Developing countries at risk of being left behind in global tax reform, say researchers

Today, the G20 Finance Ministers are meeting in Washington D.C. to consider the OECD’s proposal for a “unified approach” to update international corporate tax rules for the digital era. Following its publication last week, the proposal was described as stunning, revolutionary, and a “global shake-up.” But how radical is it really, and how will it affect developing countries? As Dr Martin Hearson says, “It is really a negotiation among powerful economies, and for that reason, may not have such a radical impact on lower-income countries.”

Dr Hearson will deliver the keynote speech at the IMF and World Bank conference on these issues Sunday 20 October. He is a Research Fellow at the Institute of Developing Studies, where he leads the international tax research programme of the International Centre for Tax and Development (ICTD).

At the moment, 134 countries are members of the G20/OECD Inclusive Framework, a new body leading the reform of international rules for taxing multinational companies. It is not yet clear how influential developing countries will be within the relatively untested Framework, especially given the power imbalance with large developed markets and the capacity demands of a rapid and intense programme of work.

While it was originally a response to the political outcry resulting from reports that large digital companies like Google, Amazon, and Facebook pay little tax in many countries in which they operate, the G20/OECD process has now broadened to adapting a century-old set of tools to make them fit for purpose for the 21st century economy.

As developing countries rely more heavily on corporate income tax revenue, they suffer disproportionately from multinational tax avoidance. The ICTD’s work in this area therefore supports research and debate to help low-income countries navigate this technically complex and rapidly evolving agenda.

On Sunday, leading policy makers and thinkers from governments, academia, civil society, and business will gather in Washington D.C. to discuss these issues. In his keynote, Dr Hearson will examine the forces driving the reform process, the institutional context and the interests of different states, and key questions and areas of concern for developing countries including: Will they get more taxing rights? Will they be able to implement the new rules effectively? And what are the opportunity costs? As he concludes, “The eventual outcome will likely be a real cost-benefit dilemma for developing countries, but the most sustainable outcome for them will be one that maximises gains in the short-term, while leaving open space for innovation in the medium-term.”

Meanwhile, the G20/OECD Inclusive Framework does not have a monopoly on decision-making in this area. This week, Dr Hearson and ICTD Senior Fellow Professor Sol Picciotto attended the UN Tax Committee Meeting in Geneva, at which the ICTD and the South Centre organised a side meeting attended by negotiators from five developing countries. As Professor Picciotto says, “The UN tax committee has a distinctive role beyond the OECD process, and certain provisions in its model treaty provide scope for developing countries to tax in ways the OECD is not considering. It should embrace this.”

There is plenty to be done in strengthening the negotiating power of developing countries both within and outside the Inclusive Framework, and this is imperative given how much is at stake.

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For further information or interview enquiries, please contact Rhiannon McCluskey at [email protected] or at +44 747 636 0064.

Notes to the editor:

1. The Institute of Development Studies (IDS) is a global research and learning organisation for equitable and sustainable change. ids.ac.uk
2. The International Centre for Tax and Development (ICTD) is a global policy research network, devoted to improving the quality of tax policy and administration in developing countries, with a special focus on sub-Saharan Africa. ictd.ac
3. See the ICTD’s online hub on Taxing the Digitalising Economy, which includes a list of key resources, news, analysis, and a curated Twitter feed here: ictd.ac/digital
4. In July, the ICTD and the BEPS Monitoring Group hosted a workshop to explore the implications of these reforms for developing countries. Find out more about the issues covered, as well as the workshop video and photos here.
5. For a short video of Martin Hearson describing why digitalisation and the reform of international tax rules is a crucial challenge for sustainable development, see here.
6. For Dr Hearson’s blog about the potential impact of the recent OECD proposal on developing countries, see here.
7. For his blog on Africa’s response to the Inclusive Framework’s digital tax agenda, see here.