Challenging Fiscal Havens and Tax Avoidance by Global Corporations

For those who are concerned to hear stories in the press about tax havens, global corporations avoiding the payment of taxes in countries where they do huge business, global banks colluding with clients to hide income and assist money laundering, there may be some hope. Out of widespread concern about this situation has emerged a coalition of organizations with concerns for social justice. With the help of German foundation Friedrich-Ebert Stiftung, they have established a commission made up of highly-respected national and international leaders, academics and tax experts to tackle the issue, not from the perspective of national advantage (which often undermines effective international collaboration), but from the perspective of what is needed for people everywhere.

In this post, we provide some background on the Commission and its preliminary declaration. Following that is a statement by Allison Christians, a Canadian advisor to the Commission. We will follow their work and help to make it known.

The Independent Commission for the Reform of International Corporate Taxation (ICRICT) aims to promote the international corporate tax reform debate through a wider and more inclusive discussion of international tax rules than is possible through any other existing forum; to consider reforms from a perspective of public interest rather than national advantage; and to seek fair, effective and sustainable tax solutions for development.

ICRICT has been established by a broad coalition of civil society and labor organizations including ActionAid, Alliance Sud, CCFD-Terre Solidaire, Christian Aid, the Council of Global Unions, the Global Alliance for Tax Justice, Oxfam, Public Services International, Tax Justice Network and the World Council of Churches.

ICRICT is chaired by José Antonio Ocampo – Professor and Director of the Economic and Political Development Concentration in the School of International and Public Affairs, Member of the Committee on Global Thought and co-President of the Initiative for Policy Dialogue at Columbia University. He is also Chair of the Committee for Development Policy of the United Nations Economic and Social Council (ECOSOC). He has occupied numerous positions at the United Nations and his native Colombia, including UN Under-Secretary-General for Economic and Social Affairs, Executive Secretary of the UN Economic Commission for Latin America and the Caribbean (ECLAC), and Minister of Finance, Minister of Agriculture and Direction of the National Planning Office of Colombia. In 2012 he was one of the two candidates from developing countries for President of the World Bank.

It includes Eva Joly, Member of the European Parliament and Vice Chair of the Special Committee on Tax Rulings; also Nobel prize winning economist Joseph Stiglitz, and other highly-respected leaders from different world regions and backgrounds. (SeeICRICT.org/the Commission). The Commission is in turn advised by a panel of experts in law, tax law, tax policy etc.

(From http://www.ICRICT.org)


Statement of Principles (copied from the ICRICT website)


1. Tax abuse by multinational corporations increases the tax burden on other taxpayers, violates the corporations’ civic obligations, robs developed and developing countries of critical resources to fight poverty and fund public services, exacerbates income inequality, and increases developing country reliance on foreign assistance.
2. Abusive multinational corporate tax practices are a form of corruption that weakens society and demands urgent action. This is even true when the practices of corporations are within the law, and especially so when corporations have used their political influence to get tax laws that provide them scope for such abuses.
3. Multinational corporations act – and therefore should likewise be taxed – as single firms doing business across international borders. This is essential because multinational corporations often structure transfer pricing and other financial arrangements to allocate profits to shell operations in low tax jurisdictions.
4. Tax havens facilitate abusive tax practices with enormous negative effects on the global community.
5. Greater transparency and access to information are critical first steps to stop tax abuses.
6. Every individual and country is affected by corporate tax abuse, and therefore the debate over multinational corporate tax avoidance should be widened and made more accessible to the public.
7. Inclusive international tax cooperation is essential to combat the challenges posed by multinational corporate tax abuse.

Saving the Corporate Income Tax:  Three Recommendations

Allison Christians

Allison Christians is the H. Heward Stikeman Chair in the Law of Taxation at the McGill University Faculty of Law. She formerly taught in the United States, and is frequently invited to present lectures and participate in conferences across Canada, the United States, and Europe. A recognized expert in U.S., Canadian, and international taxation law, Professor Christians is known especially for her work on the relationship between taxation and economic development and on the role of government and non-government institutions and actors in the creation of tax policy norms.

She prepared the following statement on the occasion of an early meeting of the Commission and has agreed that it be published by Politudes. The statement follows:

Summary

If income taxation is to survive the current era, corporate income must be taxed. Globalization has made this task more difficult but governments could tax multinationals effectively if they chose to. Instead, dominant governments have spent the past century creating an intricately coordinated reward system for multinationals that is hidden not just behind complex rules but also an intentionally opaque privacy shield that holds up across jurisdictions. To make corporate taxation a reality of the future rather than a relic of the past will require a significant disruption of the status quo.


