Tax avoidance by multinationals impacts workers too!
By Séverine Picard @Sevrine_Picard
“Taxes, taxes, taxes. All the rest is bullshit”. Last year, a discussion panel at the Davos World Economic Forum went viral after one of the panelists bemoaned the failure of the rich to pay their fair share of tax. Will the mood be any different this year?
The OECD has throughout 2019 worked intensively on a possible reform of international taxation rules for multinational corporations. The announced objective is to achieve a fairer corporate tax system, in an increasingly digitalised economy.
But what does fair taxation mean? So far, countries have been focusing on one dimension only: to retain as much as possible tax revenues on their respective territories but also ensuring that national champions do not face a too high tax burden when doing business abroad.
The conundrum is hard to solve, especially in a context of trade tensions. Recently, the French and US Finance Ministers have taken the matter in their own hands. Bruno Lemaire and Steve Mnuchin announced their plan to, bilaterally, find a global solution in the margins of the Davos world economic forum, set to take place on 21–24 January 2020. For Bruno Lemaire, “it is time to put away the pistols”.
It is also time to take out the hearing aids. Policy-makers must listen more to the voice of civil society, which is denouncing the weaknesses of the current tax architecture and its overall impact on society. Changing the rule at the margins will not help; a systemic reform is needed.
In 2015, the OECD agreed on a so-called “BEPS Action plan”. For the first time, an agreement could be achieved at multilateral level on a set of measures to combat harmful tax practices. This agreement had the merit to exist, which at the time many didn’t believe possible.
But fairness is not a key feature of the BEPS Action plan, for at least two reasons.
First, when it comes to the sharing of tax revenues globally excessive preference was given to OECD countries to the detriment of developing economies.
Secondly, the entire system is based on transfer pricing rules and the arm’s length principle. According to these rules, a multinational corporation has no existence of its own. Each of its subsidiaries and establishments is taxed as if it were an independent and autonomous company. This is a fiction of course. A multinational enterprise is a coherent unit, with a consistent tax and business strategy implemented throughout the company group, under the global oversight of the parent company.
The current transfer pricing rules therefore constitute an encouragement for multinationals to set up complex group structures with hundreds of conduit entities registered in low tax jurisdictions.
The impact of tax avoidance on public budgets is now well reported. Businesses often argue that corporate tax revenues have remained stable over the years. This is omitting the fact that corporate profits have also been steadily increasing over the past decades. Multinationals are proportionally contributing less and less to public budgets. In a context of austerity and budgetary constraints, this has an adverse impact on the sustainability of public services, social protection regimes, and regressive taxation as the tax burden is being shifted to consumers and workers.
Aggressive tax avoidance is also affecting workers in other ways. Profits are sucked out of healthy subsidiaries and sent, through complex mechanisms, to tax havens. Workers are then hung out to dry. In those companies, financial accounts are deplorable and there is little to bargain on. Wages are kept artificially low and working conditions precarious. It is pointless to reach out to management as it is hidden behind a multitude of shell companies and other letter-box practices.
In sum, corporate tax practices say a lot about the business model of a multinational. Aggressive tax avoidance is the signal of a short-term vision, maximising to the extreme shareholders’ value to the detriment of stakeholders in general, and workers in particular.
A fairer tax system is not just about the immediate impact of reform on national tax revenues. It is about what incentives can be put in place to promote longer term, stakeholders’ oriented business values. The trade union movement has long been taking position in favour of a unitary taxation principle, whereby the profits of a multinational enterprise would be determined at global level, and apportioned among countries according to a set of balanced factors. Only then would we treat multinationals as the global companies that they are, and have a real go at curbing profit shifting.
The OECD current discussions are a welcome recognition that transfer pricing rules are not fit in today’s economy. But the excessive caution and narrow interests displayed by our policy-makers will end up in a disappointing result. The discussed compromises are very limited in ambition. Unitary taxation could be introduced, but only for a very small part of a multinational profits — if at all!
The mountain that was promised to us may just give birth to a mouse.
The principle of a minimum tax rate is also being discussed in the OECD. This is in our view would be much welcome because such reform could lead to an increase of tax revenues globally, not just for a chosen few. It could also limit profit shifting to tax havens to some extent. But the devil will be in the design. Already, the rumour is that the minimum rate would not exceed 12% — which is very low compared to the global average effective tax rate (20–25%). The rumour also says that in the implementation of the rules, preference will be given to residence countries, i.e. where parent companies are. Again, this raises questions of fairness as OECD countries would benefit more. And the applicable tax rules are unlikely to be linked to the country where the workers are.
Lastly, fairness is also more tax transparency. There is no trade secret in the information that multinationals are currently required to share with tax administrations. But workers do need to have access to country by country information on the financial and economic situation of the multinational that employs them, as well as the scale of investments into low-tax jurisdictions.
