US President Joe Biden’s plan to reform global corporate taxation will do little to help countries most in need of more tax revenue, say developing economies pushing for more power over multinationals.
Washington’s ambitious proposal would tax 100 of the world’s largest companies on profits made in countries where they have little or no physical presence but derive substantial income from it and introduce a global minimum tax rate, with the aim of ending what he called it a “race to the bottom” where companies channel their profits through low-tax jurisdictions.
But companies would pay most of their taxes in the country where they are headquartered, even though their profits – and in many cases the labor and raw materials used – come from developing countries, told The Financial. Times of high-level diplomats and pressure groups.
They are also concerned that many developing countries are not participating in the negotiations on the proposal at the OECD and fear that the eventual agreement will reflect little of their interests.
Mathew Gbonjubola, Nigerian Ambassador to the OECD, said: “As I understand it, with the. . . rules being developed, is that developing countries can get next to nothing. “
He endorsed the efforts of the United States and the OECD to bring the world’s largest companies to pay more taxes in the world. “The less tax incentives developing countries offer, the more they are able to retain the income necessary for their development and the less they depend on loans or aid,” he said.
But he warned that “it is both logical and moral that the countries of origin, developed or developing, have the right of refusal before [tax revenue] go to [companies’] country of residence “.
Gbonjubola added that the United States “did not provide the economic rationale” to target only 100 companies. This target is a reduction of the OECD proposals, which would have covered thousands of companies.
“The most important point of difference between advanced economies and developing countries is the threshold that determines the number of companies included,” said Sybel Galván, Mexican Ambassador to the OECD.
Rajat Bansal, a member of the United Nations Committee of Experts on International Cooperation in Tax Matters, said setting a threshold that captures only the largest companies would mean “at the end of the day a large number of potential taxpayers would not be Covered”.
Critics also say the amount to be taxed under the US plan is too small because it is likely to represent less than a fifth of the company’s profits. Ross Robertson, International Tax Partner at BDO, said: “If the overall pot is not enough. . . it fails to offer a fair reward from outside companies [developing countries’] territories that benefit from [their] savings. “
The African Tax Administration Forum, which advises governments on the continent, called for a tiered approach in which thresholds would be set at lower levels for small economies. “We don’t believe that a single threshold for all economies is fair,” he said.
ATAF also fears that, during long and complex negotiations, poor countries will fight for their rights. “Although they have a seat at the table, it is difficult for them to keep pace. . . There may not be a high level of political awareness in Africa of this issue and the importance [the proposal] is.”
Several large developing economies are involved in a rival effort at the UN to develop an international tax regime, which would specifically target digital service companies. The move is motivated by the acrimony over the low amounts of taxes paid by US tech giants in many countries where they make big profits.
The plan would grant countries the right to tax digital business income based on where the income is generated, rather than just where the business is resident. Argentina, India, Kenya and Nigeria have all recently introduced digital taxes and a number of other African countries are considering doing so, according to ATAF.
The UN proposal, which was championed by India and Argentina, was strongly endorsed by the UN tax committee last month. Other developing countries like Ecuador, Ghana, Liberia, Nigeria, Vietnam and Zambia supported it.
The model is not binding and can only be adopted in bilateral agreements if participating countries adhere to it, but the timing is difficult for the OECD.
“There seems to be a strange competition between the UN and the OECD,” said Tove Maria Ryding, policy and advocacy manager at the European Network on Debt and Development. “The UN plans to develop taxes on digital services and the OECD is trying to get rid of them” in favor of a regime that would apply to all industries.
Christian Hallum, senior tax and extractive industries specialist at Oxfam Ibis in Copenhagen, said that for some developing countries, the feeling of being sidelined in OECD negotiations could make them reluctant to give up for them to target tech companies, which could lead to a deadlock. “There is a real risk that if rich countries dictate the outcome [OECD] process, that’s what we’ll see.
Mexican Galván said the OECD negotiations were “difficult but constructive” and that several large developing economies were “definitely in favor of a [tax] frame”.
But others have warned that the US proposal risks losing its legitimacy.
“You can call the rules global, but if the decision-making is not truly global, why would countries that weren’t involved in making the rules join it?” Ryding said. “The world’s poorest countries risk losing out again when the global tax pie divides, when they need tax revenue more than anyone else.”