A rare chance to fix the global corporate tax system

Financial Times

11/07/19

By José Antonio Ocampo

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The G7 large economies have a unique opportunity to “fight inequality through regulated, fairer and more equitable globalisation”, as the French put it in January when they took the leadership of this group.

When the finance ministers gather in Chantilly next week, they must press for an overhaul of the international tax system finally to make multinational companies pay their fair share and give governments more financial resources.

In 2013, the OECD group of wealthy nations initiated a series of tax reforms, including improved exchange of information among tax authorities. But that is not enough. Multinationals continue to move profits among their subsidiaries to minimise tax. For example, companies require subsidiaries in high-tax jurisdictions to license intellectual property rights from units located in places where little (or no) taxes are paid. The trick is even easier for digital companies and digital transactions. Economist Gabriel Zucman estimates that 40 per cent of overseas profits made by multinationals are artificially transferred to tax havens.

Rising public anger, stoked by austerity programmes, has pushed governments to reconsider. Those powerful enough to challenge the world order, such as India, have given the international community an ultimatum: if the international tax system is not reformed, they will change their laws unilaterally. That outcome would be a nightmare for multinationals. While they prefer the status quo, nothing would be worse than having to juggle dozens of national tax systems.

That gives urgency to the new proposal from the OECD Inclusive Framework — a body of 129 member states — to allow countries to estimate the taxes due from multinationals based not only on their local business but also on their worldwide profit margins. This would, for the first time, treat such companies as what they really are: integrated businesses making profits in a global marketplace.

The Independent Commission for the Reform of International Corporate Taxation, which I chair, recommends a global formula that would ensure that multinationals’ profits — and the associated taxes — are apportioned among countries based on objective factors such as sales, employment, resources and digital users. A group of developing countries led by India, Colombia and Ghana is calling for a similar method. We are the only ones proposing to use workforce as a factor and that would favour developing countries, which host a large share of multinationals’ employees.

The commission also supports a proposal for a minimum corporate tax, put forward by Germany and France. Any multinational booking its profits in a tax haven could be taxed in its home country to bring its total tax up to this minimum global rate. That would put a brake on the race to the bottom. Countries that sign up to the global minimum tax would give up the right to offer tax incentives. But it could deliver revenue to developing countries, which are more dependent on corporate taxes; they make up 15 per cent of total tax revenues in Africa and Latin America, against 9 per cent in OECD countries.

An endorsement by the G7 finance ministers would be a step toward a broader OECD deal by 2020. The minimum tax proposal would clearly also benefit richer countries that are home to multinationals. Developing economies should insist that the arrangement include a meaningful reallocation of THE way multinationals’ profits — and associated taxes — are split in the first place.

This reform is no longer a mere technical discussion, it is political. The 129 countries already on board understand that we must find a consensus. Inequalities within and between countries must be addressed. This is a once-in-a-lifetime opportunity. Governments have no right to waste it.


The writer, a board member of Colombia’s central bank and a Columbia University professor, chairs ICRICT

https://www.ft.com/content/49e25356-a1a2-11e9-a282-2df48f366f7d