The huge fiscal pressures occasioned by the pandemic mean global tax-gaming by corporations and the wealthy is a luxury we can no longer afford.
As the pandemic has raged around the world, releasing yet another wave of infections and associated deaths, economies have slumped, resulting in massive losses of livelihoods. Material insecurities are increasing sharply, with more uncertainty, discord and strife.
Yet, in the midst of all this, some corporations and individuals are doing better than ever—profiting immensely from the very forces that have laid everyone else low. And these same companies and wealthy individuals continue to pay in taxes much less relatively than others, sometimes close to nothing.
The massive inequalities inherent in the global economic system have been evident for a while but they have been laid bare and intensified over the past year. The international tax architecture continues to aid and abet increasing inequality, because of anomalies which enable multinational companies to avoid paying the same rate of taxes local companies pay. It also allows very rich individuals to avoid paying even minimal wealth taxes in their own countries of residence, by stashing away money in tax havens and via other illicit financial flows.
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We can no longer afford to allow this. This is not only because of concerns about the massive inequality it encourages, the injustice and the absence of level playing-fields for all taxpayers. Most important, right now, is that governments across the world—even those which have used central-bank liquidity to increase spending immediately—must make even larger expenditures in coming days.
They will have to deal with the pandemic and its effects on economies, support and provide social protection to those devastated by economic collapse, address and cope with the climate crisis and try to meet the United Nations sustainable development goals, which have been hugely set back. No country can afford the luxury of coddling its richest residents and large corporations by allowing this tax avoidance and evasion—and the international community cannot continue to look the other way as vast sums are denied to governments and their citizens.
Stopping the bleeding
Stopping this bleeding in practical terms is not impossible—or even that difficult. Some solutions have been apparent and in the public domain for a while. The Independent Commission for the Reform of International Corporate Taxation (of which I am a member) has suggested a set of comprehensive and fundamental reforms which incorporate basic principles of efficiency and fairness. These include enabling every country to tax the global profits of multinational companies (MNCs), by apportioning the profits according to a formula based on sales, employment, users (for digital companies) and capital, and with a global minimum tax rate of 25 per cent.
This idea mimics a system already applied in the United States, which is very federalist and allows states to have different tax policies. The beauty of this is that it completely removes any incentive that MNCs have to engage in base erosion and profit shifting (BEPS)—artificially classifying profits to low-tax jurisdictions to avoid paying higher taxes in countries where they actually operate.
Obviously, this is something most effectively done with international co-ordination, so ideally it should be organised under the aegis of the UN. Instead, the task was handed over to the Organisation for Economic Co-operation and Development, which since 2013 has been working on a strategy for stopping global corporations from shifting profits to tax havens and ending the ‘race to the bottom’ in corporate-tax rates.
But the experience has been disappointing, to say the least. The OECD is a relatively closed club of mostly rich countries. The BEPS Inclusive Framework sought to include 135 countries and tax jurisdictions, but these were included only after the more important decisions on strategy were taken, and most countries are still excluded from effective and equal participation.
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A successful strategy to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax system necessarily requires both ambition and simplicity. Both have been lacking in the OECD process, possibly because of successful lobbying by large MNCs.
As a result, the OECD’s proposals have been very delayed, very complicated (and therefore easier for corporations to game) and promoted only very marginal reform, which would barely skim the surface. Finally, even these modest and not so meaningful measures have not yet been finalised, despite years of deliberations.
So how can governments and their citizens act, in the face of such inaction? Waiting for an international agreement is no longer desirable, as the need for public expenditure to support health, incomes and employment becomes ever more pressing, and eventually these will have to be financed through taxes and other revenues. So governments should move unilaterally to introduce interim measures to ensure that profitable companies which have benefited from the pandemic—in particular those in the digital and tech sectors—contribute to a just recovery.
ICRICT has suggested five measures governments can undertake:
- apply a higher corporate-tax rate to large corporations in oligopolistic sectors with excess rates of return;
- set a minimum effective corporate-tax rate of 25 per cent worldwide to stop base erosion and profit shifting;
- introduce progressive digital-services taxes on the economic rents captured by multinational firms in this sector;
- require publication of country-by-country reports by all corporations benefiting from state support; and
- publish data on offshore wealth to enable all jurisdictions to adopt effective, progressive wealth taxes on their residents and prevent or reduce illicit financial flows.
As long as wider reforms are blocked by leading OECD members, these measures will support governments in mobilising much-needed additional revenue. In addition, unilateral measures such as these serve to bring effective pressure to bear on the international community for genuinely fair, international tax reforms.
With a change of guard at the White House, it is possible to be more hopeful than previously that some of this pressure will have positive effects. There is clearly broader public support for measures that would ensure that the rich (whether large MNCs or high-net-worth individuals) are taxed fairly and at similar rates to other companies and people.
This is clearly a carpe diem moment—not only because the stakes are so high and the costs of inaction so great, but because such measures are more feasible than ever.
This is part of a series on Corporate Taxation in a Globalised Era supported by the Hans Böckler Stiftung