Corporate Tax Reform Must Focus on Developing Countries’ Needs, Combating Inequality, Speakers Tell Special Meeting of Economic and Social Council
Harnessing the power of taxation to help nations realize sustainable growth and development requires inclusive, innovative approaches based on developing countries’ needs and aimed at leaving no one behind, delegates told the Economic and Social Council today during its one‑day annual meeting on international cooperation in tax matters.
Elliot Harris, Assistant Secretary‑General for Economic Development and Chief Economist, said, in opening remarks, that tax policies are no longer a topic for experts only. Effective tax systems are key to generating domestic resources for achieving the Sustainable Development Goals and can also act as a guide for consumer decisions. Choices among policy options should be informed by the 2030 Agenda for Sustainable Development and consider in a more inclusive manner those stakeholders with the least resources and capacities.
Elements of taxation and the digitalization of the economy are key to the long‑term quality and effectiveness of tax rules, he said. As economies are digitalizing rapidly, with companies able to sell products across borders without maintaining a presence on the ground, he said taxation must be considered alongside the current challenges involving corporate tax rules and reform. However, any reform of tax rules must pay special attention to the needs of developing countries.
Yet, reforms need not be zero sum, he said, adding that any new measures must work towards a fair system that reduces inequalities. In addition, climate change must be supported by effective measures that consider carbon emissions and related taxation initiatives. Environmental taxation matters can also shift consumption patterns and should be aligned with the 2030 Agenda, from transportation to plastic bag use. Fiscal policies are also important tools for combating inequalities, he said, emphasizing that it is possible to achieve growth that is inclusive and sustainable.
Inga Rhonda King (Saint Vincent and the Grenadines), President of the Economic and Social Council, delivering opening remarks, said the special meeting will further probe the role of taxation as a tool to strengthen the mobilization of domestic resources and as a fiscal policy instrument to directly support progress towards those objectives.
“What will impact the Sustainable Development Goal agenda is not only how much tax we raise, but also how we raise taxes and how we spend them,” she said. “These issues are vital.”
Outlining some of these issues — from going beyond current business models for digitalized economies to taxing natural resources — she said the Council’s three panels would address: “Taxation and the Digitalization of the Economy”; “Taxation and Environmental Protection”; and “Taxation and Inequality”.
During its general discussion, representatives raised concerns, provided examples of how they are dealing with challenges and highlighted areas for consideration when working on a global consensus. Many representatives emphasized the importance of new tax measures to mobilize resources to realize the 2030 Agenda’s goals and targets.
India’s representative said such urgent measures require international cooperation. However, calling a process inclusive does not make it so. Instead, a platform under the auspices of the United Nations should give all countries an equal voice on tax matters.
Thailand’s representative highlighted the need to strike the right balance between advancing gains on realizing the Goals and ensuring that corporations prosper. Tax rules must be simple and practical, particularly in developing countries where resources are limited, and global efforts must ensure compliance across countries and all stakeholders.
The Permanent Observer for the State of Palestine, speaking on behalf of the “Group of 77” developing countries and China, stressed the challenges posed by the lack of international tax cooperation, tax evasion and illicit financial flows. In that regard, she said it is counterproductive to highlight the importance of domestic resource mobilization in developing countries while not also robustly tackling the issues that impede their capacity to capture necessary resources.
She noted the importance of scaling up international tax cooperation, combating illicit flows and eliminating safe havens that enable the transfer of stolen assets. Urging the Committee of Experts on International Cooperation in Tax Matters to fulfill its mandate to consider new and emerging issues, she said there remains a significant digital divide between developed and developing countries.
Romania’s representative, on behalf of the European Union, said enhanced domestic resource mobilization and an international tax environment that is efficient, fair and transparent are essential for all Government action to achieve growth and sustainable development. However, corruption and tax evasion continue to derail those efforts, disproportionally harming developing countries. He called for international cooperation to tackle such challenges, offering support for the principles and objectives of the Addis Tax Initiative. The “Collect More, Spend Better” European approach addresses both the revenue and expenditure side of domestic public finance, with “Collect More” closing tax compliance gaps while “Spend Better” addresses efficient and effective public expenditure.