I suggest three recommendations for disruption. All three recommendations are aimed at rich countries, rather than poor countries, on the theory that the global challenges for taxation emanate from the developed world, and are visited upon themselves as well as the developing world. I recommend that as the creators and stewards of the international tax system, governments of rich countries should:

1.​Start studying how to employ more third-party reporting and withholding on transfers to and among multinationals;

2.​Revise disclosure standards under applicable securities regulations to include more corporate tax information; and

3.​Financially support more inclusive participation in tax norm- and law-making processes.


The common thread among these recommendations is that they insist upon the essential ingredients of legitimate governance, namely: accountability, transparency, and effective participation. The recommendations should be considered even if some of them do not necessarily increase tax revenues in the short term, because each holds promise for a long term shift toward a more cooperative tax culture.

Introduction

Multinational companies are becoming synonymous with inordinately low global tax rates achieved through inordinately elaborate professional advice. In some places, the public is growing weary of this status quo, mostly in Europe; others are convinced that this is a good thing for jobs and growth, and it certainly appears beneficial to those seeking election to public office. Coherently taxing multinationals corporations has not, for a long time, appeared to be a priority for lawmakers in rich countries; it has been simultaneously more important yet less feasible in poorer countries.

As the budgetary woes of many rich countries continue and worsen, there may soon come a time, if it is not yet upon us, when weaning richer societies off the corporate tax seems to lawmakers something to lament rather than celebrate. Anticipating that this day is coming, I suggest that governments take three steps toward changing the culture of acceptance for the under-taxation of multinationals.

First, governments should study how they might change the manner in which they tax corporations, by seeking ways to move toward more third-party reporting and withholding. Second, governments should gradually revise their disclosure standards under applicable securities regulations to include more corporate tax information. Third, governments should financially support more inclusive participation in tax norm- and law-making processes. These three steps should be taken even if none of them will necessarily increase tax revenues in the short term, because each holds promise for a long term shift toward legitimacy in global tax governance.

1.​Third Party Reporting & Withholding

If lawmakers want to tax multinational corporations, there are simple solutions and less simple solutions readily available to them. Some strategies require taxing headquarters of companies on the total income earned in their worldwide groups. Others attach to specific transfers between taxpayers. Some are unilateral solutions, others multilateral.

Multilateral solutions require cooperation rather than competition, which is to say that multilateral solutions generally require minimum taxation by a cartel of key capital-exporting states. To work effectively, the cartel would need to tax its headquartered companies on all or most global income earned in controlled groups. To prevent cascading tax burdens, this would have to be done on a residual basis after giving credit for taxes paid at source.

Coordinated minimum taxation would be a dramatic change and therefore difficult to accomplish, but may be necessary for the long term prospects of income taxation writ large. Multinationals would face much higher taxes very quickly if this kind of cooperation were achieved. Countries could implement global minimum taxes unilaterally: in the United States, for example, both the Baucus plan of 2014 and the most recent Obama budget proposed a minimum global tax rate for U.S.-based multinational companies. These kinds of plans have little or no political chance of success, mostly because such a tax regime imposed unilaterally would make the adopting country an extremely unpopular destination for corporate headquarters compared to readily accessible alternatives such as Canada and the United Kingdom. Corporations vote with their incorporation papers. For a global minimum tax to work, most of the OECD would have to dedicate themselves to this goal.


Third-party reporting and withholding is a potential interim solution. It might be simpler, might be accomplished unilaterally, could involve more incremental (and therefore more acceptable) change, and could pave the way for the kind of cooperation needed for coordinated minimum taxation. But it needs some thought, both in the design and the implementation.


We ought to consider third party reporting and withholding for corporate income because of what we know this mechanism has done for the individual income tax. Reporting and withholding is why, for the vast majority of individuals around the world who labor under an income tax, compliance is by no means voluntary. For that vast majority, every dollar earned is reported to the tax authority by someone else. Most of these dollars are also subject to withholding by the third party reporter, so the individual must file a return in order to claim any of it back at the end of the year.
Virtually all countries that have income taxes have made wage earners easy to tax with withholding and third-party reporting, and, more or less, gross basis taxation with a few, easy to administer exceptions. Unlike corporations, workers get few opportunities to “erode” their tax liabilities except by purposive legislative largesse. Deductions available to workers are typically tax expenditures, that is, subsidies delivered through the tax code, such as specified exemptions and exclusions for retirement savings.


