OECD

13/07/2015

Did NGOs invent a pot of gold? (No.)

A draft paper by Maya Forstater, circulated by the Center for Global Development in time for the Financing for Development conference in Addis, attacks the integrity of many people and NGOs working on tax justice and illicit financial flows.

The claims include:

that (some?) NGOs have “contributed to unrealistic public expectations and an appetite for an overly simplistic narrative about a corporate tax ‘pot of gold’” (p.31);
that (some?) NGOs tolerate “exaggerated interpretations and misunderstandings”(p.33);
that (some?) NGOs do not “engage honestly with debates over economic trade offs [sic]” (p.33); and
that this behaviour is comparable to “the use of exploitative and prejudiced imagery in charity appeals” (p.34).

Blimey.

This is a (really) long post, as I’ll try to cover the breadth and strength of Maya’s many claims. I should say that I took part in the first of two meetings of the group CGD convened to look at the issues. This was really quite a constructive coming together of different viewpoints. But I stood down when the subsequent blog post seemed to ignore most of the common ground and reiterated some earlier attacks on NGOs instead, making some claims about ‘inconvenient truths’ that resurface here. Comparing back, I’m afraid it seems as if the results of the research exercise were pre-determined.

Some main points from the discussion below:

The draft paper makes a series of claims without providing any serious evidence: most importantly, a ‘complex truth’ that tax losses are not of ‘problem-solving’ scale but ‘relatively modest in relation to development needs’. The existing evidence, e.g. from the IMF or – strikingly! – the author’s own analysis in this paper of ActionAid’s work, clearly supports the opposing view.
In the two other cases where ‘received wisdom’ associated with NGOs is contrasted with ‘the complex truth’, there is in fact no direct contradiction – but the presentation in each case creates an implicit straw man of NGO opposition to the truth.
The paper’s main thrust is that there is no ‘pot of gold’ for developing countries – but no substantial evidence is offered to support this assertion. (I’m sympathetic to the idea that this aspect of the tax justice agenda is sometimes overstated, but simply to deny the existing evidence offers no way forward. Indeed this is why I encouraged this work to focus instead on substantive research issues, albeit to no avail.)

I should point out that I was a research fellow at CGD during 2013-2014, and remain grateful to Owen Barder and colleagues for giving me a great deal of space to pursue research in just this area. I hope it may be possible to revise the final draft in such a way that it can make a useful contribution.

Measuring the illicit

The bulk of the attack in the draft paper is dedicated to three elements of ‘received wisdom’, each of which are contrasted with a quite different ‘complex truth’, so I’ll focus on these before coming back to the overarching claims. First, a little bit of context.

As has often been remarked, attempts to estimate illicit financial flows (IFF) are inevitably fraught with difficulty.

By definition, illicit flows are those ‘forbidden by law, rule or custom’: so whether or not they are technically legal, like large-scale tax avoidance, they are always hidden from view where possible. Add to this the fact that the relevant international datasets are often of less than ideal quality and coverage, or sometimes simply held in private by multilateral organisations who should know better, and the problem is of estimating things that are deliberately hidden, on the basis of anomalies in data that are imperfect in any case.

The development of the research field – which has come into being seriously only in the last 15 years – has been led by NGOs, perhaps because academic researchers felt uncomfortable with the degree of uncertainty, or because those at international organisations didn’t see it as a policy priority. At each stage, NGOs and the few academic researchers have challenged international organisations to use their capacity, and ability to access data, to do better; but until this year, there had been no serious response on any aspect of IFF except that of UNODC and the World Bank in their Stolen Assets Recover (StAR) initiative.

The 2009 Illicit Flows report: Eurodad summarising the research contribution of international organisations — Eurodad’s famous 2009 Illicit Financial Flows report, summarising the research contribution of international organisations

Following the G20 meetings in 2009, however, the issues originally promoted by NGOs in the wilderness rocketed to the top of the global agenda. Then in 2013, the G8 and G20 commissioned the OECD to carry out the Base Erosion and Profit Shifting initiative (BEPS), aimed at reducing the misalignment between the location of multinational companies’ economic activity, and where they declare taxable profits.

