The role of IFIs in assessing the impact of tax incentives and tax competition on inequality

6 October 2016

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Article summary

The link between tax incentives and tax competition and growing inequality in developing countries has been recognized by the IMF in its research work, while greater revenue mobilisation is important for implementing SDGs and Addis Ababa Action Agenda. Gaps still exist in following-up these commitments in practical country advice work. This panel discussion presented specific case-study evidence from civil society, exploring the link between tax incentives, reduced revenue mobilization and inequality as (civil society research and case-study work). Tax capacity building efforts were addressed, as was the topic of whether tax incentives are effective in attracting investment.

Sponsor: Christian Aid

Panellists:

Matti Kohonen, Christian Aid (Moderator)

Sara Jespersen, OXFAM IBIS

Victoria Perry, IMF

Professor Mariela Mendez Prado, ESPOL Ecuador

Reverend Suzanne Matale, ICRICT

Jim Brumby, World Bank

Suzanne Matale

As member of the Commission, we aspire to deepen the debate on tax reforms
It is a response to widespread anger about corporate tax avoidance
We as a nation are not supported by the tax that is due to us through the income generate thorough our resources
We are interested in ensuring that a global response is coordinated in such a way that the tax that is due to us is provided, as we face issues of poverty, climate change and others
The project of the IMF, Bank and OECD and others through the work in BEPS, but we do not feel included sufficiently.
Therefore we are anxious to see these issues resolved
It is a moral and ethical imperative.
We need to feel responsible as citizens, to be responsible and transparent to the resources such as minerals that we have
Tax abuse is corruption that weakens societies,
Many multinational companies need to be taxed as single entities – instead of a multiplicity of entities that exploits for example transfer pricing

Additionally tax havens are a problem – we as Africans know we need to put our house in order but we also need the rest of the world and corporate taxation needs to be unraveled and made transparent.

Even as non accountants we have responsibility for transparency in the way corporate tax is administered

Many multinationals investing in our countries are faceless – we don’t know who owns what. That’s why we asking countries to keep registers to know who owns what – to give us the information.

Multinationals – especially mining companies – often do not subscribe to the same standards, including climate, pollution, displacement of people, that they respect in their home countries

Mariela Mendez Prado – slides of presentation available on request

In Latin America we have about $1.4 billion in losses due to illicit flows
The cost of tax incentives is 4.35% of GDP
Tax evasion ration is 6.3% of GDP
The new Platform on Tax Collaboration of the IMF, World Bank, UN, and OECD poses challenges, especially about participation .
As an Ecuadorian, it is important to note that the demand of Ecuador at the UN to have a tax boxy is fundamentally important
At a 2015 meeting of tax administrators showed that many major issues are still unresolved, including controlling abusive manipulation of transfer prices, better information access, evaluation of tax incentives, issues of source versus residence.
The Platform needs to be a leader about these subjects, including because there are challenges for tax administrators who act as ‘rule-takers’

Sara Jespersen

Growing global inequality

Recall in 2015, 62 people had the same wealth as the poorest 3.5 billion
Since 200 the poorest half of the global populations received only 1% of the increase in global wealth
Fair taxation is vital to tackle inequality
Currently the global tax architecture does not work for the poorest

BEPS G20/OECD project

Set an agenda for developed economies by developed economies
Developing economies brought in to implement, not decide
Neglect core deficiencies of the existing system which emanates from the OECD,

Possibilities for he platform

Ensuring transparency
Identifying gaps in consistency
Reducing inequality at the center of tax policy discussions
Set and agenda for a new wave of reforms
Explore alternatives to the core system that the BEPS failed to challenge, instead fixing some deficiencies
Recognise the inherent political nature of taxation

Victoria Perry

Context of the Platform included providing toolkits requested by G20, including on BEPS and Incentives, but also other areas such as revenue statistics, tax treatment of aid
Important to look at how to support developing countries, and goes beyond important issues of international corporate taxation

Most important issues to mobilise badly needed revenue and in a fairer way, focused on inequality is administration and the structure of the domestic system

This includes VAT and how to make personal taxes on capital more effective so that elites pay their fair share

