Image Credit: Government of South Africa
ONLY TWO WEEKS ago the Organisation for Economic Cooperation and Development (an intergovernmental economic organisation, designed to stimulate world trade and progress) revealed their new policy for taxing multinational corporations. Their new taxation system overhauls the old understanding that countries which trade in multiple places should only pay tax on their revenue in the country with which they have a headquarters. This has been pushed through due to a trend of transnational corporations (TNCs) putting offices in low-tax jurisdictions so as to minimise tax.
“We’re making real progress to address the tax challenges arising from digitalisation of the economy” said the OECD secretary-general Angel Gurria, the hopeful result being that TNCs “Pay their fair share.” The old system, which was implemented in the 1920s meant corpo - rations paid tax wherever they had significant consumer facing activities, but this definition is no longer relevant in an age of tech giants that can trade in countries without having a physical presence there.
Just last week the G20, the forum for leaders and finance min - isters of 19 countries and the EU, pledged their support for the tax. Taro Aso, Japan’s (host of the G20 meeting this year) finance minister said the G20 “reaffirmed, firm support for a final report in 2020 and stressed the importance of an inclusive framework”. Another programme run jointly between the OECD and the United Nations Development Programme has also contributed hugely to this cause of increasing the tax revenue from TNCs.
Tax Inspectors Without Borders have now been running for a number of years with the goal of “providing hands-on assistance and peer-to-peer learning, the programme improves understanding of global tax challenges and helps authorities claw back unpaid taxes.” With this new tax regulation, TIWB could potentially do even more as it could now clamp down on all kinds of TNCs, including tech-based firms like Google and Facebook to make sure they are not avoiding tax. However, analysis by the Tax Justice Network, a tax campaigner group, has found that the proposed reforms will only reduce profits of TNCs by 5 per cent and could likely end up worsening global inequality.
Their analysis suggests that the OECD plan would redistribute a much higher proportion of revenue to higher income countries instead of the emerging economies that arguably would benefit most. They analysed the International Monetary Fund’s plan and revealed it reduced profits registered in tax havens by 43 per cent. Their own proposed system would reduce the amount of profits registered in tax havens by 60 per cent.The main difference lies in that the OECD’s regulation would redistribute tax revenue based on where the country gains its revenue. The TJN would instead also include where they em - ploy their workforce. According to them the OECD tax reform would “Give greater taxing rights to rich - er countries at the end of the sales process.” Alex Cobham, Chief Executive for TJN said, “After promising the radical shift in international rules that is urgently necessary, the OECD seems to be lapsing back into tinkering at the margins, and even less for the lower-income countries that lose the most to corporate tax abuse”.