But corporations have been treated differently. They have many ways and means to carve away their gross and get to a very small net, where it is convenient, and to do the opposite when that is convenient instead. Withholding and third-party reporting and filing for refunds is generally not the way governments get corporations to pay tax. For them, the income tax system is much more voluntary, and lawmakers have given them a lot of discretion. Transfer pricing is a very prominent example of this kind of discretion.


Conceptually, withholding on business income is likely to be tremendously unpopular. It is disfavored because income is a net concept, which gross basis withholding ignores or at least defers. All countries do in fact impose gross basis withholding taxes on things they regard as income, but most countries typically do so only with respect to domestic sources of income paid to foreign persons.
To illustrate this, we may simply observe the difference between resident and non resident recipients of non-wage income, such as dividends. A resident taxpayer that earns a dividend from a resident corporation generally has no withholding tax collected by the corporate payor of the dividend. Instead, the corporate payor reports the payment of the dividend to the tax authority, the shareholder includes it in her income, and there she may set it off with allowable deductions and pay a graduated tax on the net amount (with variations for intermediary entities). In contrast, a foreign shareholder isn’t likely to file a tax return at the end of the year and if she does not, the domestic tax authority will have a challenge finding assets or income to seize to pay the tax debt. This is why gross basis withholding became the norm for taxing passive income of foreign investors, while active businesses were expected to have enough presence in a territory that their compliance with the tax system could be effectively compelled, in drastic situations by seizing assets.


If the corporate income tax deteriorates enough in rich countries and the OECD does not manage to fix this problem via restrained competition, we may eventually come to a moment when governments decide that it is no longer worth bothering with net income taxation after all, especially when it generates so much rent seeking by lawyers and accountants, and so very little for government. There are various ways to introduce third party reporting and withholding for corporate taxpayers, all of which would require some creativity in design. It would also involve creating expectations that payors of income have filing obligations for payments they make, even if they are not accustomed to being third party reporters. This will require educating taxpayers, including individuals, that when they make payments to firms, they have filing obligations.


This kind of compliance is very difficult to police, so creative strategies will have to be considered especially for individual taxpayers whose taxes are not impacted by payments to firms. One reason why employer reporting and withholding works is that wages are a tax benefit item for employers; to deduct the amount paid requires verification. Paying under the table only works for corporations that are themselves not declaring income and taking deductions. That problem will persist and likely worsen as reporting is extended to persons for whom payments have no tax effect.
Imagining how more third party reporting and withholding might work is a large task that will require both resources and political focus. Funding for independent academic research, and locating policy analysis in an inclusive forum, will be critical: I return to these recommendations below.

2.​Increase Corporate Disclosure


In the introduction I posited that it is well known that multinationals do not pay tax and they are not likely going to start to do so voluntarily. However, widespread naming and shaming, or perhaps just naming, may actually have some impact on how corporate managers view their firms’ tax planning behaviors. Recent research suggests that firms may respond to negative publicity about their tax haven subsidiaries by taking less aggressive tax positions, as evidenced by reporting higher effective tax rates in annual statements following public scrutiny.


Even if managers do not respond, corporate disclosure is a way to have more informed public debate about how the income tax system actually works out in practice. Corporate tax transparency would reveal more about the one sector of corporate society—publicly traded corporations—about whom society already has more tax-relevant information than any other, precisely because of existing corporate disclosure rules. Still, firms that anticipate going public in the future as well as hedge funds and other entities may generally follow securities regulation requirements, and other companies, especially household name brand companies that are especially sensitive to public scrutiny, might also follow suit.


Increased disclosure is necessary because corporations are largely unaccountable to the public with respect to their tax payments, and there isn’t really a good reason why this this should be so. In a story on Apple’s now infamous tax planning successes, respected economist Kim Clausing was quoted as saying “The information on 10-Ks is fiction for most companies, [b]ut for tech companies it goes from fiction to farcical.” No doubt this is an accurate and possibly even charitable description. Despite the fiction, people who wish to write about the actual, on-the-ground taxation of multinationals typically have little choice but to use 10Ks as a frame of reference. That is because the actual tax information of companies is, like tax information for individuals, a confidential matter between the tax authority and the taxpayer.


Taxpayer confidentiality is the general rule around the world, and is often viewed as absolutely indispensable to ensure that taxpayers cooperate in filing their returns. Yet it is increasingly clear that the broader population has an interest in knowing that everyone in their society is paying a fair share of the tax burden, and this includes multinationals, perhaps especially when they are associated with consumer brands that are known and loved.


