Revenue losses from tax evasion and avoidance affect governments´ ability to provide social spending or public investment. They also exacerbate inequality and perceptions of unfairness. The existence of spillover effects means that t self-serving national policies can damage other countries. In fact, self-interested tax policies that disregard adverse effects elsewhere could lead all countries to end up in a worse off situation. The IMF’s new Fiscal Monitor shows that improving international coordination in taxing large corporations and information exchange on offshore holdings can benefit everyone.
Coordinating personal taxation
Much like corporations, the taxation of individuals (especially the wealthiest) also requires coordination across borders. Recent leaks of documents such as the Panama Papers and Paradise Papers revealed a massive stock of offshore wealth that take advantage of widespread tax loopholes. And with the rise of digital assets that allow for even greater anonymity, information exchange is becoming more and more vital. Beyond the revenue loss, opaque offshore accounts designed to hide wealth facilitate the transnational transfer of criminal proceeds.
Coordination can deliver tangible results. This is why, in the context of the OECD, 163 countries have agreed to exchange information under the Global Forum on Transparency and Exchange of Information for Tax Purposes.
Countries should do more to promote beneficial ownership information about who owns or controls a company. Some countries have already established such mechanisms. Effective use of the information remains critical for enforcement, and low-income countries will need to develop more know-how to realize the benefits of transparency.
Another recent phenomenon that calls for greater coordination is the increasing mobility of the labour force. Opportunities for cross-border remote work have expanded, along with the number of economies offering digital-nomad visas targeted at high-skilled individuals. Estimates suggest that cross-border remote work — given existing differences in tax rates across countries — could reallocate 1.25% of global personal income tax revenue. Coordination will gain importance in the future to ensure consistent tax treatment between countries where employers and employees reside.
Coordinating corporate taxation
Widespread dissatisfaction with low tax payments by the world’s major multinationals (despite annual profits of 9% of the global GDP) spurred a ground-breaking agreement to modernize the existing and century-old international system. In 2021, 137 countries reached a breakthrough in coordination: the Two Pillars Solution under the Inclusive Framework. With 2022 set to be a crucial year for implementing the agreement, the Fiscal Monitor gauges its potential benefits.
- Pillar 1 of the agreement states that a portion of multinationals’ profits must be taxed where the firms’ goods or services are used or consumed. This means that tech companies can be taxed where their customers are located, even if their employees are far from their customer base. In a world where digital commerce is now commonplace, this is a welcome development. While IMF’s report finds that the agreed reallocation of tax revenue covers only 2% of the global profit of multinationals, this new taxation principle sets the stage for a more efficient tax if compared to unilateral digital services taxes – to be repealed as a pre-condition for the Two Pillar Agreement –.
- Pillar 2 establishes a global minimum corporate tax of 15%. By doing so, it limits “race to the bottom” competition, reducing incentives for countries to compete using their tax rates and for firms to shift profits across borders. Some nations will top up their tax on undertaxed profit to the minimum level, increasing corporate tax revenues by up to 6% globally. By reversing the downward trend in corporate income taxation, reduced tax competition could raise revenue by another 8%, bringing the total effect up to the 14%. In the framework of the Inclusive Framework, advances should still be carried out in order to better adapt these measures to low-income countries’ circumstances. For example, to simplify some aspects of corporate taxation, strengthen withholding taxes on cross-border payments, and share more country-by-country information on multinationals. For low-income economies to reap the benefits of recent changes, they need to adopt complementary reforms, such as removing wasteful tax incentives.
Source: International Monetary Found