This year, the resulting research focus of international organisations has borne interesting fruit. The UNCTAD World Investment Report contributes a study estimating developing country revenue losses to one channel of multinational tax abuse at $100 billion per year. Furthermore, researchers at the IMF’s Fiscal Affairs Department suggest, in their Table 6, that the total developing country losses due to BEPS stands at $212 billion per year (in the long-run), or around three times the share of GDP of the losses of OECD members (around $500 billion). It’s worth highlighting that the developing country losses would on average exceed 10% of existing tax revenues.

None of this is to say that we don’t have a long way to go, not least in terms of collating additional datasets, and making existing ones fully available, and in burying down to the country and then the company level; and in methodological improvements, as in any quantitative research field. (Bring it on!) And just because they come from international organisations, these studies themselves are of course not immune from criticism.

But while many aspects of IFF remain ill-estimated at best, and the leading estimates from GFI for example do not include many of the aspects related to multinational tax behaviour, there is no question that thanks to the recent UNCTAD and IMF reports we are in a better position than ever before in terms of understanding the scale of revenue loss associated with multinational tax behaviour in developing countries.

Assessing the ‘received wisdom’

The main section of the paper outlines three ideas, labelled as ‘received wisdom’, and contrasts each with ‘the complex truth’. The three ideas are not specifically attributed to one or more NGOs; rather, “they are a set of perceptions which are often given and reinforced by the overall flow of media reports, infographics, press releases, case studies and campaign publications on this topic and are influential enough to require clarification” (p.9).

The sub-headings here are taken from the draft paper.

Idea 1: ‘Huge amounts’

Let’s consider first the attribution of this idea to NGOs, and second its truth or otherwise.

Of the three quotes to support the claim that NGOs have promulgated the ‘received wisdom’, one is indeed a clear overstatement of the case, taken from an NGO infographic; one is a newspaper headline (which refers to an NGO report that I’m guessing doesn’t make the claim itself, or would have been used directly); and one is a statement (that strikes me as defensible) from Yale professor of philosophy Thomas Pogge.

Even with this level of cherry-picking, these quotes obviously provide less than compelling evidence if you want to make the case for NGO responsibility for the narrative. But to be fair, I’d say that many NGOs and people (like me!) do indeed think the revenue impact could be ‘problem-solving’, if that means something like ‘with the potential to provide a noticeable human development benefit’; so let’s set the paper’s evidentiary approach aside for now.

To get to the substance of the claim, we need to compare what the paper calls the ‘received wisdom’ and ‘the complex truth’. There are two important ideas being combined here. One is about scale: the difference between ‘huge’, or more usefully ‘problem-solving’ amounts of revenue, and the alternative that these are ‘relatively modest in relation to development needs’. The other is about location: the question of whether the revenues that could be available would appear in richer rather than poorer developing countries.

Maya has made some useful points on the latter before, complaining rightly that the aggregation into ‘developing countries’ can hide a mismatch between revenues and development need. This doesn’t take into account the role of inequalities that mean most people living in extreme income poverty do so in middle- rather than low-income countries, but the broader point holds: aggregation can obscure meaning.

From the summary: “Any potential gains are likely to be higher in middle income emerging economies, and lower in the poorest countries, in line with levels of FDI although extractive industry rents are likely to offer a significant focus for greater domestic revenues in some countries” (p.2).

It might have been better to consider the data on FDI. While it is true in general that bigger economies have more FDI, the pattern is much more mixed – even allowing for natural resource wealth. Here’s a quick figure with an arbitrary selection of OECD and West African countries, just to highlight that risks of sweeping generalisations are not limited to NGOs.

And of course if the claim is about the relationship between FDI and revenues, and we know tax/GDP is strongly correlated with per capita GDP, then lower FDI/GDP in poorer countries might still be associated with higher (relative) potential revenue contribution (i.e. the FDI stock, and hence potential revenues, might still be higher in relation to current tax revenues).

In addition, the paper doesn’t provide any evidence for the claim about the scale of development needs, which seems odd. It does not to provide (nor seek to provide) any proof that the amounts involved would not have powerful effects in low-income countries.