When the media produces stories about the tax affairs of companies like Apple, along with GE, Google and others, we see provocative headlines about very low rates of taxes paid by these companies but no way to confirm the facts. In all probability, the stories are very close to accurate, especially considering the official responses that sometimes follow. In the case of GE and Apple, these responses have ranged from the confusing (GE suggested that it did pay more tax, then suggested it did not, and then again that it did) to the patronizing (companies repeatedly assure the public of their full compliance with all applicable laws) to the irrelevant (in response to the New York Times coverage, Apple sought to remind the reader of how many jobs it has created). What the companies don’t do is rebut the tax claims made in the articles with contrary evidence, and this sets up a perpetual “he said, she said” of speculation, recrimination, defensiveness, and hyperbole on a subject that really matters to the reader, namely, how does the tax system really work when it comes to our multinational companies?


GE and Apple and the others caught in the spotlight of media attention never reveal the information that would instantly end all of the speculation. That is because they don’t have to, and no one has all the information but them—not most of their shareholders, not the pundits or journalists, not the economists or the tax wonks, not the SEC, and possibly not even some tax authorities.


The lack of public information on the tax matters of companies has not always been the status quo, and there are a few exceptions to this norm, even today. For example, in Wisconsin, any resident may request information about the amount of net income tax or gift tax reported by another Wisconsin individual or corporation. Public interest advocates in the state, such as the Institute for Wisconsin’s Future, have used the disclosure law to demonstrate that many well-known and well-respected companies with a heavy local presence do not pay any taxes to the state.


A contemporary solution has been offered to provide the general public with more tax information with respect to public companies. That solution is broader disclosure in securities filings. An international movement has developed around “country-by country reporting”, which would require companies to disclose information about their multinational business structures, inter-company dealings, and cash tax payments, among other details. The OECD has adopted the lexicon of country-by country reporting but has strangely eviscerated the transparency that was the hallmark of the idea, restricting the reporting to between-government exchanges, strictly conditioned on confidentiality.


A main objection to broad tax information disclosure seems to be the fear that should the desired information be made public, the only plausible outcome is additional confusion and misunderstanding regarding the tax practices of multinationals. Tax law, especially international tax law, is so complex, it is argued that even people like Kimberly Clausing could not make sense of the mountains of data that would emerge through broad disclosure. Tax authorities typically require teams of experienced personnel to analyze and assess the tax matters of multinational companies; without considerable resources, few and maybe no outsiders could make sense of things. Because of all of this complexity, industry executives often suggest that what is needed is not transparency but assistance for tax authority administration, especially in poor countries. Yet in UK parliamentary hearings on the matter, Tim Scott, head of tax at Glencore, opined that “ taxation of profits is not something that we have found …tax authorities in … developing or developed countries, to have phenomenal problems with.”


The quest for more public disclosure of details about when, how much, and to whom multinationals pay tax comes at a time when countries around the world are experiencing large revenue shortfalls and cuts to public sector programs through austerity-based reforms. It is perhaps not surprising that the public seeks greater accountability through transparency not only with respect to the taxes paid by multinationals, but also those demanded to be paid by governments. It is likewise not surprising that multinationals and governments themselves fear public recrimination should such data be made public.


Transparency is the right answer, but it need not be a sudden reveal of all details; an incremental approach would be acceptable. Not all of the country-by-country reporting requirements suggested by groups like the Tax Justice Network are equally onerous. The requirement to list all subsidiaries, for example, seems like a relatively easy first step; by contrast, companies and governments may be more hesitant to accept publicity of all tax payments made on a global basis. A gradual acceptance of various aspects of multinational tax information may help create an environment of acceptance that helps make the unthinkable, thinkable. The social cost of intentional obscurity around corporate taxation, especially that involving public companies, appears now too high to be sustainable. A plausible response is to gradually move toward more transparency until a culture of accountability replaces the current culture of obscurity.


3.​Make Tax Policy Making Inclusive


Tax policy suffers when too much policy influence is wielded by one particular sector—namely, the business community in rich countries and its worldwide network of lawyers, accountants, and other advisers—and far too much of this influence is exerted in spaces and manners that are inaccessible to public view. There is too much obscurity around the many ways in which well-resourced actors control the design and execution of tax policy across the globe; and those with alternative perspectives on the appropriate direction for tax policy wield too little influence.

Therefore my third recommendation is that rich countries must prioritize broad inclusivity in global tax policymaking. The intuition is that all who are affected by a policy ought to have a say in shaping its contours. This is by no means a simple task in a globalized world of pluralized policy making and national lawmaking, but it is nevertheless a critically necessary task to undertake in order for taxation systems to be considered legitimate systems of governance.


I suggest two main approaches for prioritizing this goal: first, resources should go to the UN Tax Committee with an aim to ultimately move global tax policy making to this more inclusive forum and return the OECD to its traditional role of gathering and analyzing member country statistical data. Second, funding should be directed to independent academic research on tax policy, with an emphasis on internationally focused research and research undertaken by and about underrepresented populations.


