Global body calls for urgent changes to international tax systems to tackle inequality

PTI, Jan 21, 2020, 1:16 PM IST

Davos: With financial inequality hitting the roof in India and several other countries, a global body of rights activists and academics has called for immediate steps to make a sustainable and more effective international corporate taxation system.

Referring to an Oxfam study released here on Monday, Independent Commission for the Reform of International Corporate Taxation (ICRICTC) said the inequality crisis remains unaddressed and out of control as hundreds of millions of people are living in extreme poverty while large rewards go to those at the very top.

In 2019, the world’s billionaires – only 2,153 people – had more wealth than the poorest 4.6 billion people combined, Oxfam has said.

A new generation of inequalities is opening up, around education, technology and climate change. The demonstrations that swept across the world last year signal a global revolt against extreme inequality and the poor living standards for a large amount of the world’s population, the ICRICTC noted.

The body said it 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 and to consider reforms from a perspective of public interest rather than national advantage.

Faced with popular demands, governments excuse themselves by arguing that their coffers are empty and implementing austerity program. These measures only aggravate economic, social, gender and racial disparities, depriving people of access to health care, education, or housing, especially in developing countries, it added.

But inequality is not beyond solutions and one of the most obvious is to change the international corporate taxation system, which is not only obsolete but also unfair since it allows for systematic tax evasion and avoidance by multinationals, it said.

Corporate taxation is one of the most important tools in addressing inequality and tax evasion and avoidance by multinationals further increases income inequality, as corporate equity mostly belongs directly or indirectly through investment funds to wealthy individuals who receive profit income through dividends and capital gains.

In the face of global outrage at the low or even close to zero corporate taxes paid by some of the world’s largest multinationals, last year, the Organisation for Economic Co-operation and Development (OECD) put forward proposals for a new international tax system to address the challenges of taxing multinational corporations in the digital era.

After decades of inaction, the OECD made an important move challenging the very foundation of the international tax system, which is the ability of multinationals to report their profits in the subsidiary of their choice. In this debate, however, we do not play on equal terms,” said Jose Antonio Ocampo, Professor at Columbia University and ICRICT Chair.

For the first time, the OECD proposal has moved beyond the arm’s length principle considering taxing multinationals as global firms and distribute global profits between countries, ICRICTC said.

According to Jayati Ghosh, Professor of economics at JNU and ICRICT commissioner, since a multinational actually functions as one entity, it should be treated that way for tax purposes.

“So, the total global profits of a multinational should be calculated, and then apportioned across countries according to some formula based on sales, employment and users (for digital companies). This is something that is already used in the US where state governments have the power to set direct and indirect tax rates.”

Further, Ocampo pointed out that rich countries have more human, political and financial resources to make their views prevail. With the largest concentration of multinational headquarters, they are also those most influenced by the pressure of the corporate world, at the expense of their own citizens and the rest of the world.

“We urge economic leaders who are meeting for the World Economic Forum in Davos to push for a real reform that would benefit both developing and developed countries. This would not be achieved if the negotiations are driven by what multinationals are prepared to accept, as we have seen in the recent spat between the US and France over the imposition of a digital sales tax,” ICRICTC said.

All countries have a stake in developing a sustainable international tax system that can help to deal with the extreme inequality of today. A weak outcome dictated by the preferences of one or two G7 countries will further undermine the OECD’s legitimacy in its role as the institution responsible for setting norms for international taxation, it added.