Well; in fact, it does in one particular case.

A box on Malawi (page 12) provides probably the clearest example of why I find this paper so disappointing – what could have been offered as a useful check on use of statistics, descends instead into the absurdity of inadvertently demonstrating the truth of the position being attacked.

The box summarises ActionAid’s work [disclosure: I’m on ActionAid UK’s board] on the mining company Paladin, finding that it cut its tax bill by $43 million, and states that in one year this could have paid for “one of the following: 431,000 HIV/AIDS treatments, 17,000 nurses, 8,500 doctors, 39,000 teachers”.

It is then pointed out, accurately I assume, that the tax revenues relate to six years; and argued that it would be more appropriate to identify what could be achieved annually with the relevant share of the money (rather than offering mutually exclusive alternatives).

The annual bundle of potential services that the foregone tax could pay for, according to the draft paper, is this:

a doubling in the number of doctors, AND
a 10% increase in the number of nurses, AND
enough teachers to reduce average class sizes from 130 to 100, AND
2% of needed HIV treatments.

I guess we could argue about whether or not to call this ‘huge’, though it wouldn’t be a very useful argument. But I don’t see how anyone could deny it is a problem-solving level of revenue.

Would ActionAid have been better to present the statistics this way? Perhaps.

Does it detract from the substantive value of the ActionAid report in any way? No.

Does it support the ‘complex truth’ claim that the amounts involved are modest in relation to need? Quite the reverse – it is stark evidence to the contrary.

The draft paper has taken a potentially useful contribution, dressed it up as an attack, and lost most of its value.

Thinking at the global level, and of the 1.7% of GDP that the IMF sees as long-term annual revenue loss: it is perhaps possible to imagine a distribution of those revenues among countries in which the resulting allocation fails to be ‘problem-solving’ for most; but it’s hardly a claim we could provide evidence for at the moment, and this draft paper certainly does not.

Idea 2: Transfer pricing is tax dodging

The second aspect of ‘received wisdom’ attacked in the paper is a little confused. Per the heading and some of the discussion, it is simply the confusion of transfer pricing with tax dodging. Per the box text, however, and other discussion, it is more about whether or not transfer pricing and related rules allow multinationals sufficient room to manipulate prices, via ‘tax havens’, that curtailing this could generate significant revenues elsewhere.

Again, let’s look first at the attribution. The only quotes provided that support the confusion point come from respected academics, rather than NGOs. My feeling is that there is sometimes a confusion of language here, but the fundamental points (that there are rules in place, and that these may sometimes be abused and may sometimes allow distorted outcomes) are widely accepted by the world’s most senior policymakers.

The more interesting distinction is drawn between ‘received wisdom’ that associated revenue implications are large (for countries on either side of ‘profit havens’, as seen in #LuxLeaks); or the ‘complex truth’ that allocating profits within global value chains is difficult.

I must confess I find this one quite confusing. There’s no obvious contradiction between the ‘wisdom’ and ‘truth’. You rarely hear anyone claim international tax rules are simple or easy to comply with (for either multinationals or tax authorities); and it’s almost equally uncommon to hear a suggestion that there aren’t major revenues at risk in a whole range of countries – see e.g. the details of LuxLeaks, or the IMF results shown above.

There just doesn’t seem much disagreement to be had over whether transfer pricing rules are being exploited, to the benefit of many multinationals and a few secrecy jurisdictions, and the (revenue) loss of many countries (with both higher and lower per capita incomes) – at least not in the absence of some pretty striking new evidence.

The existence of complexity doesn’t reduce the revenues at risk, nor justify taking advantage of complexity (nor indeed lobbying to create or retain complexity). And it certainly doesn’t provide evidence against the ‘received wisdom’ suggested, so I think this section really weakens the draft.

The associated paragraphs largely focus on criticisms of some existing work with commodity trade data (including Maya’s very reasonable criticism last year of a Swiss-Zambia mispricing statistic for which I’m responsible). The discussion of the various broader studies in this draft paper is fairly light touch though. It raises a few questions on individual results, and we can easily agree that there is a good case for being cautious about data and methodologies in this area. But what of all the peer-reviewed, academic analysis that is left out?

