Intense debate and
concrete policy work is ongoing in the international community on the fiscal
contribution
of MNEs. The focus
is predominantly on tax avoidance – notably in the G20 project on base erosion
and profit
shifting (BEPS).
At the same time, sustained investment is needed in global economic growth and
development,
especially in
light of financing needs for the Sustainable Development Goals (SDGs). The policy imperative is to
take action
against tax avoidance to support domestic resource mobilization and continue to
facilitate productive
investment for
sustainable development.
UNCTAD estimates
the contribution of MNE foreign affiliates to government budgets in developing
countries at
approximately
$730 billion annually. This represents, on average, some 23 per
cent of total corporate contributions and 10 per cent of total government
revenues. The relative size (and composition) of this contribution varies by country
and region. It is higher in developing countries than in developed countries,
underlining the exposure and dependence of developing countries on corporate
contributions. (On average, the government budgets of African countries depend
on foreign corporate payments for 14 per cent of their funding.)
Furthermore, the
lower a country is on the development ladder, the greater is its dependence on
non-tax revenue
streams
contributed by firms. In developing countries, foreign
affiliates, on average, contribute more than
twice as much to
government revenues through royalties on natural resources, tariffs, payroll
taxes and social
contributions,
and other types of taxes and levies, than through corporate income taxes.
MNEs build their
corporate structures through cross-border investment. They do so in the most
tax-efficient
manner possible,
within the constraints of their business and operational needs. The size and direction of FDI
flows are thus
often influenced by MNE tax considerations, because the structure and modality
of investments
enable
opportunities to avoid tax on subsequent investment income.
An investment
perspective on tax avoidance puts the spotlight on the role of offshore
investment hubs (tax
havens and special
purpose entities in other countries) as major players in global investment. Some 30 per cent
of cross-border
corporate investment stocks have been routed through offshore hubs before
reaching their
destination as
productive assets. (UNCTAD’s FDI database removes the
associated double-counting effect.)
The outsized
role of offshore hubs in global corporate investments is largely due to tax
planning, although other
factors can play
a supporting role. MNEs employ a range of tax avoidance
levers, enabled by tax rate differentials
between jurisdictions,
legislative mismatches, and tax treaties. MNE tax planning involves complex
multilayered
corporate
structures. Two archetypal categories stand out: (i) intangibles-based transfer
pricing schemes and (ii)
financing schemes.
Both schemes, which are representative of a relevant part of tax avoidance
practices, make
use of investment
structures involving entities in offshore investment hubs – financing schemes
especially rely on
direct investment
links through hubs.
Tax avoidance
practices by MNEs are a global issue relevant to all countries: the exposure to
investments from
offshore hubs is
broadly similar for developing and developed countries. However, profit
shifting out of developing
countries can have
a significant negative impact on their prospects for sustainable development.
Developing
countries are
often less equipped to deal with highly complex tax avoidance practices because
of resource
constraints or
lack of technical expertise.
Tax avoidance
practices are responsible for a significant leakage of development financing
resources. An
estimated $100
billion of annual tax revenue losses for developing countries is related to
inward investment
stocks directly
linked to offshore hubs. There is a clear relationship between
the share of offshore-hub investment
in host countries’
inward FDI stock and the reported (taxable) rate of return on FDI. The more
investment is
routed through
offshore hubs, the less taxable profits accrue. On average, across developing
economies,
every 10
percentage points of offshore investment is associated with a 1 percentage
point lower rate of return.
These averages disguise country-specific
impacts.
Tax avoidance
practices by MNEs lead to a substantial loss of government revenue in developing
countries.
The basic issues
of fairness in the distribution of tax revenues between jurisdictions that this
implies must be
addressed. At a particular disadvantage are countries with limited tax collection
capabilities, greater reliance on
tax revenues
from corporate investors, and growing exposure to offshore investments.
Therefore,
action must be taken to tackle tax avoidance, carefully considering the effects
on international
investment. Currently,
offshore investment hubs play a systemic role in international investment
flows: they
are part of the
global FDI financing infrastructure. Any measures at the international level
that might affect the
investment
facilitation function of these hubs, or key investment facilitation levers
(such as tax treaties), must
include an
investment policy perspective.
Ongoing
anti-avoidance discussions in the international community pay limited attention
to investment policy.
The role of
investment in building the corporate structures that enable tax avoidance is
fundamental. Therefore,
investment
policy should form an integral part of any solution to tax avoidance.
A set of
guidelines for coherent international tax and
investment policies may help realize the synergies between
investment policy
and initiatives to counter tax avoidance. Key objectives include removing
aggressive tax
planning
opportunities as investment promotion levers; considering the potential impact
on investment of antiavoidance measures; taking a partnership approach in
recognition of shared responsibilities between host,
home and conduit
countries; managing the interaction between international investment and tax
agreements;
and strengthening
the role of both investment and fiscal revenues in sustainable development as
well as the
capabilities of
developing countries to address tax avoidance issues.
WIR14 showed the massive
worldwide financing needs for sustainable development and the important role
that
FDI can play in
bridging the investment gap, especially in developing countries. In this light,
strengthening the
global investment
policy environment, including both the IIA and the international tax regimes,
must be a priority.
The two regimes,
each made up of a “spaghetti bowl” of over 3,000 bilateral agreements, are interrelated, and
they face similar challenges. And both are the object of reform efforts. Even
though each regime has its own
specific reform
priorities, there is merit in considering a joint agenda. This could aim for
more inclusiveness, better
governance and
greater coherence to manage the interaction between international tax and
investment policies,
not only avoiding
conflict between the regimes but also making them mutually supportive. The
international
investment and
development community should, and can, eventually build a common framework for
global
investment cooperation for the benefit
of all.
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