“Revenue is the chief preoccupation of the state. Nay more it is the state”
– Edmund Burke
I spent the weekend with some old friends from the development sector. One of them, it now turns out, is working for a public relations consultancy. There was an awkward moment when I explained that I was working on international tax and my friend asked, with a sheepish grin, whether I was following BEPS. We were both following it from, well, different angles.
The most interesting moment in our conversation came when my friend mentioned clients’ fear of the ‘Margaret Hodge effect’. I can understand that, I thought. No company wants to see its executives thrown to the wolves in the Public Accounts Committee. But I had misunderstood.
“What my clients are concerned about,” said my friend, “is political interference in corporate tax policymaking.” I found this quite startling. Is it possible that businesses consider corporate tax policy to be a matter for private negotiations between them and the government, rather than the subject of public (and even parliamentary) debate as part of the government’s budgeting process?
The UK’s corporate tax regime has been dramatically overhauled over the last ten years, with a plummeting corporation tax rate and vast swathes of the multinational tax base exempted. This is a serious structural change in our tax system, yet there’s been barely a peep about it in public debate. And we continue to sign tax treaties, with only a cursory discussion in parliament each time. The public attention is only ever caught by the ex post impact of policy decisions in the tax returns of multinational firms. Hence why Pfizer’s bid for Astrazenica, and not the policy reforms that encouraged it, has been front page news.
I had this in mind as I read Oxfam’s new briefing paper on “Why corporate tax dodgers are not yet losing sleep over global tax reform” and Duncan Green’s blog post discussing it. Oxfam’s entry into the tax justice campaign has brought some fresh and interesting perspectives, and this is no exception. The paper argues that developing countries are unlikely to benefit from BEPS, for two main reasons:
Firstly, the business lobby currently has a disproportionate influence on the process, which it uses to protect its interests. Correcting the rules that allow the tax dodging practices of global giants like Google, Starbucks and others that lead to tax revenue losses in OECD countries will be difficult, given the size of the corporate lobby. But worse, perhaps, is that the interests of non-OECD/G20 countries are not represented at all in these negotiations.
It goes on to analyse the contributions to OECD consultations to demonstrate the overwhelming contribution from wealthy countries and business organisations. The paper calls for a three-pronged solution:
- Fully engaging non-G20/non-OECD countries in BEPS decision making
- Working towards a World Tax Authority to improve governance of international tax, along the lines proposed many years ago by Victor Tanzi.
- Widening the scope of the BEPS Action Plan to incorporate tax competition concerns, the redistribution of taxing rights, and reconsideration of the arm’s length principle
Oxfam, like other development NGOs, is keen to fix the problems it has observed with the OECD’s way of doing things. It is looking to change international institutional arrangements as a way of achieving this. The paper’s only real discussion about what happens at national level concerns “helping developing countries strengthen their fiscal administrations.”
This is all important stuff, but it’s missing something: a strategy to increase political engagement with corporate tax policymaking. International institutions can shape countries’ preferences and strategies, but the decisions they take (and maybe even the ways they work) are still products of the different positions taken by their member states. National politics matters.
If, as Oxfam argues, the business lobby has a disproportionate influence at the OECD, that influence won’t only be exerted at international level: it must also be applied inside the member states, who ultimately make the decisions at the OECD council. Is it wise to open up the source/residence debate within the BEPS process, as Oxfam proposes, when businesses favour reduced source state taxation? There is certainly a case for re-examining the political settlement at the heart of international tax institutions, but the outcome of such a process will surely follow the distribution of power among its participants.
If, as Oxfam also argues, developing countries are not participating in the decisionmaking, that isn’t just because the space for them is limited. It is also because they aren’t making the most of the opportunities available to them. Many of the UN tax committee’s most developing country-friendly initiatives in recent years have been led not by its developing country members but by members from OECD countries putting themselves in developing countries’ shoes, or by members from emerging economies whose interests do not always coincide with developing countries. That’s fine so long as international tax is a technical exercise, but an inclusive political process would cast these conflicts of interest in sharp relief.
Developing countries’ failure to take advantage of the opportunities that are already available to them can be seen in the tax treaties they have negotiated, comprehensively studied in an IBFD report for the UN tax committee [pdf]. Many significant clauses from the UN model treaty, which would confer on developing countries greater taxing rights, are absent from most of the tax treaties signed by developing countries. There are some examples in the chart below. I don’t know (yet) why developing countries often get such poor outcomes, but what happens in bilateral negotiations would surely occur in international negotiations too.
Duncan Green situates the BEPS process in the later stages of the “Policy Funnel” (below), when “the technical content gets greater, and the chance to mobilize the public declines.” But corporate tax policy has been at that end of the funnel since the 1920s. The aim should be to drag it back towards a public debate.
What Oxfam is proposing would lead to an even larger technocratic tax community at international and national levels (a world tax organisation, and more tax authority capacity in developing countries). That may well be necessary. But what we need even more is for politicans and the public in each country to hold the technocrats to account. It seems to me that this can be done more effectively by beginning at the national level, looking at domestic tax rates, tax incentives, and tax treaties. Until that happens, I don’t think that the politicians of developing countries will pay enough attention to BEPS or anything of its ilk to get stuck into the politics and shift the centre of gravity of international corporate tax policy.