Michael McCarthy Flynn is a UCD Master of Public Policy student. He points out the significant advantages corporate interests currently enjoy in shielding income from effective taxation in any jurisdiction, and the key role of effective international coordination of tax policy not only in securing tax justice but in addressing poverty and meeting global development goadls/
Corporate tax avoidance is big news these days. Barely a week goes by without details becoming public of another multinational firm using lax international tax rules to legally avoid hundreds of millions, and even billions of euro, worth of tax. One week it is Zara, another month it is Cerebus. Next month, well take your pick. One constant in many of these disclosures is the central role Ireland plays in facilitating corporate tax avoidance, as the graphic below shows (Source: Corporate taxation: new rules, same old paradigm):
The G20 has mandated the OECD to work on global reform of the current corporate tax system through the BEPS process, while the European Commission through its anti-tax avoidance package is also working to end corporate tax avoidance. Following the Apple ruling, the Irish Government has repeatedly referred to these two processes as the most appropriate way to tackle the problem of Corporate Tax avoidance. However, since the BEPS process commenced in 2014 there has been no data published to indicate that corporate tax avoidance has been reduced.
This is because the proposals that have been agreed so far at these institutions, and those that are currently under consideration, are too weak to end corporate tax avoidance. For example, the current proposals at EU level to introduce public Country by Country reporting (public CBCR) for large multinational companies operating within the EU, have some serious shortcomings. Although the OECD and EU recognizes that information about business activities, profits and taxes paid per country is important for tax authorities themselves, the current proposal for public CBCR only covers very large companies with a turnover above €750m. This high threshold is important, as in smaller developing countries, multinationals below this threshold could still be among the largest foreign investors. In fact, the current proposal isn’t real public CBCR: there is no proposed breakdown for each country in which big multinationals operate, nor is there information about their subsidiaries or assets, which means we will miss the full picture.
This may seem like a dry accounting matter, but making this detailed information public will let us see what multinational corporations are really paying in taxes and what kind of business activities they have in each country where they have subsidiaries. It is a first and very vital step towards making sure that multinational corporations pay an appropriate amount of taxes in each of the jurisdictions in which they operate. Yet even if the EU does agree stronger public CBCR rules, it is doubtful whether this will be able to address the global nature of corporate tax avoidance, as it only cover EU countries and a list of tax havens that is yet to be decided.
Ultimately, this issue can only be resolved at the UN level through the formation of an intergovernmental tax body. Such a proposal has been endorsed by former UN Secretary-General Ban Ki Moon, several independent experts on human rights and poverty issues, as well as by the Independent Commission for the Reform of International Corporate Taxation (ICRICT). In 2015, the Group of 77 (G77) and China made the establishment of an intergovernmental tax body one of its highest priorities during the UN Conference on Financing for Development in Addis Ababa. While governments failed to reach agreement on this issue in Addis Ababa, the Government of Ecuador, which is also the upcoming chair of the G77, has announced its intention to put this forward as a proposal to the UN General Assembly, in order to ensure a coherent global response to international tax dodging and to bring an end to tax havens. To date Ireland and the EU have not agreed to the setting up of this body.
Corporate tax avoidance is especially problematic for developing countries which lose around $100bn annually because of corporate tax avoidance schemes. This amount is more than enough to pay for the education for all of the 121 million children currently out of school, and to pay for health interventions that could save the lives of 4 million children. The impact of extreme global tax completion is also particularly problematic for poor countries where corporate tax revenues make up double the proportion of government income compared to rich countries. This is because taxing large and stable corporations is far easier for tax administrations in developing countries than collecting revenues from poorer individuals or fragmented smaller businesses. Such revenues are critical for the funding of essential public services such as education and health and for building infrastructure to create an enabling environment for future prosperity. Conversely, when corporate taxes are cut, governments make up for the loss in revenues by cutting vital services or increasing taxes paid by ordinary people, such as VAT.
World governments, including Ireland, have embarked on one of the most ambitious global contracts ever in agreeing the Sustainable Development Goals (SDGs). Achieving the SDGs by 2030 will require that governments, donors and private sector all contribute to generating more finance for development ($1.4tn per year). It is questionable how this can be achieved without tackling corporate tax avoidance and extreme corporate tax competition.
Supporting the development of effective states that provide basic services for their citizens such as healthcare and education, and that foster an enabling environment for prosperity, is one the most important way to address global inequality and poverty. Historically, effective states have arisen due to their ability to accurately document economic activity and tax it at an appropriate level to support economic and social wellbeing. Sweden, one of the world’s most effective states, produced compressive cadastral maps 400 years ago to ensure accurate and fair taxation of economic activities, which at that time was centred on landholdings. Today economic activity is diversified and global, and is becoming more and more driven by the activities of multinational corporations (MNC). Yet states have been unable or unwilling to work together effectively to ensure that MNCs publicly report on their economic activity in a way that prevents loopholes arising, thus limiting the ability of states to tax their profits accurately and fairly. Only an integrated global response, such as intergovernmental tax body overseen by the UN, can address this.