Multinational corporations (MNCs) frequently declare profits in low-tax jurisdictions, maximizing returns while depriving countries hosting their subsidiaries of much-needed revenue. Despite having production operations and employees in these countries, MNCs can report zero profits while declaring significant profits elsewhere. This issue disproportionately affects low-income nations, which often struggle with tax revenue.
The upcoming United Nations Framework Convention on International Tax aims to address this issue by ensuring MNCs "pay taxes where they play," meaning they would be taxed in the locations where they operate. This proposed change could shift from the contentious "transfer pricing" system, where companies choose where to declare profits, to a fairer "unitary tax" system that treats MNCs as a single entity. This change would empower countries to better enforce their taxation rights.
A decade ago, the African Union/UN Commission on Illicit Financial Flows, led by Thabo Mbeki, noted that corporate tax abuse is among the largest illicit financial flows from Africa. Research estimates that a shift to a unitary tax system could have generated an additional $300 to $500 billion in revenues worldwide between 2016 and 2022. This significant boost in revenue could have far-reaching implications for countries worldwide.
The potential benefits of a unitary tax system vary by country income level. High-income countries could see a significant boost of $140 billion annually, while lower middle-income and low-income countries could still greatly benefit, with potential annual increases of $61 billion and $4 billion, respectively. For developing countries in the G77, the additional revenue could match their total debt to the IMF.
European nations could gain an equivalent of over $13 billion, adjusted for inflation, which matches the Marshall Plan aid received post-World War II. MNCs would benefit from simplified compliance under a unitary system, avoiding the complexities and costs associated with transfer pricing. The only "losers" would be tax havens reliant on profit shifting, as well as countries where MNCs report unreasonably large profits at low tax rates.
The proposed system aims to eliminate exploitation of tax rules, asserting that taxing rights should correlate with actual economic activity. It also necessitates reliable data from MNCs and tax authorities for transparency. Moreover, the analysis highlights potential benefits for low-income countries in accurately accounting for natural resource wealth, suggesting that profits from natural resource extraction should not be included in the redistributable pool.
This drive for a unitary corporate tax system stems from the understanding that disconnecting taxing rights from actual economic activity allows profit shifting, highlighting the importance of robust national tax rights in an increasingly globalised economy. According to Atieno Ndomo, a Social Policy Analyst with a focus on Political Economy, this change could lead to a fairer corporate tax landscape, reducing instances of tax avoidance and potentially boosting revenues for countries worldwide.
Key points
- A unitary tax system could generate an additional $300 to $500 billion in revenues worldwide between 2016 and 2022.
- The proposed system aims to eliminate exploitation of tax rules, asserting that taxing rights should correlate with actual economic activity.
- The change could lead to a fairer corporate tax landscape, reducing instances of tax avoidance and potentially boosting revenues for countries worldwide.