The failure to engage with the vast bulk of the literature covered in the OECD’s recent BEPS 11 survey, for example, seems odd. The exclusion of pricing issues in relation to management services, intellectual property and debt – for example – seems doubly so. Even if the commodity critique was entirely valid, this section would not provide evidence against the ‘received wisdom’ that it intends to attack. And in addition there is now a range of analyses of individual multinational groups published by forensic investigative journalists of high quality, which go well beyond anecdote.

If we think of international corporate tax rules as the broader set within which TP rules sit, the entire BEPS process is a reflection of significant political and technical consensus on this problem. Do we have enough consistent data, or sufficient quantity of research as a result, to be precise about the scale and overall pattern of the problem? We do not, and this is the subject of much attention at the OECD, Tax Justice Network and elsewhere. Are we unsure about the broad contours of the problem? We are not. Transfer prices of everything from commodities to intellectual property to intra-group debt are manipulated for tax purposes. The scale is large, and uncertain.

The author is of course entirely at liberty to take a different view, and it would be welcome to see supporting evidence for such a position. But without presenting some pretty impressive new findings, I can’t understand why one would simply dismiss the broad consensus that exists, or seek to build a difference of opinion on the scale of a problem into an argument that the entire thing is a (deliberately?) misleading ‘narrative’ created by NGOs.

Idea 3: Money for nothing

Perhaps anticipating the reader’s scepticism by this stage, this section begins by noting: “Examples of this belief are rarely seen as direct statements” – this much is certainly true – “but often reflected in the implicit assumptions behind calculations of lost taxes…” (p.18).

The TJN quote offered as supporting evidence is intriguing:

“…tax-sensitive investment is by definition the least useful stuff: accounting nonsense and paper-shuffling that does not involve very much employment creation at all.”

Intriguing for two reasons. First, it doesn’t seem to bear directly on the ‘received wisdom’ claim. But second, because the missing start of the sentence is “But as Section 3.3 explains…” And section 3.3 includes a short literature survey with six references on the incidence and impact of corporate tax. Neither the survey nor any of the references are cited in the draft paper.

Instead, the main thrust of this brief section of the paper is to emphasise that (higher effective) corporate taxes can have negative dynamic effects. A selective survey of a few papers supporting some of these leads to the following conclusion:

“These arguments then, are not reasons to give up on taxing corporations, or necessarily to lower corporate tax rates, but underline the need for tax policy to be supported by economic analysis, rather than based on the assumption that there is ‘money for nothing’” (p.18).

If you believe in the existence of this particular ‘received wisdom’, even without any direct evidence being presented, then this is presumably a useful counter-point: we should be more careful to recognise the wider impacts of taxing corporate profits.

In any case, that’s hard to argue with – so hard, in fact, that you want to ask who would argue to the contrary? Here’s the implicit straw man that the paper has constructed:

“Tax policy should not be supported by economic analysis, but instead be based on the assumption that there is ‘money for nothing’.”

There may be a group of people who believe this (or there may not); and if there were, such a group might object to ‘the complex truth’ of policymakers actually having multiple objectives.

But if there is such a group, it presumably has little overlap with those people and NGOs like TJN that have been researching and advocating over the last fifteen years for a tax policy agenda based on economic analysis, rather than one that ignored the growing reality of abusive multinational tax practices; and for the importance of taking into account multiple objectives such as distribution.

It’s disappointing, and difficult to understand, that the paper would seek to attribute this straw man to those people and NGOs.

Summary: Straw men

It’s hard to see the contribution of this main section of the paper. The ‘complex truth’ with respect to idea 1 is a set of assertions lacking evidence, while any remaining objections to the ‘received wisdom’ are questions of scale that must be addressed by serious research. The ‘complex truth’ in relation to ideas 2 and 3 is hardly disputed, but does not contradict the main points of the ‘received wisdom’.

So the overall effect is to suggest that NGOs hold, or have promoted, extreme or unnuanced views that somehow contradict the known facts. That there is, if you like, in fact a received wisdom which the NGO narrative continually contradicts.

