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Calls for governments to clamp down on companies who use tax havens to pay lower taxes on their profits have been growing louder over the past year. Apple, Facebook and Amazon have been in the firing line for not paying taxes in the countries where their economic activity is generated. France became the first Western country to approve a new digital tax that would hit large American tech companies like Google, with the Trump administration threatening tariffs against imported French goods including wine if they go ahead with implementation. The United Kingdom also announced a tax of 2% on new digital services. The Organisation for Economic Cooperation and Development has subsequently put forward proposals for a new international tax systems to address the challenges of taxing tech giants in the digital era, which will be discussed at a meeting at the end of the month in Paris. At the World Economic Forum taking place in Davos, Switzerland, the Independent Commission for the Reform of International Corporate Taxation has called on world leaders to fix the global tax system. The ICRICT, which has big hitters like Columbia Professor Joseph Stiglitz in its camp says in this report that 40% of foreign profits go to tax havens. Auditing firm PwC has advised South Africa a couple of years ago to look closer at the global tech giants selling their services on local shores. – Linda van Tilburg
ICRICT: Fix the global tax system to fix the inequality crisis
The inequality crisis remains unaddressed and out of control. Hundreds of millions of people are living in extreme poverty while large rewards go to those at the very top. In 2019, the world’s billionaires, only 2,153 people, had more wealth than the poorest 4.6 billion people combined, according to Oxfam. A new generation of inequalities is opening up, around education, technology and climate change. The demonstrations that swept across the world last year signal a global revolt against extreme inequality and the poor living standards for a large amount of the world’s population.
Faced with popular demands, governments excuse themselves by arguing that their coffers are empty and implementing austerity program. These measures only aggravate economic, social, gender and racial disparities, depriving people of access to health care, education, or housing, especially in developing countries.
Inequality is not beyond solutions
One of the most obvious is to change the international corporate taxation system, which is not only obsolete, but also unfair, since it allows for systematic tax evasion and avoidance by multinationals. Corporate taxation is one of the most important tools in addressing inequality. Tax evasion and avoidance by multinationals further increases income inequality, as corporate equity mostly belongs directly or indirectly (e.g. through investment funds) to wealthy individuals who receive profit income through dividends and capital gains.
In the face of global outrage at the low or even close to zero corporate taxes paid by some of the world’s largest multinationals, last year, the OECD put forward proposals for a new international tax system to address the challenges of taxing multinational corporations in the digital era. For the first time, the OECD proposal moved beyond the arm’s length principle considering taxing multinationals as global firms and distribute global profits between countries. This is progress, but overall the proposals are neither ambitious nor fair enough as we explained in our latest report.
This year could set the foundations of our next international tax system, with the OECD’s “Inclusive Framework” (a group of 137 countries across the globe) next meeting taking place at the end of January in Paris. We urge economic leaders who are meeting for the World Economic Forum in Davos to push for a real reform that would benefit both developing and developed countries. This would not be achieved if the negotiations are driven by what multinationals are prepared to accept, as we have seen in the recent spat between the US and France over the imposition of a digital sales tax.
All countries have a stake in developing a sustainable international tax system that can help to deal with the extreme inequality of today. A weak outcome dictated by the preferences of one or two G7 countries will further undermine of the OECD’s legitimacy in its role as the institution responsible for setting norms for international taxation.
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