Sweeping proposals to tackle the “broken” system of taxing companies’ profits through a radical shake-up of the rules and a global minimum corporate tax rate have been put forward by an international panel of development experts.
Joseph Stiglitz, a Nobel Prize-winning economist on the panel set up by trade unions, development charities and campaigners called on world leaders to be more ambitious in their plans to reform the international tax system in response to public outrage over corporate tax avoidance.
The panel called for a fundamental overhaul of the global tax system by adopting a scheme called “formulary apportionment” which involves using a formula to carve up profits between the countries where multinationals operate.
The declaration is a sign that campaigners will continue to criticise the international corporate tax regime even after the conclusion of the Paris-based Organisation for Economic Co-operation and Development’s “base erosion and profit shifting” [BEPS] project later this year. The project was aimed at closing tax loopholes in the international tax system and was set up by G20 governments.
Pascal Saint-Amans, the top tax official at the Paris-based OECD, criticised the call for global formulary apportionment, saying it would never be agreed. He said: “We need to be pragmatic. We need to move things forward . . . This type of message pretends to be positive but it is claiming defeat.”
But he accepted another of the panel’s findings that the BEPS project should be made more inclusive to reflect the priorities of developing countries.
The panel’s report was published shortly after an International Monetary Fund working paper put forward a “highly speculative” estimate of the cost of BEPS, which suggested that developing countries lost $213bn a year — close to 2 per cent of GDP, a far larger share than advanced economies.
The panel, called the Independent Commission for the Reform of International Corporate Taxation, acknowledged the difficulties of reaching agreement on formulary apportionment, saying “such a unified approach to taxing corporate profits would require more inclusive and stronger international co-operation as well as focused research”.
But Mr Stiglitz said governments should embrace the concept as the current system was obsolete. “Multinational corporations act and therefore should be taxed as single and unified firms — it is time for our leaders to be bold and recognise the legal fiction of the separate entity principle,” he said.
“During the transition, leading developed nations should impose a global minimum corporate tax rate to stop the race to the bottom,” Mr Stiglitz added.
Formulary apportionment systems are used within the US, Canada and Switzerland. Brussels is pushing for such a system to be adopted in Europe.
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