Brazil’s delegate underscored the need to reduce international tax avoidance and increase the exchange of information between tax authorities to foster a transparent environment. He noted that the digitalization of the world economy presents a challenge to developing economies if not addressed from the taxation side. He therefore welcomed the agreement by all States during the recent Council Forum on Financing for Development that “any consideration of tax measures in response to the digitalization of the economy should include a thorough analysis of the implications for developing countries, with a special focus on their unique needs and capacities”. As international taxation norms and standards undergo rapid transformation, developing countries need to be fully integrated, active participants in the discussion.
The representative of Liechtenstein cited the importance of international tax cooperation, noting his country has expanded its networks of agreements with 20 treaties to date. Noting Liechtenstein is one of most highly industrialized countries in the world, he stressed the importance of bilateral tax treaties. Domestic tax provisions have been brought in line with international standards. His Government has also introduced the automatic exchange of information and country‑by‑country reporting. A strong, coherent framework of international standards can enhance realization of the 2030 Agenda, he stressed.
Norway’s representative said his country supports the establishment of an international tax system, as it is the best way to enhance domestic revenue and achieve the Sustainable Development Goals. Growing inequalities are a barrier to achieving those Goals, and fiscal policies must address that issue. The current financial governance system contributes to growing inequalities between people and countries. Progressive tax policies can address that problem and combat corruption and illicit financial flows. He stressed the importance of a system that prioritizes certainty, transparency and fairness, and ends impunity. Digitalization represents a challenge, with a lack of an effective taxation framework, which disproportionally affects developing countries.
The representative of Nigeria agreed that enhanced domestic resource management will help developing countries. However, it is counterproductive to stress that without addressing international loopholes which harm those States. Multinational companies should work to enhance international cooperation, and pay taxes where value is created. In addition, regulatory frameworks must be strengthened at all levels. The digital divide presents a profound challenge to tax collection in developing countries. She encouraged Member States to prevent and counter illicit financial flows, and expressed support for international efforts in that domain.
In closing remarks, Ms. King said the special meeting demonstrates that while progress has been made, much work remains ahead to build a global tax architecture aligned with national, regional and global sustainable development priorities. A presidential summary of the meeting will soon be available, she said, encouraging delegates to use it in their work. The findings and conclusions should be added to a growing body of actionable recommendations that could guide tax policies of countries at different levels of development in mobilizing additional domestic resources to support national sustainable development strategies.
Panel I
The Council held an interactive dialogue on “Taxation and the Digitalization of the Economy”, moderated by Kosha Gada, Contributor, Forbes and Consumer News and Business Channel, or CNBC, and featuring: Irving Aw, Counsel, Legal Department, International Monetary Fund (IMF); Eric Nii Yarboi Mensah, Co‑Chairperson, Committee of Experts on International Cooperation in Tax Matters and Assistant Commissioner, Revenue Authority, Ghana; Marilou Uy, Director, Intergovernmental Group of Twenty‑Four on International Monetary Affairs and Development (G‑24); Carlos Protto, member, Committee of Experts on International Cooperation in Tax Matters and Director, Division of International Tax Relations, Ministry of Treasury, Argentina; and Brian Jenn, Co-Chair, Task Force on the Digital Economy, Organization for Economic Cooperation and Development (OECD) and Deputy International Tax Counsel, Department of Treasury, United States.
Ms. GADA said the dialogue aims at reaching an alignment on what constitutes a digital economy, understanding obstacles to achieving a consensus on this theme and making proposals on what actions to take going forward.
Mr. AW outlined challenges, pointing to situations where companies operate in countries where they have no physical presence and those whose user participation activities — including goods and services exports — operate outside tax policies. Because so much of the economy is digital amid a dearth of related policies, efforts to deal with this have led to short‑term measures in such countries as Australia, Chile and the United Kingdom. However, these short‑term unilateral steps could be damaging in the long term and a more inclusive multilateral process is needed. Citing a new IMF paper that proposes several possible measures, such as a destination‑based tax on consumption and residual profit allocation, he said each option must be considered alongside the needs of lower‑income countries. IMF is not trying to set standards, but to focus on proposals about how future steps can unfold in an inclusive manner. Discussions on alternatives are tentative and much more analysis is needed on the consequences of each proposal, he said, expressing support for the OECD framework project.
