Earlier this week, the International Monetary Fund (IMF) released a policy paper taking an in-depth look at the current state of corporate taxation throughout the globe, specifically detailing how developing countries “can continue to collect corporate tax revenues from multinational activities.”
Generally speaking, this policy paper “notes the considerable positive developments achieved…including the G20/OECD BEPS project and the expansion of the OECD’s body for reaching consensus around these issues to include over 125 countries in the new Inclusive Framework.”
However, the IMF realizes “issues remain in continued opportunities for profit shifting, and that concerns regarding tax competition and, more fundamentally, the allocation of taxing rights across countries now underlie much of the discussion within the Inclusive Framework.”
Plenty of International Tax Challenges Lie Ahead
In terms of what’s still missing, the IMF believes there are still plenty of shortcomings within the international tax system with “many countries [facing] pressures to introduce unilateral action.”
The international organization’s “Directors agreed that much remains to be done to find sustainable global solutions, building on the progress achieved so far to ensure fairness, inclusiveness, and broad consensus, although their views differed on the extent of needed reforms and the roles of relevant bodies.”
Some of the challenges pinpointed in the IMF’s report include:
- Profit shifting, particularly in developing countries;
- “Limitations of the arm’s-length principle—under which transactions between related parties are to be priced as if they were between independent entities;”
- “Reliance on notions of physical presence of the taxpayer to establish a legal basis to impose income tax,” which “have allowed apparently profitable firms to pay little tax;”
- The technical and political issues pertaining to the taxation of the digital economy, and;
- “The damage from continued harmful tax competition, including the risk of a race to the bottom, while recognizing the importance of respecting national sovereignty in tax matters.”
Are Any of the Alternative International Tax Proposals Viable?
Part of the IMF’s assessment was to analyze several alternative proposals vis-à-vis corporate taxation that are being discussed by the OECD, the EU and other international organizations.
According to the IMF’s Directors, it’s “too early to endorse any of the particular alternatives,” but “they found the discussion a useful analytical complement to existing debates,” particularly with regards to “the benefit of minimum taxation in dealing with harmful tax avoidance and profit shifting practices.”
Some of the “alternative international tax architectures” discussed in this policy paper include:
- Minimum taxes on both inbound and outbound investment;
- Residual profit allocation schemes;
- Taxing rights’ allocation to destination countries, and;
- Border adjustment taxes;
The IMF “emphasized that, to better inform the ongoing debate, considerable further analysis of the reform proposals is needed with respect to legal issues, practical consequences, including distributional effects, and implications for various groups of countries with similar or unique characteristics.”
Source: IMF Policy Paper, Corporate Taxation in the Global Economy, March 2019
For instance, the IMF explains, “Even for advanced economies, little is known about the nature and extent of residual profits.”
OECD Leads the Way but More Say to the Developing World
The IMF did suggest that the current model, one “with the OECD as a central body and standard-setter and supported by the Inclusive Framework,” works well, but more has to be done to include greater “representation of developing and low-income countries in the decision-making process.”
Additionally, the IMF hopes to take on more of a consulting or advisory role in defining future tax policy.
The organization believes it “is well placed to undertake economic analyses of the impact of possible changes, both within and across countries, as well as to ensure that their implications for developing countries are adequately considered.”
With this in mind, “most Directors advocated a more active role for the Fund in providing analytical contribution, influencing the debate, and fostering broader cooperation.”
In an op-ed in the Financial Times, Christine Lagarde, the IMF’s Managing Director, concluded: “The bottom line is that the current international corporate tax architecture is fundamentally out of date. By rethinking the existing system and addressing the root causes of its weakness, all countries should benefit, including low-income ones. At the same time, we can restore faith in the fairness of the international tax system.”
What are your thoughts on the IMF’s role in setting international tax policy? Let us know in the comments section below!