New project: Big companies’ tax avoidance and the SDGs

Our Proposals Today we draw on the wealth of research at the University of Oxford and the World Bank to set out the impacts of our proposed action on extreme poverty, and some recommendations…

New project: Big companies' tax avoidance and the SDGs

Our Proposals

Today we draw on the wealth of research at the University of Oxford and the World Bank to set out the impacts of our proposed action on extreme poverty, and some recommendations to bridge the gap between current efforts and what is needed to meet the target by 2030.

The World Bank launched its fifth global development strategy in October, which calls for “a break with the decades of underinvestment and neglect” by US multinationals in development.

Our report shows that US companies have paid just US$1.07bn in tax between 2008 and 2015. That’s less than 0.05 per cent of the profits of the most profitable companies in the world, and small change compared to the tax-exempt profits of most wealthy countries. Without substantial changes, governments in developing countries will need to find an extra USD6.3trillion in tax revenues every year to reach the US$1trillion annual tax shortfall required to sustain the Sustainable Development Goals.

But we’re not calling for a US$6.3trillion tax revenues flood. We estimate that tax revenues could be as high as USD500bn (£380bn) – US$1 trillion if there was better transparency on these companies’ profits, as well as the levels of corporate compensation and the frequency with which corporations report tax payments. These would go a long way to ensuring that companies would no longer be able to treat their money as pure profit.

The World Bank and the International Monetary Fund (IMF) also recognise that there are inefficient taxes and inadequate revenue collection in most low-income countries, but they fail to argue for comprehensive tax reform that would make the public and private sectors more accountable to people. Global institutions are missing a chance to leverage better data and better management from governments to create a greater tax base and tax collection by big companies.

Tax reforms that we want

The report contains proposals for reforms that we think would result in better data and stronger public revenue collection, and that would deliver the US$1trillion budget deficit gap. They include:

International tax standards that take into account global company rules, particularly the requirements of double taxation agreements, that would lower withholding taxes on commercial transactions and boost tax compliance in poor countries. States should immediately stop applying profits to local taxable income on the basis of preliminary determination, and enable both types of calculations of taxable income.

Transfer pricing reform that calls for both the incorporation of pricing power in public law and a common methodology for international comparisons of prices. The IMF argues that public law should require public enterprises to increase their proportion of transaction prices paid to foreign investors, which is otherwise enforced through additional withholding taxes on profits. This would encourage efficient and accountable investment in local labour and capital.

Taxation of employment as a form of economic rent, which should be exempt from all corporate tax. The report notes that EU countries have encouraged local labour, capital and services instead of jobs, by exempting employment from corporate tax and lowering labor and social charges on employment in other countries. This would result in an increase in public revenue and efficiency.

We also take the issue of carbon tax very seriously and propose three concrete ways to tackle carbon emissions:

Allow consumers to purchase non-polluting and emissions-reducing products and services. Price these products at least partially below the global average, to curb consumption. A broader set of offset systems should allow every household to offset their polluting consumption by spending on climate-friendly ones, and introduce a portion of spending available through such offsetting systems to low-income households. Share the carbon tax income with households in environmental management activities.

In today’s report we call for a genuine economic transformation: we need to change businesses and invest in policies that would boost countries’ tax bases while protecting poor households, creating a “culture of accountability” for big companies, and getting all companies to pay their fair share of taxes, all in pursuit of the SDGs. We recommend the Centre for Global Development (CGD) and Greening the Economy in Developing Countries (GTECD) as the authors of a “global learning network” for accurate information, data, and innovative policies on pollution, tax and carbon pricing that can be used by developing countries.

We are calling for a two-way conversation to help make the globalisation of economies in and out of the United States a success. We believe that once companies have a serious stake in our societies, they will start acting in the interests of society as a whole.

This post is co-authored by researchers at the University of Oxford and the CMD Group.

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