Will poorer countries benefit from international tax reform?

INTERNATIONAL TAX reform pits tax-hungry governments against giant multinational companies and their armies of tax advisers. It sets high-tax jurisdictions against low-tax havens. And it requires rich- and poor-country governments to somehow reach agreement. The 139 countries haggling at a forum run by the OECD, a club of mostly rich countries, have yet to reach a consensus. Poorer countries worry that the proposals on the table discussed are too complicated, inflexible and unfair.

Developing countries are thirsty for revenue in general, and reliant on corporate tax in particular. In 2017 African countries raised 19% of their overall revenue from corporation tax, compared with an average of just 9% for OECD members. That is partly because large informal sectors mean that they raise less in, say, personal-income tax.

The current system for global tax dings poor countries in two ways. For a start, multinational companies shift their reported profits to low-tax havens, depriving them of revenue. Then the rules allocate taxing rights to countries that are home to company headquarters, which tend to be rich. Poor countries’ tax revenues are depressed by as much as 5% relative to an alternative system in which profits are taxed based on the current location of companies’ revenues, their employees and their wage bills, according to an estimate by Petr Jansky of Charles University and Javier Garcia-Bernardo of the Tax Justice Network, an advocacy group. By contrast, those in rich countries are only 1% lower.

The reforms being discussed, and supported by America’s Biden administration, would reallocate the right to tax a slice of some companies’ profits, and agree on a global minimum corporate-tax rate, perhaps of 15%. Poor countries want to crack down on tax avoidance as much as rich ones. But a lack of cash and personnel makes it harder for them to engage in negotiations. Though low-income countries represent 22% of negotiating members, they make up only 5% of those attending important working-party meetings. Those constraints apply to the ability to administer tax and police evasion, too. On May 12th the African Tax Administration Forum (ATAF), a group of national agencies, criticised the idea of reallocating the right to tax the portion of multinationals’ profits above some “routine” level, as “far too complex”, suggesting that a share of total profits be reallocated instead.

Another worry is that the new deal will become a straitjacket. The Biden administration has proposed a “binding, non-optional” dispute-resolution process as a way of reassuring anxious companies that they will not be taxed several times over. But some poor countries fear being on the wrong end of rulings too often, and see broadly applied binding arbitration as a “red line”. (A process applying to a narrower set of disputes could fly, however.) Another concern is that a minimum tax could threaten poorer countries’ use of tax incentives to reel in investment. But a minimum rate of 15% is still well below most poor countries’ statutory tax rate, leaving room for enticement. A global floor might encourage some countries to go the other way, by emboldening them to raise taxes on profits that are reported at home.

Perhaps the biggest complaint is that rich countries may get the bulk of taxable profits being grabbed back from havens, while poor ones are left with the scraps. In October the OECD estimated that a reallocation of taxing rights on some companies might help raise corporate-tax revenues in poor countries by around 1% (a newer proposal from the Biden administration should yield a similar sum). One negotiator for an African country called that a “disaster for developing countries”. ATAF suggested that more companies be included, by drastically lowering the revenue threshold from €20bn ($24bn) to €250m. It is hard to imagine rich countries agreeing to that. The complex knock-on effects of a proposed minimum tax of 15% could raise poor countries’ corporate-tax take by another 2-4%. Even so, rich countries will probably make bigger gains still. ■