Proposed reforms of international tax rules by the Organisation for Economic Co-operation and Development will only claw back 5% of profits, and could end up worsening global inequality, analysis by tax campaigners has found.
A study by the Tax Justice Network found that the OECD proposals, designed to limit the scope of multinationals to avoid tax, could end up shrinking the tax paid in poorer countries.
Researchers found that the additional tax recovered from corporate tax havens would mainly benefit the richest countries.
While the poorer countries often lose out the most through tax abuses, the OECD reforms could end up seeing their tax bases shrink by 3%, researchers warned, while about 80% of the taxes clawed back are likely to be redistributed in high income countries.
The reforms have been in gestation since 2015, including proposals specifically designed to address how online tech giants such as Amazon, Google and Facebook are taxed. In May, 129 countries signed up to the OECD’s “road map for resolving the tax challenges arising from the digitalisation of the economy”, working towards new rules by the end of 2020. The OECD estimated the annual tax loss at $240bn, but according to Tax Justice the figure is likely to be double that, at more than $500bn.
The study compared the outline OECD proposals with two alternatives, one from tax justice campaigners themselves and another from the International Monetary Fund (IMF). It found the OECD approach was by far the weakest in tackling tax abuse, resulting in a mere 5% drop in profits registered in corporate tax havens – including Ireland, Jersey, Luxembourg, and Switzerland – compared to a 43% and 60% reduction under the IMF and campaigners’ proposals respectively. The latter scheme would also be far more beneficial to non-OECD members, including the G24 and G77.
All three proposals aim to tax multinational groups as a whole, instead of as various national subsidiaries, and share out the total tax around the countries in which the group operates. However, the OECD plans would focus on the multinational firms’ sales, rather than also incorporating where employees are based, as campaigners prefer.
Researchers said the OECD and IMF plans would “give greater taxing rights to richer countries at the end of the sales process than to lower-income countries at the start of the process”. For instance, a multinational shoemaker would be taxed where it sold its brand name running shoes and not where the shoes were stitched together, it said.
Alex Cobham, chief executive at the Tax Justice Network and a co-author of the study, said: “We’re concerned the OECD may be fumbling a golden opportunity to lead the world into a new era of equitable international tax rights.
“After promising the radical shift in international rules that is urgently necessary, the OECD seems to be lapsing back into tinkering at the margins – doing little to redistribute profits from tax havens, and even less for the lower-income countries that lose the most to corporate tax abuse.”
The study relies on aggregate statistics from multinational companies’ country-by-country reporting. Cobham said that the release of that data – made publicly available only this year after demands for greater transparency – fell short of what was needed for countries who were signed up to the framework deal to be able to scrutinise the proposals fully.
“They should demand the OECD release its full country-by-country data so that governments can make informed decisions on the likely impacts on their economies and their citizens,” it said.
The OECD said the criticism ignored vital features of its work and misrepresented the outcome for developing world countries.
It said the base erosion and profit shifting (BEPS) programme has expanded to include 134 countries and it has consulted widely with developing world leaders on the best way to tackle tax abuses.
“There is no recognition of this fact which is important because we now serve all these countries and a compromise will have to be found among all of them,” said Pascal Saint-Amans, head of the BEPS project.
“We are not drafting books for the shelves or speeches for whoever, we are trying to get all countries to agree which means that a solution will have to be somewhere between the current proposals on the table. If there is no agreement there will be a much worse situation for all, starting with developing countries,” he said.