revenues of more than $200 billion a year to multinationals’ profit-shifting, and OECD countries around $500 billion a year. That means developing countries lose about three times as much as a share of GDP. So it’s increasingly clear that international tax rules don’t work for OECD countries, and even less so for developing countries.

How long can a few major powers prevent other countries from adopting more effective alternatives to the OECD rules? The greater the resistance to change in intergovernmental settings, the more likely we are to see substantive splits, with increasing numbers of countries giving up on the OECD rules in practice, regardless of rhetorical commitment.

As I noted in a discussion of the politics of country-by-country reporting for multinational companies, the successful lobbying by US multinationals in particular might turn out to be a pyrrhic victory: the strangling at birth of that measure, in terms of value for developing countries at least, may actually lead to more pressure for effective transparency, and potentially greater compliance costs for multinationals too.

In this case, successful resistance to a genuinely representative intergovernmental tax body might simply accelerate the loss of credibility of the OECD and its rules, leading to greater fragmentation.

And the answer is…

The most likely outcome in Addis is, of course, a fudge: agreement to a body, probably based on the UN tax committee, which has some greater political power via ECOSOC but remains so strapped for resources that it is never able to challenge the OECD or IMF.

The OECD will hold on for a while, the IMF will spin its wheels (and produce useful research), and the constrained UN body will offer just a little space – and no more – for other approaches like formulary apportionment.

But this is not a stable equilibrium, given the multiple and near-universally acknowledged flaws in international tax rules. If that’s where we end up after Addis, increasing fragmentation of national approaches seems inevitable. And perhaps it is anyway.

29/06/201529/06/2015

Tax Justice Research Bulletin 1(6)

June 2015. Surprising everyone by actually arriving within the stated month, here’s the sixth Tax Justice Research Bulletin – a monthly series dedicated to tracking the latest developments in policy-relevant research on national and international tax, available in full over at TJN.

This issue looks at a new paper in The Lancet on the potential links between direct taxation and health outcomes including child mortality; and at research on the suitability or otherwise of accounting data for tax purposes. The Spotlight falls on tobacco taxes, the shameful manipulation of economic arguments by Big Tobacco, and a paper entitled The Single Best Health Policy in the World: Tobacco Taxes. If this issue was any more health-y, you could put a vest on it and send it out to do a half-Iron Man with Owen Barder.

June’s tune, via Sarah Knott, is Jawad Ahmad’s ‘Bhola kya karey – Wo jiay ya marey‘.

The main research event of the month, nay the year, is the TJN annual research workshop at City University, which you’ve either just attended (great to see you!) or just missed (boo).

This year’s thematic focus was on the flawed notion of “competition” between nation states, and there’s a cracking set of papers from a whole range of disciplines (from philosophy to accounting) and backgrounds (including practitioners, civil society researchers and academics from universities from Hong Kong to Barcelona); and touching on all sorts of tax and non-tax aspects of ‘competition’, with insights into everything from Guernsey’s dominant investment position in annexed Crimea, to the ‘voluntariness’ of migration; and from regulatory responses of commodity traders to the role of KPMG in systemic regulatory arbitrage.

The workshop ended with a really engaged discussion about the relative merits of taking on the entire logic of state competition, versus the practical value of keeping focus on tax and arbitrage calculation.

There’s certainly an important challenge in reclaiming the word ‘competition’ in this context, which has been used almost as a synonym for ‘no government intervention’ – when ensuring competition may well require greater intervention, in order to prevent power abuses leading to further concentration. The creators of the ‘Global Competitiveness Index’, for example, probably don’t see themselves as advocates for a world regulatory body, preventing unfair competition between states…

Submissions for the Bulletin, including tax-related melodic suggestions, are most welcome.

29/06/201529/06/2015

Is accounting data any use (for tax)?

From the Tax Justice Research Bulletin 1(6).

