International Taxation from Global South Perspectives
Badr Mandri from the Policy Center for the New South and Sebastien Babou Diasso and Aaditri Solankii from the South Centre
South Centre (SC) in collaboration with the Policy Center for the New South (PCNS) organized on October 13, 2021, a webinar on the issue of International Taxation from the Global South perspectives. Tax revenue mobilization plays a key role in financing the economic and social development of countries. When well designed and implemented, tax policy can help developing countries raise revenue and increase their spending, especially in the social sector. Indeed, tax revenue as a share of GDP represent only 15% to 20% in low and middle-income countries, because of obstacles such as the imbalanced and complex international standards designed for developed countries, and the difficulties in collecting taxes in developing countries. This webinar addressed key questions such as:
- What reforms to international standards are needed that can strengthen the capacities of governments to raise revenue from multinational enterprises (MNEs) without discouraging economic activity?
- What is the cost of tax havens for developing countries and what role can international cooperation play in dealing with this issue?
- What might the future of tax reform look like in the post-COVID-19 era, given the growing digitalization of the economy?
1. Professor Carlos Maria Correa, South Centre Executive Director
Prof. Correa acknowledged the collaboration with the Policy Centre for the New South (PCNS) and welcomed the participants. In his opening remarks, he made the following observations:
- Developing countries need to mobilize their domestic resources. This is not just to deal with the costs associated with COVID-19. It is necessary to reach the Sustainable Development Goals in order to have a long-term development perspective for developing countries.
- The Southern countries face different challenges: a tax system that is not fair at the global level and that deprives some countries of their taxing rights, especially in activities related to the digital economy.
- The agreement on new international tax standards to raise revenues brokered by the OECD is not sufficient to meet the needs of developing countries. Hence, there is a need to promote reforms in this area.
- It is critical for the negative impact of tax havens to be addressed at international level to emphasize the need to achieve balance in the tax reform.
2. Natalia Quiñones Cruz, Colombia’s former representative in OECD tax negotiations
Ms. Cruz started by remarking that the new international regime that was adopted on October 8, 2021 by the OECD/G20 Inclusive Framework is not stable and the proposed solution does not resolve the issues that have been raised by developing countries, in particular the allocation of amount A and the taxing right.
- For Ms. Cruz, developing countries and international organizations should make sure that this agreement is revised and soon, to address properly significant distributional issues.
- She emphasized the importance for developing countries to increase resource mobilization and suggested that this may be done through joint action involving all countries.
- Given that MNEs are so powerful, it is easy for them to manipulate and to relocate each production factor, knowing the high mobility of these factors, depending on national policies. Tackling in a global way the global problem would be much less difficult for countries. Thus, it is not suitable for countries to undertake separate actions. Ms. Cruz found that it is better to coordinate joint actions, and 136 jurisdictions being able to speak together for solutions is already a good step.
- It is necessary to expand the single entity approach instead of considering companies within multinational groups as separate entities. That may help reduce the space MNEs have to choose where they pay taxes and how much.
- Developing countries need to create jobs and raise revenue for their economies but this is hampered by the lack of education, good public health and good infrastructure, which can attract investments as in developed countries, as the UK prime minister stated. In that case, Ms. Cruz thinks that the tax system may be addressed in a way to consider these differences.
- On tax havens, Ms. Cruz stressed that countries need to be able to obtain information on the beneficial owners of structures. Unfortunately, the current Automatic Exchange Information System has not been enough and still does provide information on who owns what. Beneficiaries should be known and included in a global database. International cooperation can be used to achieve this.
3. Kim S. Jacinto-Henares, Commissioner, The Independent Commission for Reform of International Corporate Taxation (ICRICT)
For Ms. Henares, there is no need to discuss any more the effects, benefits, or disadvantages of the OECD two-pillar solution, and the ICRICT has sent a letter to the G20 clearly mentioning that these solutions will only benefit developed countries.
- Thus, the resolution of the problem needs to address the heart of the problem, which is providing solutions to help developing countries mobilize resources.
- For Ms. Henares, developed countries should have helped developing countries bring prosperity in their countries since it is to the benefit of MNES and developed countries that developing countries prosper, so their people have high purchasing power and are able to buy MNEs’ products and services.
- She thinks that the whole tax system needs to be rethought because the postulate underlying economic activities and growth is no longer valid. The theory of economic growth supposes that activities are directed by capital and investments. Nowadays activities are not directed by capital and investments; activities are rather directed by consumption.
- China is an example of a country that redirected its economy towards domestic consumption. Like in China, demand is high in developing countries. Knowing that one should not have a tax system based on income but focused on demand.
4. Abdul Muheet Chowdhary, Senior Program Officer, South Centre Tax Initiative
Mr. Chowdhary spoke on the need to reallocate taxing rights to developing countries and an assessment of the Two Pillar solution on taxing the digitalized economy.
- The biggest victory for developing countries in the Two Pillar negotiations in the Inclusive Framework is that demand is now considered a factor in allocating profits. As they are mainly importers of goods and services, allocating profits to subsidiaries entirely on a supply basis was disadvantageous to developing countries.
- Taxing rights are allocated under the model conventions, either the UN model or the OECD model. Both models excessively allocate taxing rights to developed countries or residence jurisdictions. The fight that has been waged in the UN model is to change it so that taxing rights are reallocated more to source countries. Some of the issues developing countries are raising relate to capital gains, permanent establishment, royalties, and shipping.
- Pillar Two, or the minimum tax, is of little use to developing countries and can and should be ignored by developing countries. As structured right now it gives priority to developed countries to collect the undertaxed profits. Developing countries have better alternatives including Alternative Minimum Taxes or using anti-abuse rules such as Principal Purpose Tests or Limitation of Benefits rules.
- Pillar One similarly allocates only around $10 billion to developing countries, which is not enough when revenue losses are between $100-240 billion per year by OECD estimates and even higher by others. Most demands made by developing countries in the negotiations were rejected.
- Developing countries can wait and see whether developed countries ratify the agreement; until then they can continue with unilateral measures or Article 12B. They are under no legal obligation to abide by the political statement in the Inclusive Framework.
5. Larabi Jaidi, Senior Fellow, Policy Center for the New South
- Mr. Jaidi began by welcoming this initiative to discuss such an important topic, which heralds many developments in the months to come. The questions that he asks himself are what the next steps in this agreement are and what the point of view of the South is on the agreement.
- He reminded participants that the process of this agreement has been long and is not yet finished because the agreement must be adopted by national parliaments.
- According to him, the future of this agreement will depend on the national regulations that will be put in place by national lawmakers, especially in the United States because it should pass through the American Congress, and this does not seem easy: as we know, these reforms are part of a set of global reforms of the tax system initiated by the Democrats.
- He added that even if an agreement is reached, there are still a few issues that need to be addressed, including complex and difficult technical issues for implementation. For example, we know that even if it was agreed to redistribute 25% of the residual profits of multinationals, the question of how to obtain the necessary information in order to distribute this share is not yet clear.
- Mr. Jaidi indicated that tax evasion is estimated to be worth $23 billion in the countries of the South, and the multinationals have been identified as the main cause. Tax reform is therefore essential, especially in the context of COVID-19, for which more resources are needed.
- For him, Africa has been one of the continents that has called for the reform and clarification of tax practices. But the question today remains whether this package of solutions will be sufficient to curb the tax evasion Africa suffers from.
- We have seen that organizations such as the African Union have called on African countries to fight to raise tax rates and balance the sharing of the right to tax, and a profound reform of the taxation of multinationals in the subsequent phases. Such calls should be considered, according to Mr. Jaidi.