Mr. MENSAH said the current tax rules requiring a physical presence in a jurisdiction are no longer applicable and future efforts must consider a digital presence. Underlining the need for new measures to challenge existing tax rules, he said that in cases of cross‑border enterprises where demand and supply is spread across jurisdictions, tax rights must be given to relevant States. Work is now being carried out to reach a global consensus on the matter. But, when shaping such approaches, tailored measures which consider developing countries’ special needs are important. Proposed solutions must also consider the changing face of technology, he said, pointing to the work under way by the Committee of Experts on International Cooperation in Tax Matters. Without such considerations, developing countries might lose out, he said.
Ms. UY said the road is long to ensure a fair playing field. In recent years, there has been a much greater awareness about improving the fairness of international tax matters for developing countries. These States have a strong stake in international tax measures, partly because revenues relative to the gross domestic product (GDP) are much lower than other States and they are much more dependent on corporate taxation. With a view to achieving the Sustainable Development Goals, the G‑24 launched a working group in 2018 to identify pressing issues, including shaping a view of digital economies and base erosion and profit shifting. Examining the definition of substantive economic presence, she said measures could include revenues generated on a sustained basis in a given jurisdiction. Empirical work will be essential to assess the combination of this and other factors to determine what defines economic presence and to shape policies to tax digital activities. Using corporate business’ profits as a tax base is one way, but it is not being commonly used. For its part, G‑24 aims at designing simple measures addressing such issues as fractional apportionment and withholding taxes in digital transactions.
Mr. PROTTO, noting that taxation can help to realize the objectives of the 2030 Agenda for Sustainable Development and shape behaviour to achieve other sustainable goals and targets, said the current landscape has become a high‑level political concern fuelling a desire to find a multilateral solution. Citing a 2018 report on digital activities, he said companies are reaching scale without mass, generating income across borders where they have no physical presence. To address these concerns, the international community is now considering proposals. Indeed, different approaches require specific measures that can address issues such as routine and non‑routine profits and the application of their distribution. Yet, a global solution must consider everyone’s needs, with the United Nations playing a key role in developing international standards whereby no one is left behind. To ensure that, he underlined a need to cooperate, be inclusive and reach a consensus. A global solution is needed quite soon in order to address the current measures that, if left in place, can threaten the global economy. Instead, reaching a consensus on a final solution can have the reverse consequences while also fostering growth and reducing poverty.
Mr. JENN, highlighting progress since the beginning of the OECD project on base erosion and profit shifting, said the discussion has evolved from focusing on digital companies, where some countries felt pressed to pursue tax measures, to how tax rights should be allocated among countries. There is a widespread sense among States that current measures are no longer suitable or satisfactory. Various initiatives, such as digital services taxes, comprise one aspect of a broader phenomenon of States taking unilateral legislative action to generate tax in their respective jurisdictions. In transfer pricing and other areas, there is a variety of novel approaches that are, among other things, creating risks for businesses and cross‑border commerce. Such initiatives contribute to a broad desire to discuss these matters at a global level.
There is general agreement that approaches should be explored to allocate greater tax rights to the market and to restore a stable international consensus to support action at the audit level and within the realm of legislation, he said. “The harder question is how to split up the global pie,” he said, adding that OECD is currently considering several proposals in this regard. Achieving such a consensus will be challenging, but there is strong motivation to do so because the prospect of a continued unravelling consensus under existing tax measures presents a real threat to global commerce and the welfare of individual countries.
In the ensuing discussion, delegates asked a range of questions about ways to set a framework for consensus‑building. Some raised concerns about developing countries being left behind during the process of drafting global proposals and standards.
A representative of the civil society organization Eurodad pointed out that OECD is drafting measures, but its membership of 36 States does not reflect the needs of developing countries. The offer on the table now for developing countries is that they can sign on to the base erosion and profit shifting project — a 2,000‑page agreement made in 2015 — to join the discussion. Meanwhile, the “Group of 77” developing countries and China, with its membership of more than 130 States, has proposed a meeting at United Nations Headquarters, reflecting positions of more than just the OECD 36 member States.
