The State of Tax Justice report criticises the EU and OECD for failing to effectively tackle global tax losses due to multinational enterprises (MNEs) shifting profits to tax havens. The research is based on anonymised 2016 CbCR data published by the OECD this year. This inaugural edition of an annual report by the TJN on global tax abuse argues that a UN tax convention would help to tackle elitism in global tax decision-making.
“The OECD’s failure to deliver meaningful reforms to global tax rules… makes it clear that the task was impossible for a club of rich countries,” said Dr Dereje Alemayehu, executive coordinator at the Global Alliance for Tax Justice.
The OECD was due to conclude negotiations this year on the pillar one and pillar two proposals to tax the digitalisation of the economy. However, COVID-19 and political differences have delayed progress until 2021.
George Turner, director of investigative think tank TaxWatch UK, said a UN convention could represent a “powerful means of breaking the logjam” on the political agreement at the OECD. Pascal Saint-Amans, director at the OECD Centre for Tax Policy and Administration, declined to comment on the TJN report.
Some believe that the UN is better equipped than the EU and the OECD to reach a fair deal because its membership is more representative of the world’s countries than the other organisations. Neither the EU nor the OECD memberships include any African countries, which means the continent is excluded from major discussions on taxing the digital economy.
Cephas Osoro, partner at tax advisory firm Crowe in Kenya, said that “the UN would level the playing field… we’d get a better deal with the UN”.
Osoro added that, without representation for Africa via either the UN or the African Union (AU), “the EU and OECD will take care of themselves and we will be left crying”. In the absence of a UN convention, Osoro proposed that the AU should be included in discussions to negotiate for Africa.
With no adequate representation, the tax authorities of the East African Community (EAC) member states announced in November that they have decided to develop a joint strategy for taxing the digital economy and tackling base erosion, profit shifting and illicit financial flows within the EAC. Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda will address the “legal framework in terms of definitions, identification of players and the legal mechanisms”, the EAC said in a statement.
The UN is trying to address the digital tax gap through the introduction of a new Article 12B in its Model Tax Convention, although it is unlikely to be finalised before 2021. However, it is the OECD that has been the focus of efforts to establish a multilateral solution. The TJN contends that a UN tax convention is needed “to ensure a global and genuinely representative forum… and to deliver comprehensive, multilateral tax transparency”.
Excess profit tax on MNEs and public CbCR
The TJN report also proposes an excess profit tax on MNEs that have been particularly successful during the coronavirus pandemic, which would hit digital companies hard.
“For the digital tech giants who claim to have our best interests at heart while having abused their way out of billions in tax, this can be their redemption tax,” said Alex Cobham, chief executive of the Tax Justice Network.
This suggested tax shows similarities with proposals for a global minimum corporate tax rate. A truly multilateral solution would mean that shifting profits from one jurisdiction to another would no longer yield tax benefits.
“Multinational corporations’ excess profit would be identified at the global level, not the national level, to prevent corporations from underreporting their profits by shifting them into tax havens, and taxed using a unitary tax method,” wrote the authors.
Another suggestion is that MNEs should be identified in the published CbCR data, a proposal that is likely to attract criticism from the international corporate community.
The report shows that $427 billion in tax is lost each year to global tax havens, $245 billion of which is lost to corporate tax abuse by MNEs. Companies paid less in tax than they owed by shifting $1.38 trillion from the countries in which the profits were generated into tax havens.
It is important to note that as this data is from 2016, the OECD BEPS project had begun implementation only one year before.
Failures of the EU blacklist
Meanwhile, the EU tax haven blacklist came under scrutiny once again for failing to include the Cayman Islands, the UK, the Netherlands, Luxembourg, and the US in its latest October 2020 edition.
The report attributes just 1.72% of global tax losses to countries on the EU blacklist, while EU member states were found to be responsible for 36% of global tax losses. The Cayman Islands was blacklisted in February 2020 but removed from the list in October 2020 after it was found to operate in line with international tax rules.
“Cayman being deemed to be compliant with international tax rules despite being the world’s greatest enabler of global tax abuse is evidence that current international tax rules are not fit for purpose,” according to the TJN. The report cites this as a clear reason for establishing a UN tax convention.
However, George Turner of TaxWatch UK said it is “not fair” to blame the EU for failing to blacklist its own members, despite some members actively encouraging international tax avoidance.
“It is a membership organisation that works on the principle of consent and so the Commission is constitutionally unable to impose sanctions on member states unless they have broken EU law,” explained Turner.
Nevertheless, Paul Tang, chair of the recently formed EU committee on tax matters, acknowledges the weaknesses within the 27-member bloc.
“The EU clearly needs to force through reforms of its own members. The COVID-19 recovery fund provides a good tool to do this. Recovery funding should come with strict conditionality,” proposed Tang.
Tang is optimistic about both the OECD’s progress on a multilateral agreement on digital taxation and the EU’s ability to effectively tackle tax losses. “With new EU tools, ranging from state aid rules to looking at distortions to the single market, we can start addressing at least some of our problems without needing to have the EU tax havens on board,” he said.
A number of the suggestions in the TJN’s report will be contentious, not least the excess profit tax on MNEs that have been successful during COVID-19 and the proposal to de-anonymise CbCR data. Meanwhile, the researchers’ use of CbCR data is further evidence of the power of tax transparency measures.
