G20 leaders adopt BEPS package for International tax reform
There’s surprising news from Antalya, where the G20 leaders met last weekend. The meeting was obviously dominated by immediate crises dramatised by the terrorist attack in Paris and the continuing drama of mass refugee movements. They nevertheless found time to discuss, among other issues, a new legal framework to curb international tax avoidance by multinational corporations. See Communiqué.
The G20 leaders adopted the BEPS tax reform package. These are measures proposed by the OECD, as part of its base erosion and profit-shifting (BEPS) project, aiming to deal with tax avoidance by multinational enterprises (MNEs). The G20 leaders in 2013 mandated the BEPS project to reform international tax rules to ensure that MNEs could be taxed ‘where their economic activities occur and value is created’.
This was the political response to the increasing widespread public concerns about the growing evidence of the use by many MNEs of complex corporate structures to shift profits and reduce their tax liabilities. This has affected tax revenues in many states, but hurts especially developing countries, which are particularly dependent on corporate tax revenues. A recent study for the IMF, although admittedly speculative, estimated that the long-run revenue loses for advanced economies are of the order of 0.6% of GDP, but over three times greater for developing countries, at close to 2% of GDP.
Our researcher, Prof. Sol Picciotto attended the G20 Antalya summit, and he had this to say:
It is a significant achievement for the G20 and OECD tax experts to have been able to deliver a consensus package of proposals for international tax reforms. However, this should be regarded as not the end but the beginning of a longer process. First, there is the challenge of implementation, which will require adoption of many changes in national law as well as international treaties. The OECD proposes to monitor this process, to ensure effective implementation.
But beyond that, the project has not yet resolved some key issues, including work on the profit split method, and the much wider issues raised by the digitalisation of the economy, which they say will take five more years. This also requires reconsideration of the key principles underlying existing international rules, notably the allocation of the tax base between residence and source countries, a key issue for developing countries.
Indeed, most international tax specialists consider that the problems of the international tax system run deeper, and require a new approach, based on treating MNEs in accordance with the economic reality that they operate as unitary enterprises. Several such approaches have been proposed, such as worldwide taxation by the home countries of MNEs, with a credit for foreign taxes paid, put forward for example by Edward Kleinbard. A radical approach would be a destination based corporate tax, suggested by Devereux and de la Feria. A more holistic solution would be unitary taxation with formulary apportionment, long used in some federal states (notably the USA), and which has been proposed for the EU by the European Commission. This requires further research, which led the ICTD to sponsor work to investigate some of the implications of such an approach for developing countries, the results of which can be found here.
ICTD researchers have also been investigating some more immediate possible approaches for developing countries, and some of the outputs are being made available here.
Also, see Sol’s contribution to the coverage of the G20 in the main evening news programme of the Vietnam Television Network (VTV) here.
Sol Picciotto is also the Coordinator of the BEPS Monitoring Group (BMG), a network of international tax experts that monitor the BEPS Action Plan, as well as related initiatives for the reform of the taxation of MNEs.
His analysis of the international tax system was published as ICTD Working Paper 13 “Is the International Tax System Fit for Purpose, Especially for Developing Countries“.