Mr. JENN, in response, said OECD is involving more than 129 countries in its work on digitalization today, with participants being on equal footing as OECD members.
Mr. PROTTO said the Tax Committee, with only 25 members, is also considering the needs of developing countries in its work on a global consensus, with a broad objective of leaving no one behind.
Mr. AW said IMF and the World Bank can inform such discussions based on its experience.
AART ROELOFSON, Tax Committee member, said the issue is not avoiding tax, but dividing the pie. In this regard, OECD might have a different perspective than developing countries. But, the Tax Committee can make independent decisions on this issue as well as other matters.
RAJAT BANSAL, Tax Committee member, said ways must be found to identify a new nexus rule. Highlighting a growing impatience to find solutions, he said the 2015 proposal has sensitized the world about the urgent need to find ways to resolve existing challenges.
Panel II
The Council then held an interactive dialogue on “Taxation and Environmental Protection” moderated by Janet Milne, Director, Environmental Tax Policy Institute and featuring: Kurt Van Dender, Head of the Tax and Environment Unit, OECD Centre for Tax Policy and Administration; Gervais Coulombe, Senior Director, Excise, Sales Tax Division, Tax Policy Branch, Department of Finance, Canada; Rodrigo Pizarro, University of Santiago, former Head of Information and Environmental Economics, Ministry for Environment of Chile; and Natalia Aristizabal, United Nations Committee of Experts on International Cooperation in Tax Matters, Coordinator of Subcommittee on Environmental Taxation Issues.
Ms. MILNE said the dialogue considered how environmental taxation can be used to achieve environmental protection and the Sustainable Development Goals, as well as be shaped to the needs of individual countries. She noted today’s opportunity addressed how the fiscal system can be used to those ends. English Professor Arthur Cecil Pigou had introduced the concept of environment and taxation overlapping in 1920. She noted the formula is tax base x tax rate = tax revenue, and the tax rate should equal the cost of the pollution. The environmental benefit was the key, along with questions of equity, economic impact, administrative feasibility and fiscal impact. Polluters should be made to pay in order to change their behaviour and produce a greener fiscal system.
Mr. VAN DENDER made three main points, stating that environmental taxes make sound environmental and fiscal policy. He added that environmental fiscal reform is poorly executed, and Governments must unlock their potential by pragmatically designing policy packages. He noted the example of a carbon tax driving revenue, and cited such a 2012 tax in Australia, which cut emissions before they rose again after its repeal in 2014. Such taxes work and are cost‑effective. While there is a range of environmentally related tax revenue in OECD countries, Governments are not keeping track of the results. Stressing that the gap between “what we do and what we should do” on environmental taxation remains wide, he added that taxes should not be discussed without also examining revenue use.
Mr. COULOMBE addressed the Canadian Federal Carbon Pricing System, which comprises a regulatory charge on fossil fuels, and an output‑based pricing system. The fuel charge begins at $20 per ton of carbon dioxide emissions. Consumers do not directly pay it, as it is embedded in the price of fuel, and the levy is aimed at changing behaviour, not raising revenue. A total of 22 types of Canadian fuels are affected by the charge. In developing it, the Government had to address fairness and biomass issues. Stressing the importance of consulting stakeholders in imposing any such policy, he said the federal Government had worked extensively with subnational entities, which have deep experience in the issue. The Canadian Government returns direct proceeds from the federal pollution pricing system to the province or territory of origin; 7 of 10 households benefit from the system.
Mr. PIZARRO, presenting highlights on a case study in his country, said Chile introduced a 2014 reform bill with three new taxes on: new cars, local contaminants and carbon dioxide emissions from boilers and turbines. Outlining the formulas for these taxes, he said environmental taxes of $5 per ton were imposed on emissions, while local contaminants were taxed based on air quality, social cost and the population. The taxes are also based on emissions, and not on fuels, as is the case in Colombia, Mexico and South Africa. Chile chose the emissions‑based tax because it encompasses stationary instruments such as boilers and turbines. With revenues generating modest amounts — $107 million from new cars and $186 million from emissions — they are now decreasing, which demonstrates that emissions are dropping. The fiscal reform is central to the 2030 Agenda and resulted in several conclusions, including that such taxes make private agents’ behaviour transparent and develop consistent information for public policies.
