Financial and Monetary Systems

Why we must reform global taxation to fund development

Jose Antonio Ocampo
Professor of Development Practice in International and Public Affairs, Columbia University
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Financial and Monetary Systems

When it comes to funding development, taxes are perhaps the most critical piece of the puzzle. But the system of taxing global profits is broken – and it is exacerbating inequality both within and across countries. If the world is to make progress toward its goals of eradicating poverty and stemming rising inequality, the system must be reformed.

The biggest problem with the current system is that, by taxing the subsidiaries of multinational corporations as separate entities, it provides plenty of room for global companies to dodge their tax obligations. The reform efforts by the OECD, acting at the request of the G-20, represent welcome attempts to address so-called “base erosion and profit shifting” (BEPS), but they do not go far enough.

The most significant deliverable of the OECD’s BEPS initiative lies in its new country-by-country reporting requirements, which force multinationals to provide aggregate information annually, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid. They must also provide information about which entities do business in each jurisdiction and the economic activities in which they engage.

But such reporting will apply only to entities with revenues above €750 million ($845 million) and will not be made public. Furthermore, countries have to meet certain conditions to access the information – a structure that will not benefit most developing countries.

Yet developing countries have the most at stake. Indeed, the International Monetary Fund recently reported that developing countries lose three times more of their corporate-tax revenue to BEPS activities than their developed counterparts. According to the United Nations Conference on Trade and Development, such activities by multinationals – which represent one-third of the potential corporate-tax base in developing countries – result in annual losses of $100 billion.

Given the major role that tax revenues play in funding development efforts – providing two-thirds of the financing for the UN Millennium Development Goals, with official aid and private flows covering the rest – the bleeding must be stanched. As world leaders gear up for this month’s Third International Conference on Financing for Development (FFD3) in Addis Ababa, where they will develop a strategy to fund the post-2015 global development agenda, a move toward a more efficient and equitable global tax system could not be more urgent.

That is why a group of public intellectuals from around the world has created the Independent Commission for the Reform of International Corporate Taxation (ICRICT), which I chair. We believe that the world has an unprecedented opportunity to bring about significant reform of the international corporate-taxation system that serves the global public interest, rather than national advantage.

To help induce world leaders to take advantage of this opportunity, the ICRICT has issued a set of recommendations for reform of the rules and institutions governing international corporate-taxation. The proposals include a minimum corporate tax agreed by developed countries, and mechanisms to prevent multinationals from shifting their profits to subsidiaries in low-tax jurisdictions.

Moreover, in contrast to the OECD reforms, the ICRICT recommends public reporting by multinationals on taxes paid in all jurisdictions. And, in the longer term, it calls for a transition to a system in which multinationals are taxed as one firm, with taxes allocated to the different countries in which they operate according to an agreed-upon formula.

A first step toward achieving these objectives would be the establishment of an intergovernmental body with the mandate and resources to push through much-needed tax reform, while promoting stronger tax cooperation among governments. The decision about whether to establish such a body is an important feature of the FFD3 agenda.

Such a globally representative forum on taxation should not only serve as a venue for inter-governmental cooperation; it should also support a broader, more inclusive debate on tax reform. For too long, such discussions have been the preserve of closed-door negotiations among governments and large corporations, with the topic considered too technical for the general public to understand.

Even now, many argue that including everyone in the discussion would result in politicization of the tax system, and that decisions should thus be left to the experts. But taxation is inherently political, as it involves issues of equity, justice, and the common good. Indeed, issues of taxation were at the heart of the creation of modern democratic parliaments. An issue with such far-reaching consequences should not be debated in secrecy.

If world leaders are serious about reducing inequality and eradicating poverty, they must commit to creating a just and transparent tax system. One hopes that this month in Addis Ababa, they take credible steps in that direction.

This article is published in collaboration with Project Syndicate. Publication does not imply endorsement of views by the World Economic Forum.

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Author: José Antonio Ocampo, former United Nations Under-Secretary-General for Economic and Social Affairs and former Finance Minister of Colombia, is Professor of Professional Practice and Member of the Committee on Global Thought at Columbia University. 

Image: People stand on a platform at a train station in Tokyo. REUTERS/Yuya Shin.

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