International Taxation and Global Development

by José Antonio Ocampo – July 7, 2015

Project Syndicate

NEW YORK – When it comes to funding development, taxes are perhaps the most critical piece of the puzzle. But the system of taxing global profits is broken – and it is exacerbating inequality both within and across countries. If the world is to make progress toward its goals of eradicating poverty and stemming rising inequality, the system must be reformed.

The biggest problem with the current system is that, by taxing the subsidiaries of multinational corporations as separate entities, it provides plenty of room for global companies to dodge their tax obligations. The reform efforts by the OECD, acting at the request of the G-20, represent welcome attempts to address so-called “base erosion and profit shifting” (BEPS), but they do not go far enough.

The most significant deliverable of the OECD’s BEPS initiative lies in its new country-by-country reporting requirements, which force multinationals to provide aggregate information annually, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid. They must also provide information about which entities do business in each jurisdiction and the economic activities in which they engage.

But such reporting will apply only to entities with revenues above €750 million ($845 million) and will not be made public. Furthermore, countries have to meet certain conditions to access the information – a structure that will not benefit most developing countries.

Yet developing countries have the most at stake. Indeed, the International Monetary Fund recently reported that developing countries lose three times more of their corporate-tax revenue to BEPS activities than their developed counterparts. According to the United Nations Conference on Trade and Development, such activities by multinationals – which represent one-third of the potential corporate-tax base in developing countries – result in annual losses of $100 billion.

Given the major role that tax revenues play in funding development efforts – providing two-thirds of the financing for the UN Millennium Development Goals, with official aid and private flows covering the rest – the bleeding must be stanched. As world leaders gear up for this month’s Third International Conference on Financing for Development (FFD3) in Addis Ababa, where they will develop a strategy to fund the post-2015 global development agenda, a move toward a more efficient and equitable global tax system could not be more urgent.

That is why a group of public intellectuals from around the world has created the Independent Commission for the Reform of International Corporate Taxation (ICRICT), which I chair. We believe that the world has an unprecedented opportunity to bring about significant reform of the international corporate-taxation system that serves the global public interest, rather than national advantage.

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