There are two main problems with this. First, the paper does not provide any serious evidence either for its own assertions (on which the entire argument hangs), or that any wrong views (disagreeing with an actually true ‘complex truth’) are in fact held or promoted by NGOs.

And second, even if a new draft were to do so – I’m just not sure that this is a useful way to make an argument: defining the righteous view, and implying that others disagree (or perhaps that they dishonestly pretend to).

That pot of gold

Ultimately, the CGD paper makes the argument that NGOs have exaggerated the ‘pot of gold’ that developing countries could obtain by better taxation of multinationals.

To be upfront on this, I share something of this concern. Specifically, I think the balance of attention here, compared to other aspects of tax systems, has not always been right. (At the same time, I can see good arguments for emphasising this aspect in certain policy situations.)

What do we actually know about the size of that pot though? Notwithstanding all the uncertainties discussed, and the importance of new data and continuing to improve methodologies, the best guess at the moment is probably somewhere near the latest IMF researchers’ piece: that developing country annual revenue losses might be around $200 billion, or north of 1.5% of GDP. Given average total tax revenues less than ten times that size, it’s a pretty big pot. (And all without mentioning the trend for rising shares of profits to GDP, and generally stable or falling corporate income tax revenues…)

That doesn’t mean the pot is all obtainable, or that important advances in other areas aren’t also possible, and clearly we need country-level analyses to understand the specific possibilities. But on the CGD paper’s terms, and in respect of its central claim, this is a decent pot of gold. And not one that rests on the work (or the word) of NGOs, if that’s a concern.

So if we put the mischaracterisation of the narrative, and the role of NGOs aside, the central claim of the paper just does not stand up well itself.

My final sadness about the paper is this. The last section proposes some recommendations for NGOs to improve their ways of working that are really worth discussing.

It may be difficult to move towards positive engagement based on their inclusion in a paper that makes this kind of sustained integrity attack, but I hope it may somehow prove possible to take the conversation forward in a different context.

Last thought: Does it matter?

Despite the claim to be serving the cause of better evidence and clearer debate, the draft paper muddies the waters on the potential revenue benefit from improved taxing of multinationals in developing countries – even as the evidence base has recently been further strengthened.

The timing of its being published, at the kick-off of the Financing for Development conference – the best UN opportunity in years (ever?) to lock in greater policy space for the taxing of multinationals by developing countries – is unfortunate.

The Center for Global Development is an important development think tank, and so this paper, even in draft, may well catch the attention of policymakers at Addis. And while CGD publish individual views rather than institutional ones, this may be seen as more than an individual view because it comes from a CGD process with an advisory group.

For the avoidance of doubt, I don’t think there’s any agenda at CGD – so I guess the content of this paper, its timing and any potential impact on FFD progress is just bad luck.

I very much hope that the final draft of the paper, if indeed there is one, will be quite different. A removal of the most polarising claims, where these are made on the basis of limited or no evidence, would be a good start. What would be valuable instead is a concerted examination of the data and methodologies that have been used for various aspects of revenue loss and other IFF estimates, in order to point the way forward to a strengthening evidence base over time. I hope this is a possibility; but I fear the paper may end up as a missed opportunity to contribute to an important policy research debate.

But: be not downhearted: there is substantial policy focus around the world on taxing multinationals, the research field is healthy and the agenda for new work is plentiful!

And, you know…

Hello Addis! That’s right #globaltaxbody is in…#FFD3 pic.twitter.com/V5ZSYBZ1NK

— Global Tax Body (@GlobalTaxBody) July 13, 2015

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.

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…

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…

08/06/201510/06/2015

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…

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.

01/06/201501/06/2015

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.

01/06/201501/10/2015

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.

The 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.

In 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.

18/05/2015

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 emphasizes purely technical reforms instead. Whilst there is nothing wrong with bringing in these new systems, such as those created by Couchbase and similar companies, it is how these technologies are used that should be considered.

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.

Why 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. In any research survey, there should be careful consideration of the demographic and picks for sampling. A study of various sampling methods, along with ample research into other areas of surveying, can help improve results. A large part of the populace that usually gets overlooked can then be better helped. 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.

Our 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.

13/05/201513/05/2015

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.