Hence the Platform is not just BEPS nor transnational corporate tax, though it is starting with BEPS

By year-end we will issue repot on offshore assets, looking at natural resources and telecommunications – the governmental assets that have caused so much strife. The toolkit will seek to examine how to capture gains on transfers from such assets – this is not part of BEPS but is very important to low-income countries

In summer the G20 requested a paper from the Platform on enhancing the effectiveness of external support in building tax capacity in developing countries

Key recommendations

Prerequisite is a high level political commitment to collect taxes
Potential for medium term revenue strategies
Strong managerial and sills base is essential
Strengthen knowledge and evidence base
Further inclusion of developing countries in international rule setting

Bank-Fund initiative to develop strengthened frameworks for tax policy analysis, in addition to commitment to deepen dialongue on international tax issues including via semi-annual conference at spring and annula meetings for last 2 years

Oxfam’s points about fundamental changes as opposed to tinkering is precisely the issue we hope to confront, including in next conference (Sunday coming) on source versus residence issues, as aprt of the need to look more deeply at the international tax system. We, the Bank and academics are certainly looking deeply at the international tax regime.

Since 2015 we publish revenue data set – IMFWoRLD – available on the website and it provides longitudinal granular revenue dataset for almost all countries for 25 years

IMF now piloting work to focus in article IV surveillance issues of inequality, which though implies lots of issues, includes taxation and revenue issues which are naturally part of the normal coverage but to bring the inequality issues more directly and therefore the technical assistance the IMF provides and which states tend to keep private will be better accounted for and described bvia the surveillance reports

It will also include examination of international corporate tax issues in 10 developed and developing countries – one of the first pilots was the United States, looking at possibilities for international corporate tax reform including focusing on spillovers of US policy on other countries.

Note also new book on international taxation and the extractive industries

Jim Brumby

At Addis in 2015, the objective of moving from billions to trillions was understood to be too big a task to be met by ODA or existing levels of domestic resource mobilization
International organisations and states had to examine themselves to consider what they could do to further tax reform in developing countries
The Fund deals more directly with more states than the Bank, trhoguh surveillance and its other work. The Bank focuses on lower income states – so we cross paths in some though not all states
Hence we have sought to cooperate better together and that would lead to better impact, and sought to reach out to the OECD and UN as the other mian organisations involved in this field
We support several initiatives on fiscal transparency, though sometimes tax has been downplayed as a transparency issue
The question of identifying gaps – the issue is not knowing what they are but rather getting action and accepting that they’re are different tools for different purposes – e.g. inequality should not be judged by doing business indicators – whose tax element is controversial, including within the Bank
In our dialogue, including at annuals, we talk to countries about medium term revenue strategies. We think that we should not just go to the easiest terrain, including at different levels of income and development including the most challenging
Some comments on tax incetnives: apart from the paper Vicky mentioned, we do have to accept that tax incetnives are prevalent everyewhere, though with heavy variation (e.g. OECD heavily uses research & development incentives).
The prevalence of tax incentives – especially those exercised with insufficient transparency & accountability – are a key issue
Tax incentives’ influence on inequality exist in a few areas, above all lost foregone or lost revenue.
Solutions include encouraging avoidance of environment of damaging tax competition, includign via regional groupings conducting tax revenue foregone analyses. We encourage states to produce data on tax expenditure information, which is often revelatory and alters some of the decision making in terms of expenditure allocation adn where to provide tax – hence transparency for decision makers and those who influence them is highly important.

There is often a false attraction is relating tax incentives with inequality – what really matters is relating it to households’ interactions with the fiscal sector. The improvement in equality associated with the fiscal sector is often less than presumed and very small in absolute for poorer nations, the benefit gained for equality from the fiscal sector is greater in OECD nations.

Hence initiatives like cash transfers of things like Brazil’s Bolsa Familia shows the need to consider the whole structure of the fiscal sector, which can counteract the effect of such policies

Also there is not a very clear relation of preferences for higher tax or use of incentives and greater equality

Institutions: International Monetary Fund (IMF) World Bank Group

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The role of IFIs in assessing the impact of tax incentives and tax competition on inequality

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