Ms. ARISTIZABAL, raising concerns that developing countries are afraid to impose carbon taxes, explained how the subcommittee is creating a handbook on carbon taxation to help guide States via a framework and practical advice. “The instruments are out there,” she said, adding that the handbook will examine a range of issues, including a conceptual framework and motives for introducing a carbon tax and an institutional and political framework on how to support policy coherence and coordination among different Government entities. It will also provide guidance on designing a carbon tax, its administration and revenue use, she said, noting that Colombia’s carbon tax is funding environmental efforts with the country’s peace agreement. In addition, it will provide country experiences, she said, encouraging delegates to contact the Tax Committee with examples of their practices and lessons learned.
Ms. MILNE then asked the panellists how important it was to have the tax be visible to the end user.
Mr. PIZARRO said that the tax in Chile is small, only $5 a ton, but had prompted companies to avoid using coal and retire current coal‑producing energy plants, in view of the visibility of the tax.
Mr. COULOMBE said transparency is important in his Government’s use of tax revenue and to show that emission reduction is being addressed.
Ms. ARISTIZABAL stated that in Colombia, the tax was issued under a broader package of tax reform. “It has really changed behaviour,” she said, adding that people feel involved in the process.
Mr. VAN DENDER added that emerging research on carbon taxes reveals the name of the tax may have an effect in how it is perceived and its effect on behaviour. “Transparency is absolutely key” in any tax hike, he said, both in the tax and what is done with the revenue.
Ms. MILNE then asked about the equity impacts of an environmental tax.
Mr. VAN DENDER responded that poorer households pay more for heating but not always for transportation fuel, which richer households consume in greater amounts. It is important to distinguish equity from affordability.
Mr. COULOMBE added that it is important to have the capacity to evaluate impacts on households and other economic sectors.
Mr. PIZARRO said that poorer communities disproportionately benefit from climate‑change‑related taxes because they are surrounded by more pollution.
In the ensuing discussion, delegates asked a range of questions. The representative of Mexico asked what the right level of tax would be, and its effect on economic growth.
A Tax Committee member asked how to increase visibility and build capacity within Governments.
Ms. ARISTIZABAL responded that coordination is crucial between different levels of Government, and that in Colombia, many different ministries are involved in issuing a policy paper.
The representative of the Russian Federation said increasing revenues implies that extra funds would be invested in environment‑related areas. In terms of changing behaviour, he wondered how “trainable” humans are and what choices Governments have with these options.
Mr. VAN DENDER, in response, said carbon price levels are not sufficient to deliver decarbonization goals. The best way to advance on a low‑carbon path is having indications, such as pricing. On long‑term behavioural impact, he said this can be pursued jointly with generating revenue. More broadly, an increasing price path is needed. Revenues from carbon taxes will increase when they are in line with Paris Agreement targets.
Mr. PIZARRO said there is a need to develop more global markets to reduce the overall cost of carbon dioxide taxation. Taxation is not the only instrument to deal with climate change and environmental concerns, he said, adding that such tools should complement the broad range of initiatives.
Panel III
The Council then held a panel on “Taxation and Inequality”. Moderated by Wilson Prichard, University of Toronto, it featured: Alvin Mosioma, Executive Director, Tax Justice Network Africa; Elfrieda Tamba, United Nations Committee of Experts on International Cooperation in Tax Matters; and Ricardo Fuentes-Nieva, Executive Director, OXFAM Mexico.
Mr. PRICHARD, opening the discussion, emphasized that under the tax system, the poor should get more out of the system than they put in and that the rich should be more heavily taxed to counteract the accumulation of extreme wealth. The tax system should also treat everyone equally under the law. However, many of these elements are not practiced. Citing examples of inequalities in tax burdens and other related areas, he said studies show wide disparities among countries and income groups. Challenges are acute and must be urgently addressed if tax collection is going to contribute to the 2030 Agenda.
