Developing nations lose $100bn in tax revenue each year – will G20 reforms help?

Global tax reform is on the agenda at the G20 in Brisbane to prevent aggressive tax avoidance, but developing countries are being excluded from decision-making

Tax avoidance and evasion will be at the top of the agenda at the G20 Leaders’ Summit this month, when the leaders of many of the world’s biggest economies will meet in Brisbane. In particular, the G20 will discuss measures to combat what is known as base erosion and profit shifting (BEPS) by multinational corporations.

BEPS schemes can be very complex but the aim is simple: companies shift profits across borders to low or no-tax jurisdictions to avoid paying higher tax rates in the country where the profit is made. A number of multinational corporations have been accused of using these methods which are permissible within existing national laws. One of the biggest tax avoiders is Apple, which is reported to have shifted an estimated AU$8.9bn (£4.9bn) in untaxed profits out of Australia over the last decade.

Australian treasurer Joe Hockey, who has called tax avoiders ‘thieves’, has made tackling tax avoidance a priority during his chairmanship of the G20 finance track. At the Cairns meeting in September, G20 finance ministers committed to finalise the OECD’s 15-point Action Plan to counter BEPS by 2015.

Produced at the request of the G20, and launched at last year’s G20 finance ministers’ meeting in Moscow, the Action Plan aims to provide governments with global solutions for addressing BEPS to create a more progressive international tax system that requires multinationals to pay their fair share of tax.

Australia, like other G20 nations, has much to gain from global tax reform. According to a report commissioned by the Tax Justice Network and United Voice, almost one third of ASX 200 companies pay less than 10 cents in the dollar in corporate tax.

But non-G20 countries also stand to benefit from global tax reform, especially the world’s poorest economies.

It is difficult to assess how much money countries lose to aggressive tax planning, but international aid agency Oxfam estimates developing nations lose US$114bn in tax revenue each year. While most countries feel the impact of tax avoidance, Oxfam Australia G20 coordinator Claire Spoors says it takes an especially profound toll on low-income countries.

“Developing countries tend to be the hardest hit by tax avoidance by multinational corporations. The main reason being that developing countries are more reliant on corporate tax than developed countries.”

According to anti-poverty organisation Action Aid, corporate income tax comprises a significant share of tax receipts in low and lower-middle income countries—an average of 18%.

Many of these countries also rely on foreign aid and grapple with poverty. Bangladesh for example, where more than 30% of the population live below the poverty line, is deprived of around US$310m (pdf) every year in tax revenues due to profit shifting by multinational companies.

But despite being the hardest hit by tax avoidance, there are concerns that the poorest countries do not have an equal say on the BEPS process.

“Oxfam has been concerned that this is an OECD-G20 initiative that clearly leaves out the world’s poorest countries,” Spoors says. “We’ve been calling out for developing countries to have real participation on an equal footing with the decision-making of what is being decided in this BEPS process.”

At the Cairns meeting, OECD secretary-general Angel Gurria recognised that developing countries are hit particularly hard by tax avoidance and said that all countries, including low-income countries, would benefit from G20 tax reform.

But Spoors says developing countries need more than words from the G20: “There are 15 proposals in the BEPS project, and seven of them have been decided on in Cairns. But developing countries have not been in the room and agreed to those proposals, so there’s been some doublespeak.”

Decision-making on the BEPS Action Plan and its proposals rests with the 44 OECD and G20 member countries. Spoors says a number of these countries—for instance Switzerland, Luxembourg and Ireland—are responsible for the loopholes in the system and have an interest in protecting the status quo. So far the OECD has initiated four regional consultations with low-income countries on BEPS, in an effort to facilitate developing world participation. But according to Oxfam, it is not clear how these consultations with developing countries will inform the BEPS process.

Kerrie Sadiq, professor of taxation at QUT Business School says these regional consultations should not be one-off events.

“It is important that developing nations continue to be consulted. Their concerns tend to be more fundamental that those of developed nations.”

The BEPS process has led to positive outcomes, including for developing countries. In a big step forward for international tax transparency, in Cairns finance ministers agreed to a template for country-by-country reporting, which would see multinationals disclose sales, profits and taxes paid in all jurisdictions in their audited annual reports and tax returns.

But the information will only be shared between countries’ tax authorities. This may leave developing countries, who do not have the people capacity or administrative structure to participate in reciprocal information-exchange, in a difficult position.

“Many developing countries are likely to be cut out of that exchange because they do not have the capacity to ensure the confidentiality that is being prescribed,” Spoors says.

To this problem, there may be a simple solution: share the information publicly. This could also have the added benefit of deterring aggressive tax planning by multinational corporations looking to avoid reputational risks.

At the Leaders’ Summit next month, we can expect governments to take meaningful steps to counter tax avoidance, even if only ‘in principle’ agreement is reached. But whether developing countries will also benefit from the G20’s tax reform agenda remains an open question.