On February 21, 2019, the Executive Board of the International Monetary Fund (IMF) discussed a paper setting out the current state of international corporate income tax arrangements.
The policy paper Corporate Taxation in The Global Economy, explores options that have been suggested for their future development, including several now being considered in global fora and considering the contribution of the Fund to debates and processes now underway.
The IMF is not a standard setting body in this area. Intensive discussions of possible changes to the international tax system are now underway in the Inclusive Framework on Base Erosion and Profit Shifting (BEPS)/the OECD, and the paper is intended to complement that work, reflecting the distinct contribution that the IMF’s broad membership, mandate, expertise and capacity building work position it to make.
The paper builds on an earlier IMF analysis (2014), which stressed the macro-criticality of international corporate tax arrangements, the importance of cross-country spillovers in analyzing corporate tax reform and the particular vulnerability of low income countries to profit shifting activities. The paper discussed on February 21 continues these themes. It provides an update on what has been achieved, an account of remaining challenges, and a high-level overview of key economic aspects and implications of alternative schemes, some of which are now under discussion. Finally, it stresses the importance of fully inclusive cooperation in this area and reflects on the supportive role that the Fund can play in this context.
The paper notes the considerable positive developments achieved since the previous paper was discussed, 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. It notes too, however, that 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.
The paper does not endorse any specific proposals for international tax reform. It recognizes that views differ widely. Rather the paper identifies and discusses potential criteria by which alternatives might be assessed—with special attention to the circumstances of developing countries—and provides some empirical analysis to support discussions.
The paper stresses the need to maintain and build on the progress in international cooperation on tax matters that has been achieved in recent years, and in some respects now appears under stress. It considers the supportive role that the Fund can play in this context, including by drawing on its capacity building work to inform the standard setting that others lead, and stresses the importance of cooperation among the international organizations active in this area, including through the Platform for Collaboration on Tax.
Executive Board Assessment
Executive Directors welcomed the opportunity to take stock of recent developments in international aspects of corporate taxation, and offered preliminary observations on alternative proposals currently being debated. They acknowledged the importance of these issues to all Fund members in their efforts to raise revenues in an efficient and equitable manner, and the potential for significant cross‑border spillovers.
Directors welcomed the significant progress made in addressing corporate tax avoidance and enhancing multilateral cooperation, notably by the G‑20/OECD project on Base Erosion and Profit Shifting, and the Inclusive Framework that has broadened the scope of cooperation to many non‑OECD countries. At the same time, they noted that there remain shortcomings in current international tax arrangements, and that many countries face pressures to introduce unilateral action. 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.
As an important element of the current debate, Directors welcomed the discussion on tax challenges associated with digitalization. They recognized that this is a difficult issue, technically and politically, and that views on whether special treatment is needed, and if so in what form, continue to differ widely. For the long term, a number of Directors considered that it would not be desirable or feasible to design ring‑fenced solutions. Directors looked forward to the final report from the OECD to the G‑20 in 2020, which could serve as a basis for a cooperative approach going forward.
Directors noted other challenges that have yet to be fully addressed. They welcomed the emphasis in the paper on profit shifting, which is a particular concern for developing countries. They also pointed to 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. Some Directors were of the view that the benefits of fair tax competition should also be acknowledged.
Directors noted that views on the relative merits of alternative reform proposals vary to a great extent. They emphasized that much depends not only on the detail of specific proposals and their implementation but also on the relative importance attached to the various assessment criteria. Noting the tentative nature of the staff assessment, Directors stressed that it should be interpreted and communicated with caution. While Directors considered it too early to endorse any of the particular alternatives, they found the discussion a useful analytical complement to existing debates. Specifically, many Directors saw the benefit of minimum taxation in dealing with harmful tax avoidance and profit shifting practices. Directors 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.
Directors underscored the need for an inclusive process for discussing international taxation, especially as fundamental issues in the allocation of taxing rights come under discussion. Many Directors felt that the current governance arrangements, with the OECD as a central body and standard‑setter and supported by the Inclusive Framework, are broadly appropriate. At the same time, many Directors saw room for improvements, including to enhance the representation of developing and low‑income countries in the decision‑making process.
Directors emphasized the important role of the Fund in the area of international corporate taxation, focusing on its universal membership, macroeconomic perspective, and analytical expertise. They stressed in particular the value of Fund advice and extensive capacity building, helping member countries to implement best practices on tax policy and administration. While recognizing that the Fund is not a standard‑setting body in international taxation, they noted that the Fund 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. In this context, most Directors advocated a more active role for the Fund in providing analytical contribution, influencing the debate, and fostering broader cooperation. A number of Directors stressed that efforts to bridge data gaps would need to take account of confidentiality issues and limited capacity in many developing countries.
Directors underscored the importance of continued close collaboration with the OECD and other international organizations active in this area, to ensure that the Fund’s work remains complementary to, and avoids duplication of, that of others. They noted that the Platform for Collaboration on Tax provides a useful framework for bringing together the IMF, OECD, UN, and World Bank, and could continue to play an active role in supporting international tax coordination.
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