Posted in: thought leadership

7th July 2020

If Rising Nationalism Kills off Global Tax Avoidance Negotiations, We’ll Pay a Heavy Price

By Paul Polman, Chair, The B Team

It appears that the United States has turned its back on negotiations to reform the international tax system, at least for the time being. While this shortsighted move is likely tactical and hopefully temporary, it points to a deeper malaise in multilateral cooperation that should deeply concern all of us.

Six months into the COVID-19 pandemic, we’ve seen clearly both the imperative and failure of multilateralism. The crisis has exposed the fragility of multilateral institutions—the very institutions on which our collective response should have been based.

Many leaders concede that our collective effort to stem the pandemic has been lacking, and some talk of a unique opportunity to revive global cooperation. This must apply for global public health, but also for the range of mutual challenges we face, from climate change and international migration to trade and terrorism.

As we look for opportunities to revive multilateralism, international tax reform may not automatically present itself. Previous attempts to tackle corporate tax avoidance have proven deeply challenging. Yet as has become clear through leaks such as the Panama Papers, corporate tax avoidance is a global bad. It deprives governments of revenue, disproportionately impacts developing countries, and foments an anti-competitive environment for businesses.

While tax avoidance is a shared problem, it of course differs from the current health crisis. COVID-19 has no regard for borders; tax avoidance knowingly exploits them. And while the virus was novel—catching us underprepared—tax avoidance is a well-known foe. On this basis, there is little excuse for avoiding joint action.

The OECD is leading a project involving 135 countries to improve the way we tax profitable companies in an increasingly digital economy. These efforts are crucial—because digitalization and globalization have fundamentally destabilized the foundations on which the international corporate tax system was built. Without consensus on reform, we will perpetuate a system that allows profitable companies to avoid tax.

Not all companies are tax avoiders—more and more commit to responsible tax behavior. But the scale of tax avoidance remains considerable. According to the IMF, tax havens could cost governments $500 billion annually. As fiscal deficits skyrocket, many capitals face a renewed imperative to reduce these costs.

Sadly, however, recent developments suggest we are moving in the wrong direction. Frustrated at their inability to tax big tech, numerous countries from Italy to India are exploring, or implementing, new taxes on the revenues of technology companies. The United States—home to a majority of these companies—has threatened retaliatory tariffs. Despite a truce agreed at the G7 in August 2019, the issue has once again come to a head, and the United States’ latest move threatens the prospect of reform in the foreseeable future.

All countries have the right to design their own tax systems, and it is understandable—particularly in the context of spiraling fiscal deficits—that many are seeking to tax the revenues of profitable tech companies. But, rushed, this approach risks being more of a temporary band aid than a long-term solution. Taxing corporate revenue rather than profit, if not coordinated, can be distortive, resulting in the misallocation of investment and adding complexity to an already complex tax system. There is so far little evidence that corporate revenue taxes will raise significant sums.

Those considering or implementing unilateral measures must ask whether a retaliatory weaponization of trade is a price worth paying. Meanwhile the United States should take into account the economic recalibration from physical to virtual—against this backdrop, it is vital that we ask profitable technology companies to make a fair tax contribution. And on both sides of the debate, governments should look to the disintegrated global response to COVID-19 as a model to avoid.

Pascal Saint-Amans, Director of the OECD’s Centre for Tax Policy, shrewdly identifies what he calls the ‘Tax Paradox’: “In order for countries to be more sovereign and national on tax, they will need more multilateral cooperation.” He is right—without international cooperation, the only winners will be tax havens and aggressive tax avoiders. Achieving consensus will be challenging, but we must not throw out the baby with the bathwater.

It will take a brave and coordinated effort to overcome re-emerging tendencies towards national self-interest, not least on the question of tax, which has proven time and again to be contentious and polarized. But with spiraling fiscal deficits, corporate tax avoidance is set to re-emerge into the spotlight, and citizens around the world will rightly demand change.

As Mary Robinson and The Elders have said, “Multilateralism is not an option: it is the only path that can deliver a green, sustainable and equitable recovery.” The smart move for governments and companies alike would be to advance cooperation on tax—however arduous that effort may prove.