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ICRICT launches new paper: “The fight against tax avoidance. BEPS 2.0 : What the OECD BEPS has achieved and what real reform should look like”

21 January 2019
The Independent Commission on the Reform of International Corporate Taxation, of which PSI is a member, is launching a new petition, analysing the successes and failures of the OECD's Base Erosion Profit Shifting initiative.

In 2012, the G20 called on the Organization for Economic Cooperation and Development (“OECD”) to reform the international corporate tax system through the Base Erosion and Profit Shifting (“BEPS”) initiative and associated processes. In 2015, a package of reforms was unveiled by the OECD. The reform process was only afterwards open to non-G20 countries, including developing economies, within the “Inclusive Framework”.

BEPS has resulted in helpful solutions for some of the most shocking tax avoidance mechanisms. But it has failed to address the core problem: companies are still allowed to move their profits wherever they want and to take advantage of very low tax jurisdictions.

Read the full report here.

ICRICT Report: Executive Summary

By not collecting the revenue that is being lost through tax avoidance schemes by multinationals, governments are failing in their obligation to mobilise all available resources towards the realisation of economic, social and cultural rights.

The most shocking aspect of multinational tax avoidance is the fact that it is legal.

Multinationals fix the prices of transactions between their subsidiaries to guarantee that their revenues are taxed in countries where tax rates are lower – and not where their economic activity and the creation of value really take place. It is called the “transfer pricing system”. This way, they are able to concentrate enormous profits in just a handful of tax havens thanks to a powerful industry of intermediaries – banks, consultants and law firms.

These taxes that are dodged are compensated for with higher contributions from the middle and working classes. It is toxic for democracy and contributes to the kind of populist backlash that allows authoritarianism to flourish, as we see today.

WHAT THE G20/OECD BASE EROSION AND PROFIT SHIFTING PROCESS HAS ACHIEVED
In 2012, the G20 called on the Organization for Economic Cooperation and Development (“OECD”) to reform the international corporate tax system through the Base Erosion and Profit Shifting (“BEPS”) initiative and associated processes.


In 2015, a package of reforms was unveiled by the OECD. The reform process was only afterwards open to non-G20 countries, including developing economies, within what is called the “Inclusive Framework”. BEPS has resulted in helpful solutions for some of the most shocking tax avoidance mechanisms. For example, it introduced country-by-country reporting of profits and taxes paid by the largest multinationals, and an exchange of information among countries. But the project failed to address the core problem, which is the transfer pricing system itself. This still allows companies to move their profits wherever they want and to take advantage of very low tax jurisdictions.

As a Commission, we believe that the OECD BEPS Process has achieved what it could, within the constraints of politics driven by big corporations. We therefore urge governments represented in the Inclusive Framework, the UN Tax Committee and all multilateral institutions involved in efforts to reform the international tax system, to evaluate alternatives to the transfer pricing system.

OUR ALTERNATIVE APPROACH TO TAXING MULTINATIONAL
As outlined in our previous report A roadmap to improve rules for taxing multinationals, the fairest and most effective approach is for multinationals to be taxed as single firms doing business across international borders.

A simple, formulaic approach would ensure that global profits and associated  taxes could then be allocated according to objective factors such as the sales, employment, resources (and even digital users) used by the company in each country, rather where they locate their different functions (procurement, marketing, funding, etc) and claim their Intellectual Property.

If multinationals paid taxes as single, unified companies, the use of transfer prices to shift profits would disappear, because their global income would be consolidated and they would not be able to shift profits through internal transactions.

In turn, all countries would obtain fiscal revenues from the multinational group in proportion to the real economic activities that take place in each territory. This proposal, combined with a global effective minimum tax of 20-25% would drastically reduce the financial incentives for multinationals to shift profits between jurisdictions and for countries to cut their tax rates.

THE LEGITIMACY OF THE PROCESS
Today’s reality is that the OECD is playing the leading role is shaping tax standards. In addition to our concerns on the legitimacy of the OECD vis a vis the United Nations, we are worried about the way developing countries are prevented from engaging in the shaping of global tax standards.

The OECD BEPS process was developed by developed countries for developed countries. Most developing countries do not have the capacity to assess and reap the benefits of it. Yet, the BEPS outcomes are being implemented as the new global standard applicable to all countries.

Developing countries should therefore carefully evaluate the opportunity cost ofengaging in the Inclusive Framework, and the practicability of signing up to and implementing the BEPS outcomes that may not address their needs.