One of many happy things about the Tax Justice Network is the range of experts involved, by discipline and by professional background. And one of the great things this gives rise to is analysis that is often so far ahead of the immediate public policy discussion that you might not even be able to see it from over there. For example…

Two TJN stalwarts from the accounting side – one an academic, Prof. Prem Sikka, and the other practitioner-turned-campaigner, Richard Murphy – have come together to address the prickly question of whether accounting data can actually be part of the solution to the corporate tax base erosion and profit shifting of multinationals.

Their working paper is published by the International Centre for Tax and Development, in its important series addressing unitary taxation. [Full disclosure, just in case it’s not completely clear already that I’m biased: I have an unrelated paper in that project, and am working with the ICTD on other stuff too.]

A little background: TJN started up in 2003 with a project to promote country-by-country reporting by multinationals (notably, Richard’s draft standard), as a major transparency tool to limit tax abuse. Since then this esoteric proposal has moved steadily from the extremist fringes to centre stage, with the 2013 meetings of the G8 and G20 directing the OECD to produce such a standard for global use.

One effect of this is that accounting data has probably become more central to high-level political proposals (and scrutiny) than – well, perhaps ever. (I still remember a meeting of the International Accounting Standards Board in the mid-late 2000s, marked by the then-revolutionary presence of NGOs which pointed the way forward to that greater public interest, especially with the ASC 606 changes. Happy days…)

The tendency, conscious or otherwise, has been to assume that accounting data is accurate (though not necessarily addressing the right things), and at least broadly consistent across jurisdictions. As such, it can provide the basis for powerful measure such as country-by-country reporting (for both red-flagging by tax authorities, and holding to account by civil society).

But if there’s one, top line message from the new Sikka & Murphy (2015), it’s this: accounting data does not at present provide a good basis for this greater understanding of tax. Rather, accounting data not only provides a means by which tax positions can be obscured from view; it also provides an additional vector by which tax positions can be manipulated. If your business is looking for an accounting firm in NYC to look after their money and stay legal, there are plenty of options available to you.

How so? The abridged Table 1 gives a sense of it (scroll down or click for larger version). The differences around the world in accounting treatment for tax purposes are manifold and fundamental. The opportunities are legion for multinationals to exploit differences in national treatment, in order to achieve preferred global tax outcomes.

Now since “no jurisdiction which we can identify relies upon unadjusted traditional accounting profit as a basis for the taxation of corporate income”, and reliance on International Financial Reporting Standards would exacerbate not ameliorate the problem, the authors argue that “tax-specific measures of income and expenses for taxation purposes need to be defined” – not least, for any proposal for a full shift towards unitary taxation of MNEs. Whether this is carried out by an accountancy firm like Faris CPA for a company or by an in house team, having this defined clearly will help all involved. Their specific suggestion is this:

“[W]e think it possible that a taxation base for unitary taxation that is broadly, but not precisely, equivalent to the accounting concept of EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) could be developed. This resulting tax base before offset of locally-determined allowances could then be apportioned in accordance with a formula that is likely to exclude assets, because relief for expenditure on capital will be given locally and capital costs do not therefore need to be considered for formula purposes.”

Even more than usual, this summary is nowhere close to doing justice to the deep and rich set of questions that the paper raises. It’s a difficult paper, technically challenging in more than one way and requiring the reader to think well ahead. This is why people often use accounting student services to gain a better understanding of how to approach these questions. And it’s an important paper. We may not hear much about it for a while, but it wouldn’t be at all surprising to see it being referred back to as a foundational piece of problematisation in years to come.

19/06/2015

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

External analysis of UK positions in OECD BEPS initiative
Evaluation of UK policies in BEPS areas
Evaluation of BEPS outcomes (BEPS Monitoring Group)
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

Review takes place
Review engages seriously with views of multilateral partners, especially EU where discussion is currently ahead of UK
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

UK provides full access to developing countries
UK ensures its territories and dependencies provide full access to developing countries
UK works to ensure other leading economies and financial centres provide full access to developing countries
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

15/06/2015

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…

02/06/201502/06/2015

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.

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:

Tax multinationals as single firms
Curb tax competition
Strengthen enforcement
Increase transparency
Reform tax treaties
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.

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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!)

This 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.

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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.
Figures 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.}

The 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.

The 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.