Anti-poverty advocates are lauding a new staff paper from the fund released Wednesday. Its findings not only coincide with civil society calls for major taxation reforms at the national and international levels, but also repeatedly push back against longstanding tax-related dogma, including that offered by the
“This is, frankly, a revolutionary paper,”
“It looks very carefully at many aspects of tax planning, and each time says that this has very negative impact on developing countries … Ultimately, it says that traditional tax theory is essentially uninformed by empirical knowledge.”
The paper is the result of a new focus on tax-dodging among the Group of 20 (G20) industrialised countries, which directed the fund to undertake related research. The findings are particularly notable in their sustained focus on the impacts on developing countries.
“Our technical assistance work in developing countries frequently encounters large revenue losses through gaps and weaknesses in the international tax regime,”
“The sums involved for them can be large, not just relative to corporate tax but relative to all tax revenue: 10-15 percent in some cases. The paper reports new evidence that these effects are in fact systematically more important for developing countries.”
Corporate tax rates in all countries have plummeted in recent decades, the paper notes.
Low-income countries have seen these rates degrade from near 50 percent in 1980 to under 30 percent last year. Others have seen similar plunges, with high-income countries seeing corporate taxation fall from around 40 percent three decades ago to little more than 20 percent today.
Such trends have been tracked for years. Yet in the aftermath of the global financial crisis, rich and middle-income countries have begun actively discussing how to maximise their tax revenues, with a focus on ending corporate accounting gimmickry.
Rich companies and individuals could be stashing away as much as
“Developed countries today need more income and are mad because not everyone is paying their taxes,” Griesgraber says.
“And that anger is also translating into public pressure. People who pay their taxes even during a difficult recession are even madder than the governments.” Related IPS Articles
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According to the IMF data, developing countries should perhaps be the most incensed by the impacts of today’s global taxation hodgepodge. The paper offers new findings on the ramifications of what the fund terms “spillover effects” – the ways in which one country’s tax rules impact on another country, which can also be thought of in terms of tax competition between countries.
This phenomenon has been significantly exacerbated as multinational companies have increasingly learned how to legally “move” their operations – largely on paper – for tax benefit. Such companies appear to be based in countries with low taxes, despite doing most of their work in another country that, in turn, is unable to place levies on the company’s full earnings.
“Current international tax arrangements rest on concepts of companies’ ‘residence’ and the ‘source’ of their income, both of which globalization has made increasingly fragile (some would say meaningless),” the paper states.
“At its core, a key issue in assessing any international tax arrangement is how it divides the rights to tax between source and residence countries … The allocation of rights is especially important for low-income countries, however, as flows are for them commonly very asymmetric – they are essentially ‘source’ countries.”
The fund staff found that the impact of these spillover effects on corporate tax bases are “significant and sizable” but are “especially pronounced for low-income countries”. Compared to rich countries, the paper notes, “the base spillovers from others’ tax rates are two to three times larger” in developing countries, and “statistically more significant”.
Particularly problematic has been the extractives industry, though the fund also calls out telecommunications companies. The paper recounts IMF experiences in multiple countries where corporate tax trickery has eaten up much of a project’s revenue, such as a “gold mining sector in which
The fund ultimately goes so far as to suggest that countries should be extremely careful about signing any bilateral tax treaty, urging developing country governments instead to signal openness to investment by other means. Through such agreements, countries can sign away their right to levy full tax rates and give an upper hand to foreign corporations.
“The IMF analysis raises some very worrying concerns about the impact of tax rules and practices in rich countries on the ability of poor countries to raise their own revenues,” Diarmid O’Sullivan, a tax justice policy advisor with
“We see a clear message to … major capital-exporting countries to review their tax rules and make sure they are not harming the ability of poor countries to raise the revenues they need for their development.”
One key step being pushed by governments and civil society today to cut down on corporate tax avoidance entails the automatic exchange of tax information between governments. Doing so, proponents say, would quickly clear up the discrepancies that can be exploited by tax-dodgers.
In February, the
Some are now hoping that this new flurry of work could be leading towards the formalisation of a stricter international framework on tax policy, in line with the globalised environment of today’s multinational corporations. Indeed, the IMF’s new paper notes that “the case for an inclusive and less piecemeal approach to international tax cooperation grows.”
Indeed, a decade and a half ago an IMF official proposed the establishment of a
“As tax dodging knows no border, it makes sense to move to the international level to create such a worldwide entity,”
“Modalities about its functionalities and mandate would remain to be determined, but it could have a role in setting minimum standards to avoid harmful tax competition between countries – and, if ambitious, an international dispute mechanisms to fight countries that deliberately put in place tax policies with too much negative spillover effect on others.”
The IMF and OECD reports will both go before the G20 at a summit in November.
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