Corporate Tax avoidance by multinationals: key facts
•IMF’s Fiscal Affairs Department estimates annual total corporate tax losses associated with profit shifting at more than $500bn, with $400bn for OECD member states and around $200bn for lower-income countries per annum.
•Tax Justice Network researchers estimate annual corporate tax losses of $500bn per annum due to profit shifting.
•Profit shifting by MNEs is estimated to cost EU member states €50-70bn per annum.
•Latest research indicates that a move to global formulary apportionment will benefit both developed and developing countries (Cobham & Janský, and Zucman) to the detriment of tax havens.

Examples of tax avoidance by multinationals:
•Facebook paid just £7.4million of UK corporation tax in 2017, despite revenues of £1.3billion in the country and global profits before tax of 50%.
•Amazon paid just €16.5m (£15m) in tax on European revenues of €21.6bn (£19.5bn) reported through Luxembourg in 2016.
•Google moved 19.9 billion euros ($22.7 billion) through a Dutch shell company to Bermuda in 2017, as part of an arrangement that allows it to reduce its foreign tax bill, according to documents filed at the Dutch Chamber of Commerce.
•Starbucks Coffee Company UK Limited recorded a profit of £4m on turnover of £372m in the UK, but that profit is reduced by an intra-group royalty and licence fees of £26m, more than 5 times the value of profit.
•Vodafone, the first big multinational to voluntarily publish country by country data in its financial statements for 2016/2017, shows that nearly 40% of its profits are allocated to tax havens, with Eur1,4bn declared in Luxembourg, where the company provides intra-group services and funding, and is taxed at an effective tax rate of 0.3%.
•Since 2015 there has been a dramatic increase in companies using Ireland as a low-tax or no-tax jurisdiction for intellectual property (IP) and the income accruing to it, via a nearly 1000% increase in the uptake of a tax break expanded between 2014 and 2017, measures are estimated to have reduced Irish companies’ tax liabilities by up to €3.3bn, just from tax allowances on the intellectual property moved into Ireland in 2015. On top of that, figures released in July 2017 show that corporate groups are channelling interest payments on at least €70bn of related-party debt through tax-free Irish special purpose vehicles.
•Four pharmaceutical corporations—Abbott, Johnson & Johnson, Merck & CO (MSD), and Pfizer— appear to deprive developing countries of more than $100 million every year through tax avoidance

Read the full report here.

In 2012, the G20 called on the Organization for Economic Cooperation and Development (“OECD”) to reform the international corporate tax system through the Base Erosion and Profit Shifting (“BEPS”) initiative and associated processes. In 2015, a package of reforms was unveiled by the OECD. The reform process was only afterwards open to non-G20 countries, including developing economies, within the “Inclusive Framework”.

BEPS has resulted in helpful solutions for some of the most shocking tax avoidance mechanisms. But it has failed to address the core problem: companies are still allowed to move their profits wherever they want and to take advantage of very low tax jurisdictions.

The Independent Commission for the Reform of International Corporate Taxation (ICRICT) thinks the OECD BEPS process has achieved what it could, within the constraints of politics driven by big corporations. We are also worried about the way developing countries are prevented from engaging in the shaping of global tax Standards, since the BEPS process was elaborated by developed countries for developed countries.

We are assessing, in this new paper, what the OECD BEPS process has achieved so far, offering ideas about what real reforms should look like.

This report is issued less than a week before an important meeting in Paris (January 23) in the OECD offices. For the first time the OECD will be presenting to developing countries, the preambles of what will be the “BEPS 2.0” plan, in other words, a deeper transformation of the tax system, looking at the challenges posed by the digitalization of the economy. It is a unique opportunity for all governments to urge the OECD to move away from the transfer pricing system towards a fairer and more effective system.

The lack of consensus so far on how to tax digital multinationals has led numerous countries to implement (India, Italy, Spain, and France) or to promise to implement (United Kingdom) taxes based on turnover on a unilateral basis as a stop gap measure to raise revenue.

You will find here and attached the full report.

You will also find here and attached a media advisory. Journalists can find here:

- A summary of the report

- Key facts and figures about corporate tax avoidance

- Examples of tax avoidance by multinationals

- A box reviewing the OECD BEPS process (positive and negative steps, as well as current failings)

- A series of quotes by ICRICT commissioners

 

ABOUT ICRICT:

The Independent Commission for the Reform of International Corporate Taxation aims to promote the international corporate tax reform debate through a wider and more inclusive discussion of international tax rules than is possible through any other existing forum; to consider reforms from a perspective of public interest rather than national advantage; and to seek fair, effective and sustainable tax solutions for development.

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