Governments should activate a greater role for independent academic research in tax policy governance by funding research grants focused on international tax policy, or undertaken by academics from under-represented countries. This would include public (as opposed to private) support for independent academic research on tax policy issues, sponsoring cross-border academic collaboration and involvement in transnational policymaking spheres, and ensuring that global tax policy committees and working groups use independent academic research to study ongoing tax policy issues.


I focus here on developed countries because of course developing countries face resource constraints that impede their ability to increase the role of academics in their national tax policymaking dialogues. This is a recipe for a vicious cycle of exclusion from global policy networks like the OECD, and it would even persist in more inclusive network settings such as the UN. Support for independent academic research and a more inclusive forum for tax policymaking are both necessary to produce improvements to the international tax system.


Mobilizing academic research of course requires that academics not themselves represent the same interests as those who currently wield political influence, or otherwise benefit personally from producing what would amount to special interest advocacy rather than unbiased research. We should be able to expect the same accountability from academics as from elected officials. Researchers should disclose all of their direct and indirect funding sources whenever they publish anything, but most especially when they purport to provide policy advice to governments. Only those academics who are outside observers of tax policy and who do not have a financial stake as an advocate for particular tax policy outcomes are in a position to provide a much-needed counterweight in international tax policy spheres.


Overall, the mobilization of independent academic input is particularly important given the tax policy monopoly that is controlled by institutional structures, which have been in the service of the world’s richest countries throughout the century-long existence of global income tax law and policymaking efforts. The existing policy monopoly is ideally challenged by putting resources into independent studies by tax law and policy academics who operate outside of established institutional frameworks. But it must also be challenged from within by ensuring that transnational tax policy committees and working groups that address tax issues with global significance consistently include academic participants among their ranks at best, or serious consultation with independent research reports and articles at a minimum.


In addition to the inclusion of academics and research from developing countries into policy debates, intergovernmental organizations should also consider giving official observer status to development NGOs and civil society groups if such an action would amplify the voice of the academics touched by this prescription. Organizations such as the OECD are by definition comprised of the richest and most powerful countries. Despite this restricted composition, however, these organizations make policy decisions that directly affect poorer nations. Accordingly, the inclusion of diverse perspectives via an official observer mechanism could also yield long-term political and economic stability, which may not occur if those who lag in development are completely marginalized. This is a second best approach to an inclusive forum and should be viewed as an interim measure to the development of a more inclusive policy making body.


A possible argument against this proposal is that intergovernmental organizations like the OECD exist so that similarly situated groups can discuss and plan among themselves. In other words, the price for entry into these clubs is economic power and an argument against inclusion for those whose views are excluded is precisely that they have not achieved the necessary prerequisites. This view, however, is short-sighted. First, the privileged position of the economically powerful was not always earned by merit or valor, and was often gained through exploitative behavior. Although such actions may have been accepted in the past, all vestiges of past exploitative and marginalizing behavior should be rejected in favor of broad inclusion wherever possible. Additionally, there are well-known political and risk-management benefits to considering fairness in relation to developing countries in the policy-making sphere.


These solutions are relatively simply stated, but of course their implementation is more difficult and each involves the sustained commitment of resources. But separately or together, the strategies prescribed could help move toward a more even distribution of democratic participation and political influence in governance, which over time, could lead to more coherent tax policy.


Conclusion


Taxation is an increasingly challenging aspect of governance in a world of mobile capital, but taxing multinationals is not an impossibility as yet. If governments want to save corporate taxation from its imminent collapse, they will have to act to regain ground lost to the obscurity, lack of accountability, and democratic deficits in policymaking that currently characterize the international corporate tax system. I have here suggested three recommendations that could begin to regain that ground. These are but three possible avenues and each will require some creativity on the part of those who would study the potential for reform as well as those who would be charged with implementing the ideas. I have occasionally suggested herein that incrementalism would not be a bad thing for improving international tax in all cases; this is an uncomfortable point in the face of looming crisis. But given the importance of getting things right on transparency, accountability and participation, we may find it expedient to sacrifice immediacy where what is needed is ultimately a shift in cultural attitudes toward corporate taxation on the part of individuals, firms, and even governments themselves. This is, at least, a partial answer to those who dismiss as wholly unrealistic any grand plans to shift the locus of policymaking, to open up sacred cows surrounding things like taxpayer confidentiality, or to take seriously philosophical intuitions about the obligations we may have to one another across the lines drawn by nation states.

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