Mr. MOSIOMA, delivering a presentation by video teleconference, said growth in Africa is highly skewed and uneven across countries, sectors and in terms of the concentration of wealth, as indicated in a recent United Nations Development Programme (UNDP) report. This is largely a reflection of policies in place, with a recent study showing that Governments are being pressured to mobilize resources and, in response, are implementing regressive policies. In fact, political pressure has been used to urge some Governments to refrain from taxing the rich. Yet, some measures are making gains in taxing high‑income individuals. Providing a snapshot of the current situation on the continent, he said there is a growing gap between the rich and poor at a time when policies are being designed to benefit the wealthy. To address some of these challenges, African countries can invest in innovative technologies to boost their economies, involve citizens to enhance progressive taxation and explore ways of shifting taxation to high‑income earners. In Uganda, for instance, property taxes are in place.
Ms. TAMBA said the United Nations is pivotal in providing for those who have too little. Progressive fiscal policy measures complemented by fairer implementation can reduce both social and economic inequality. She pointed to research in sub‑Saharan Africa that demonstrates the importance of education and health care in reducing poverty. But without progressive taxation on the wealthy, they may increase inequality. Such measures include a luxury tax, and better access to less expensive microfinance loans. She cited a social development fund in Liberia, and a national health insurance scheme in Ghana, funded by a 2.5 per cent levy on some goods. As a result, it is cheaper to fly to Accra than it is to India, and people can receive comparable care. Social protection expenditure policies can benefit the bottom 40 to 50 per cent of the population. Investment by China is helping to close the infrastructure gap in Africa. She noted that 27 of the world’s 28 poorest countries are in Africa, due to irregular access to water, health care and “the Big C, corruption”. Younger people in Africa rightly want greater access to services and technologies. In 2050, 25 per cent of the world’s population will be in Africa. In view of that, she said achieving the Sustainable Development Goals is paramount.
Mr. FUENTES-NIEVA said that at a time of growing distrust and anger at established institutions around the world, tax is at the centre because it is a social contract between the citizen and the State. Tax policy must be revisited. One would wonder why citizens would want to pay more taxes, he said, raising the issue of tax morale. Examining taxation must be seen and considered alongside Government accountability, expenditure and corruption when justifying tax rates to reduce poverty and inequality and achieving the Sustainable Development Goals. To fight inequality through the tax system, efforts must ensure accountability for effective Government expenditure, which also contributes to tax morale. If a Government could not show corruption was being tackled, it would be difficult to raise the tax morale. But, when a Government can demonstrate that corruption is not present, discussions can constructively address taxation issues. Mexico is a case in point, as it collects 20 per cent of its GDP through taxes, about half of what OECD countries collect. For decades, Mexico was dependent on oil revenues and a federal tax system. Taxes and public expenditure should be closer to communities in terms of accountability. He wondered how taxes and transfers are changing the distribution of income. Among the most devastating consequences of globalization are tax havens and tax avoidance, and dealing with those problems is crucial for progress.
In the dialogue that followed, delegates gave examples of best practices and raised several concerns, with the representative of Mexico citing several successful transfer programmes. But, challenges remain, he said, noting that better coordination between federal and municipal levels was key in achieving Sustainable Development Goal 10.
The representative of Singapore asked about the future of wealth taxes, noting that countries imposing such policies, including on inheritances and property, have a challenging time enforcing them.
A representative of the International Society for Development said the realities of illicit financial flows and corruption in developing countries make it very difficult to implement new, progressive taxation policies.
A representative of the Indigenous Peoples Survival Foundation said a global sustainable solution to solve problems rests on providing quality education, especially at a time when humans are destroying the Earth.
Ms. TAMBA said a civil education is essential in improving tax compliance. In Liberia, the Government’s efforts to encourage civil society participation in tax education helped to improve outcomes, as did education outreach on property tax measures. Accelerated action is needed to combat illicit outflows.
Mr. MOSIOMA said in that some cases Governments have difficulties in collecting corporate income tax and then impose taxes on citizens. The gap is ever‑growing in terms of the low tax rate companies end up paying. A system must be developed that is mutually beneficial to all. Increasing corporate transparency is another needed step. However, these are global solutions that should be discussed at the United Nations.
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* The 9th Meeting was covered in Press Release ECOSOC/6970 of 11 April 2019.