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G7 agreement on taxation does not benefit South countries

2021-06-14, 1:17pm Op-Ed

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Tax

Manila, Jun (Tony Salvador) – The so-called 5 June “landmark agreement” of the Group of 7 countries on a global minimum corporate tax rate of 15% seeks to reduce the ability of corporations in the G7 countries to shift their profits to low- or no-income-tax jurisdictions, but will not help developing countries to tax non-resident foreign corporations, especially those engaged in e-commerce.
The agreement to reach “an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises” is something that might be used to tax the digital enterprises.
However, this is still subject to agreement among nations, and one can only wonder what price will be asked of developing countries in exchange for this “concession”.
Moreover, it is not assured that there will be profit exceeding a 10% margin, nor is there any assurance that there will be no controversy as regards what will be included in revenues and costs or expenses to arrive at the margin.
It will also exclude most digital companies, since the rule as envisioned shall apply only to the “largest and most profitable multinational enterprises”.
There are simply too many variables, known and otherwise. Administrative feasibility, a fundamental principle of a sound tax system, will obviously be placed in doubt.
Equally important is the fact that taxing rights emanate from the people and devolved to their legislature. It is not something that is awarded by foreign nations.
The G7 agreement fits right into the plan to force developing countries to accept an international legal framework on taxation, complete with threats of unilateral trade sanctions (even developed countries have been threatened for exercising their sovereign right to tax e-commerce) and/or trade sanctions “agreed” through an international tax convention.
These smack of “GATTization” of what is essentially a sovereign prerogative – the power of each nation, through its legislature, to tax corporations, transactions, incomes, gains, etc. and at the same time use taxation as a policy tool.
Not content with chipping away the ability of developing countries to use trade as a policy tool, rich nations also want to take away the sovereign right to impose taxes.
While developing countries may want to engage in negotiations towards an agreement on an international tax legal framework, this must be done only at the level of the United Nations and not in configurations led by rich countries.
The OECD has a project to set up an international framework to combat tax avoidance by multinational enterprises using base erosion and profit shifting tools.
According to the OECD website, “Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax. Developing countries’ higher reliance on corporate income tax means they suffer from BEPS disproportionately. BEPS practices cost countries USD 100-240 billion in lost revenue annually. Working together within OECD/G20 Inclusive Framework on BEPS, over 135 countries and jurisdictions are collaborating on the implementation of 15 measures to tackle tax avoidance, improve the coherence of international tax rules and ensure a more transparent tax environment.”
The preliminary results (BEPS Pillars 1 and 2) clearly do not address the issues of developing countries with respect to, among others, their inability to tax e-commerce due to the absence of a “permanent establishment” and the ever-problematic transfer pricing method for allocating revenues and expenses.
Obviously, the 100-year-old international tax legal framework is at least 30 years out of step with technological developments.
This is complicated further by the ever-increasing role of intangible property in the global economy, and the ability to electronically transmit goods and services to customers in a taxing jurisdiction without paying corporate income tax or customs duties in that jurisdiction.
It cannot be overemphasized that while engaging in international processes, no country should be prevented from exercising its sovereign right to impose taxes, especially since these processes will take some time to play out.
Meanwhile, countries need more revenues for basic services, especially due to the COVID-19 pandemic.
The attempt to vilify especially a developing country’s initiative to pass tax laws by characterising it as “unilateral” is thus unacceptable.
It is the people who delegated to the legislature the power to tax, and the legislature is accountable only to its constituents.
Taxation properly belongs to the domestic legislature, not to the international negotiators, who invariably belong to the executive branch.
Meanwhile, in order to head off a comprehensive tax legal framework for e-commerce and the digital economy, the World Trade Organization (WTO) members renew every two years the moratorium on customs duties on electronic transmission on e-commerce, even as there is allegedly now a negotiating text for a plurilateral agreement on e-commerce which seeks precisely to make permanent such exemption from customs duties on e-commerce.
The proposal would supposedly also prohibit a WTO member country from compelling digital companies to locate their data and/or servers in its jurisdiction, thus allowing these companies to avoid having a “permanent establishment”, consequently making them exempt from corporate income tax.
WTO members who are part of the plurilateral negotiations on e-commerce want to have substantial progress on these negotiations in the run-up to the 12th Ministerial Conference of the WTO in November 2021.
The imposition of customs duties on e-commerce is an integral part of a range of policy options that would enable countries to tax non-resident corporations who pay no corporate income tax while making tons of money in a tax jurisdiction. Removing this taxing power by way of a WTO agreement constitutes a carve-out, a veritable special and differential treatment in favour of digital companies, almost all of which are located in rich countries.
It is therefore crucial that all countries respect each one’s sovereign right and duty to impose taxes through its legislature (hopefully not to be used for a race-to-the-bottom tax policy), remove from the WTO the discussions on an important tax measure, i.e. the imposition of customs duties on digital transmission of goods and services, and have a comprehensive discussion on international taxation at the United Nations, and not at the OECD/G20.
-    Third World Network