The International Monetary Fund (IMF) today released the study "Spillovers in International Corporate Taxation," that explores the nature and policy implications of cross-border effects from national corporate tax policies, highlighting how these effects can be significant for developing countries, with resulting tax revenue losses sometimes quite large relative to total government revenues.
Well-known multinational brands have reportedly managed to reduce their global corporate tax bills to almost zero. This has placed corporate tax avoidance by multinationals high on the political agenda, highlighting the spillovers that one country's tax structure can have on others.
The G-20 and OECD's joint action plan aims to develop better global guidelines and standards for the taxation of multinationals, to reduce the base erosion and profit shifting (BEPS) that risk undermining both tax revenues and the effective functioning of the international tax system.
The Fund paper, which draws on its extensive technical assistance experience in this area, goes beyond the BEPS Action Plan and explores the broader macroeconomic and development impact of corporate tax spillovers, including wider issues of tax competition between national governments.
"Our technical assistance work in developing countries frequently encounters large revenue losses through gaps and weaknesses in the international tax regime.
The sums involved for them can be large, not just relative to corporate tax but relative to all tax revenue: 10-15 percent in some cases," said Michael Keen, Deputy Director of the IMF's Fiscal Affairs Department. "The paper reports new evidence that these effects are in fact systematically more important for developing countries."
Capacity building to implement new guidelines remains important to better cope with spillovers. But weaknesses in domestic laws and international arrangements also must be addressed.
The paper flags, for instance, the risk that countries run by signing bilateral tax treaties, such as foregone revenue from withholding taxes and base erosion through treaty shopping. It also draws attention to the ambiguities in many tax laws regarding the taxation of offshore capital gains, often related to extractive industries. And many countries fail to provide protection against excessive debt finance or manipulation of transfer pricing.
Wider reforms to the international tax system that have been proposed address some spillovers under current arrangements but would bring their own difficulties. For instance, formula apportionment, which is widely canvassed, involves significant risk of creating new distortions and may not benefit developing countries.
The paper also stresses that the institutional framework for addressing international spillovers is weak. As the strength and pervasiveness of tax spillovers become increasingly apparent, the case for an inclusive and less piecemeal approach to international cooperation grows.