Finance

Background

The IMF’s work on tax spillovers and developing countries

10 April 2014

Sponsors: Action Aid/UK, IMF, TJN Africa, New Rules Coalition, International Centre for Tax Development

Panellists: Anna Thomas (ActionAid UK), Vicky Perry (Assistant Director, Fiscal Affairs Department, IMF), Michael Durst (Contributing Editor for Bloomberg BNA), Michael Keen (Deputy Director, Fiscal Affairs Department, IMF), Savior Mwambwa (Tax Justice Network Africa), CHAIR: Jo Marie Griesgraber (Executive Director, New Rules for Global Finance Coalition)

Presentations

Mick Keen, IMF

  • International tax system is pretty well broken; ideas of “source” and “residence” are now very slippery and difficult because of changes in structures, finance; arms-length principle under increasing stress
  • Main questions in our forthcoming paper: types of tax spillovers, relevance, size, developing country concerns, can we address the spillovers better?
  • Some of this is about tax competition, tax rules can affect prices, interest rates, exchange rates – though we focus on the fiscal side
  • We are complementing and not trying to duplicate BEPS, we are focussed on the economic impact; BEPS takes the rules as given, which we don’t have to do
  • There is a fairness dimension

Vicky Perry, IMF

  • Some issues in our paper:
  • impact of tax treaties on developing countries – the treaties have useful things such as definitions
    • But treaties have expanded massively – often to attract FDI, but evidence is mixed that this works
    • Treaty shopping problem, May not offset revenue losses
    • indirect transfers of interest (for example up the chain of corporate entity controls)
      • capacity issues
      • interest deductibility – BEPS is dealing with this; we talk about solutions that are good for developing countries
      • international arms-length pricing – we look at practical and conceptual aspects
        • what kinds of measures could help developing countries
        • capacity building is good but not enough nor necessarily most important; but don’t overstate the case

Mick Keen, IMF

  • spillovers means we have a coordination problem, but others disagree and say this is efficiency inducing
  • Even if BEPS fixed everything – there would still be spillovers and tax competition
  • Balance between territorial taxation and worldwide taxation needs to be discussed
    • Ideas of multinational group unitary taxation, formula apportionment is possible – it works where countries have subnational income taxation
    • You have to then think about the weights, using anything but employment as the basis doesn’t really help developing countries
    • A number of other options are also possible
    • Questions of policy coordination – how do you bring this about? Tax is different from trade – little countries in tax are really important but they are not in trade – the politics are very different

Michael Durst, International Commission on Tax and Development

  • Politically – BEPS is another word for “nullification” of corporate taxation, but nullification is no accident, it is a result of policy choices
    • Dysfunctional transfer pricing being allowed is deliberate
    • Developing Countries have not implemented OECD recommended policies such as limits on exceptions. Why? Tax competition
    • For some corporate taxation nullification is not a bad thing – it is described as inefficient – but depends on the country; developing countries have trouble meeting needs from domestic tax base
    • IMF should recommend countries deal with tax competition and put in place OECD recommended anti-avoidance measures, including withholding taxes network
    • Political opposition will be huge, arms-length standard is unenforceable in the whole though you could improve
    • Regional cooperation could help mitigate tax competition, you could do formulae apportionment approach regionally – as audits needed and resources should be pooled
      • Sales only apportionment doesn’t work for export oriented, but still would be better than what we have now
      • This is going take a long time

Savior Mwamba, Tax Justice Network Africa

  • Efforts to attract FDI are a particular reason for dismantling tax systems in Africa – particularly in the extractives industry
    • And supposed jobs/supply chain benefits don’t materialise, meaning tax is the only benefit to offset environmental/social costs
    • Mineral export levels are not proportional to revenue
    • OECD BEPS will not solve developing country tax problems, we hope IMF can fill the gaps
    • Beneficial ownership questions and automatic info exchange are important – but ambition is weak
    • BITs, FTAs and tax treaties are detached from current political discussions on tax
    • We need to look beyond the BEPS project, and developing countries need to come up with their own measures – IMF can support spaces to allow African governments to get their voices heard – for example the UN tax committee

Anna Thomas, ActionAid

  • Welcome IMF’s work and on corporate taxation – corporate taxation is 17% of LIC revenue
  • Focus on tax rules themselves is important, not just on enforcement on existing rules; though we will keep campaigning on avoidance
  • Technicalities/complexities scare people away from thinking about this, contributing to the denigration of the rules
  • Real impacts are important – think about the potential schooling that could be funded with taxation
  • Need measurement of spillovers, we lack systematic data and information; we need vertical as well horizontal spillover analysis – like the UK controlled foreign corporations rules
  • We want more withholding rights for taxation

Discussion

Q: BEPS process may not have positive effects, what can be done to ensure we have right data?

Q: Policy coordination – we need to clearly discuss how this can be policed? A World Tax Organisation?? How can IMF/World Bank to incentivise cooperative corporate behaviour?

Q: examples of dealing with spillovers, corporate tax floors at regional levels?

Vicky: the Netherlands has started for example with treaty re-negotiations; we do mention minimum taxes

Mick: what you need is data at company level, not just country-by-country reporting, but expansion of existing datasets which we have on Northern countries; macro-level data is not very helpful, need micro level panel data; we know how corporate respond to tax incentives; it is hard to come up with a single bottom line number; there are also winners and losers. A World Tax Organisation is not going to happen; but agree UN tax committee is shamefully under resourced. Don’t have too many expectations from this paper.

Jo-Marie: What can we do? Are there background research papers?

Mick: interactions with CSOs are very important, give us your honest opinions. Paper will be available later; emphasis on extractives is important and we are working on a book on this

Vicky: see older papers on UK rules shift

Q: tax collection mechanisms in developing countries are full of loopholes; need to think holistically; VAT is a big problem for developing countries – unfair competition among companies

Q: political economy of this? Can the Bank help with data availability?

Q: can you tell as more about regional coordination?

Anna – we need the analytical work to help us crack the politics; remember we have come really far in the last 5 years

Savior – technical cooperation is happening for example West African rules on corporation taxation. We need the corporates to compete not have the countries compete. But African governments should not wait for the OECD, we need to fight to get the governments to work on this

Michael – once capital became mobile, corporate taxation has become harder to sustain politically; there is some momentum now to reverse this but this may not stay; US reaction to BEPS show we may not make progress; lobbying/objections has skewed rationality for many analyses – so the IMF can rise above that

Vicky – important to see the linkages – corruption, wealth taxation etc; VAT is of big economic significance; what helps is getting attention to this subject

Mick – regional coordination is good, and IMF has tried to help this but it is difficult; we need to think about purpose of corporate tax as there are a broad range of views;  We have come a long way

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