Ireland needs to ensure developing countries also benefit under international tax changes

The Department of Finance is actively involved in the BEPS process, but how it manages to balance national interests with a commitment to help developing countries reap the benefits of the reforms remains to be seen’

The recent Luxembourg leaks have kept the spotlight firmly on the lengths to which some multinational companies will go to avoid paying tax – and the lengths to which some states will go to facilitate them.

We are familiar with the problem, but we know far less about what is being done to fix it. Since 2013 the OECD – mandated by the G20 – has been working on BEPS (base erosion and profit shifting) – essentially a process to modernise international tax regulation and close the loopholes that facilitate these schemes.

Almost inevitably, the reforms will have implications for Irish tax policy. The Department of Finance is actively involved in the BEPS process, but how they manage to balance national interests with a commitment to help developing countries reap the benefits of the reforms – a stated objective of the BEPS process – remains to be seen.

Real questions remain about the ability of the OECD to deliver reform to the benefit of all countries. Many developing countries have voiced their concerns about the BEPS process, claiming it is not doing enough to fundamentally reform an international tax system that according to Christian Aid research, results in developing countries losing more than $160 billion to corporate tax dodging annually.

Fundamentally flawed

Plans for greater consultation with developing countries announced recently are welcome, but it is as much an acknowledgment the BEPS process has been fundamentally flawed. More consultations will not get to the core of the problem. The OECD is not a globally inclusive body; its members are 34 wealthy countries, and the BEPS action plan has been designed by and for those 34 plus the non-OECD G20 countries – not with developing countries in mind.

A recent Christian Aid report shows the impact of this. The report shows many tax issues crucial for developing countries are not even on the agenda, while the sequencing of reforms shows a process skewed in favour of the interests of developed countries. The reforms of most benefit to developed countries have been prioritised, while those of most value to developing countries have been long-fingered. Three examples drawn from September’s report on seven of the 15 action points in the BEPS action plan illustrate the point:

Action point 5 commits the OECD to tackle harmful tax practices – tax practices of one country which negatively impacts on the revenue take of another. Successful action on this point has huge potential for developing countries, but vested interests (including OECD member countries), have ensured that little or no progress has been made on it.

Action point 13 requires companies to report on their activities on a country by country basis. This would make it easier to assess whether they pay tax where they have real economic presence, and would help identify instances of aggressive tax avoidance.

Public domain

However, the OECD does not propose to place this information in the public domain, and critically, it may not even make it available to developing countries’ authorities. Action point 8 has seen considerable work done on identifying “intangibles”, items such as intellectual property (IP) rights, and how to value them correctly when they are traded between sister companies. The lack of clarity in this area enables companies to use artificially manipulated values of IP rights for example, to shift profits into low-tax jurisdictions. OECD proposals to deal with this seem to have only succeeded in adding layers of complexity to an already complex issue. This is disastrous for developing countries, already struggling to ensure companies pay a fair amount of tax in their countries.

Pascal Saint Amans, director of the OECD’s centre for tax policy, has sought to legitimise the process by highlighting that, with the involvement of the G20 countries, the process includes almost 90 per cent of the global economy. While this may provide an economic mandate, with more than 100 of the world’s poorest countries excluded from the process, it cannot be called a democratic mandate.

How Ireland contributes to the ongoing process will be revealing. Ireland is in a strong position to influence the outcomes, being represented across a number of the BEPS working groups. Questions remain, however, on a possible contradiction between what some view as the harmful tax practices that form the basis of our foreign direct investment policy, and a welcome commitment to working for reforms that work for all countries equally. In ensuring Ireland is able to thrive under whatever new tax regime develops, we need also to provide the same opportunities to others and ensure we are not condemning poor countries to a future of poverty and a reliance on aid. Sorley McCaughey is head of advocacy and policy, Christian Aid Ireland