The Financial Times
Victor Mallet
Developing countries will be invited by G20 governments to join talks aimed at stopping multinationals dodge taxes in a bid to defuse tensions over their limited role in global tax reform.
Finance ministers meeting in Shanghai later this week are expected to endorse proposals to open up talks on stopping “base erosion and profit shifting” (BEPS) to all countries willing to implement them.
Pascal Saint-Amans, the top tax official at the Paris-based OECD which has been drawing up the BEPS reforms, said the development was likely to be “a turning point in international taxation”.
The move follows criticism from some governments and campaign groups that plans drawn up over the past three years to tackle tax avoidance did not go far enough to help poorer countries collect corporate tax.
On Monday, Christine Lagarde, managing director of the International Monetary Fund, said that despite a big effort to include developing countries in the BEPS discussions, the measures did not “fully address” some of their specific needs.
She said the BEPS project was an important step in the right direction, but added that “much more work needs to be done both in terms of substance and scope”.
The move is likely to increase the number of countries deciding on the remaining aspects of the BEPS project — and monitoring its implementation — from 44 to more than 100. Although most of the BEPS reforms were announced last October, some contentious issues remain to be decided on, including how to allocate taxable profits between countries.
The decision to open up negotiations only applies to the BEPS project. But it sets a precedent that, if extended to future negotiations over tax rules, could end up shifting the balance in taxing rights between industrialised and developing countries. Campaign groups partially welcomed the change but said it came too late. Oxfam said poor countries were being required to “accept a tax reform package they had no say in designing, which doesn’t meet many of their needs and that fails to address critical issues such as the use of tax havens”. It called for more fundamental reforms to be agreed in a truly international forum such as the UN.
Countries such as Mauritius, Barbados and the Seychelles that play an important role in the tax structures used by multinationals investing in developing countries will come under particular pressure to join in the implementation of the BEPS rules. Britain and Italy have the largest number of “very restrictive” tax treaties with developing countries, according to research published on Tuesday by Action Aid, a campaign group.
Its analysis of more than 500 tax treaties found that Bangladesh, Mongolia and Pakistan had agreed the most tax treaties that imposed severe limits on their ability to collect tax from multinationals. It estimated that Bangladesh lost $85m per year as a result of restrictions on its ability to tax dividends.
It called on governments to “urgently reconsider” the treaties that restrict the taxing rights of low and lower-middle income countries.
Research by the IMF found the empirical evidence on the investment effects of treaties was mixed, adding that the potential revenue loss, especially to developing countries, was a cause of “increasing concern”.
The OECD will shortly announce plans to work more closely with the IMF, World Bank and UN on tax matters. Mr Saint-Amans said it largely shared the IMF’s views on developing countries, although there were some differences concerning its attitude to tax treaties. The OECD is cautious about advocating the imposition of withholding taxes, although it urges a crackdown on abuses that involve routing payments and dividends through low tax countries.
