Church Action for Tax Justice Newsletter – November 2019

<![if !vml]><![endif]>Over the last month, there have been a series of significant events in the international tax justice arena. As CATJ has previously reported, up to $400bn a year is lost from global south countries through a range of tax abuse mechanisms. That is three times the amount those countries receive in aid.

The OECD is currently spearheading a process of reform to international taxation under the title of BEPS (Base Erosion and Profit Shifting). It refers to the practice of many multinational companies who shift their profits from the countries in which they have actually done business to tax havens where they pay little or no tax. With the growth in the digital economy, many OECD countries (ie. wealthier nations) are now getting fed up losing tax revenue to the likes of Google, Amazon, Facebook and Apple (so-called GAFA).

In response to all this a number of different things are happening simultaneously. Firstly, some countries are launching their own digital services taxes. We have already seen this in France and the UK is planning to introduce one in April 2020. Some of the parties have signalled they intend to extend its scope.

Secondly, the OECD has launched its own public consultation on the two pillars of its proposal to address this issue. In summary, pillar one proposes a ‘unified approach’ to the taxation of multinational corporations. Currently, multinationals are taxed by using the arm’s length principle in which different parts of the multinational are treated, for tax purposes, as if they are independent entities. The ‘Unified Approach’ suggests a variation to this in which tax liabilities begin with an assessment of the global consolidated profits of the whole multinational including its subsidiaries.

However, there are major problems with the technical details of the OECD proposal. One of these is that the ‘Unified Approach’ distinguishes between routine profits and residual profits for each multinational. So-called ‘routine’ profits would continue to be taxed in the normal way and this means that there is huge scope for multinationals to argue that most (maybe all?) of their profit is ‘routine’, and therefore they will see no effective change to their tax liabilities. Tax dodging will continue but just in a different way.

In response, Church Action for Tax Justice, has been working with Tax Justice Europe and others to argue for a different approach in which the routine / residual distinction no longer applies, and in which taxing rights are based not just on sales but also, for instance, on employment within any particular country. The reason for this is that the technical paper we reported on last month by Cobham et al has shown the OECD proposal would generate little benefit for poorer countries in particular. They wrote “reallocation of taxing rights towards “market jurisdictions”, as it is currently understood, is likely to be of little benefit to non-OECD countries. Indeed, the proposal is likely to reduce revenues for a range of lower-income countries.” Church Action for Tax Justice also wrote its own response to the BEPS Pillar One consultation, and currently discussion of these responses is ongoing.

The OECD have also more recently launched their consultation on Pillar Two of their proposals. Essentially, this was meant to be a proposal about a minimum effective global corporate tax rate – possibly set at something approximating 24%. If all profits were taxed in the way described by Pillar One and if the minimum corporate tax rate globally was around 24% then the global scourge of tax havens would be severely diminished. However, we were very disappointed that when the consultation document was published there was no proposed minimum tax rate which suggests that behind the scenes intense lobbying by some countries has effectively stalled this process. Without knowing what the effective minimum tax rate is, it is hard to see how any of the proposals in Pillar One would have any meaningful effect. In addition, more recent reports have suggested the agreed rate could be as low as 12.5% which would effectively make the whole world a tax haven!

All of this discussion is compounded by the third issue that arises in regard to review of international taxation – namely whether the OECD is the right location for these discussions anyway. The OECD describes their approach as ‘inclusive’ as despite the fact that the OECD itself is made up of wealthier nations there is some mechanism by which the rest of the countries in the world can participate. However, tax justice campaigners have long suspected that the so-called ‘inclusive framework’ is not that inclusive and it is noteworthy that a number of non-OECD countries, led by India, are now suggesting that the whole conversation should be moved to the United Nations where they have more effective representation and where they feel that their voice will be heard to a greater extent. Indeed, the G77, a group of 130 poorer countries, has introduced a draft resolution to the United Nations calling for the UN expert committee on tax to be upgraded to an intergovernmental UN tax body, and at least one party manifesto has supported this move.

This last point raises a fundamental issue of tax policy at the international level. International tax policy is horrendously complicated and lower income countries simply do not have the resources to negotiate on a level playing field with the armies of tax experts provided by wealthier nations. Yet, current international tax arrangements favour those wealthier nations to the tune of $400bn per year. There is then a moral responsibility for the new arrangements to shift that balance back in the direction of those countries that have a moral right to those tax revenues and who need the money more. Arguably, in light of the cost of climate change which has been caused by the West but whose effects are most felt by the poorer parts of the world, this moral duty is even more significant.

IPPR Poll reveals growing support for major changes to UK economy
The Institute for Public Policy Research (IPPR) has released new polling ahead of the general election that suggests the British public are supportive of ‘paradigm shifts’ in the way the UK economy is managed. Key points from their survey include:

10 Demands for Tax Justice in the Extractives Industry
<![if !vml]><![endif]>Much of the technology we use on a daily basis is dependant on cobalt. Cobalt is dug out of the ground in Africa and is a key ingredient in many of the batteries in our electronic goods. Yet the mining companies that dig this out and many other raw goods often find ways to avoid paying taxes in the countries where this material is being produced. In light of this, the Global Alliance for Tax Justice held a day of action on Tuesday November 19th in which they listed their 10 demands for tax justice in the extractives industry. These include:

1. Stop the plunder and exploitation of natural and human resources
2. Ensure a comprehensive and effective tax regime for extractive industries
3. Ensure that extractive taxes are just and progressive and fund public services for all
4. Scrap wasteful tax incentives for extractive industries
5. End the impunity of mining corporations and hold them to account for their practices
6. Ensure transparency and accountability of government officials overseeing extractive industries
7. Institute and enforce tighter social, financial and environmental regulations for extractive industries
8. Reject or cancel harmful provisions in tax treaties and agreements
9. Uphold the rights of communities affected by mining
10. Protect the rights of artisanal miners

Justin Thacker

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