I wrote the following piece as part of a course on International Taxation at Leiden University.
The whole idea is that through Base Erosion and Profit Shifting - BEPS - multinationals, mostly those operating in the so called digital businesses, are taking money away from countries and their citizens.
I would like to offer a somewhat different angle.
Here it goes.
The most recent economic landscape sees the emergence of complex business models with value creation occurring across different countries to an extent unthinkable before.
The interaction between different and competing tax systems in the different countries has created opportunities for base erosion and profit shifting (BEPS), and double non taxation.
Multinational corporations can create structures consisting of different legal entities incorporated in different countries with different taxation rates and rules. The same multinationals can move taxable activities from one jurisdiction to another.
This scenario determines three main risks:
As a consequence of multinationals exploiting these opportunities, governments lose revenue and the capability to deliver services. Citizens would have to accept the lower standards, or would have to pay those taxes multinationals avoid. Frustration and lower compliance among taxpayers would be another consequence.
2. Distortion of competition
Companies who operate within their domestic market, would not have access to the same non-taxation opportunities.
3. Distortion of investment decisions
Businesses would make decisions according to taxation considerations rather than genuine business criteria.
I would like to raise two further questions first, and then attempt a different interpretation of the BEPS scenario.
1. To what extent should countries impose taxes, and be in charge of providing services to their citizens and businesses?
This question is old, and has received many answers. Some countries have been in favor of a heavy public presence in the economy combined with high taxation.
Other countries support a lower level of public expenditure, combined with lower taxation.
Different countries may choose one direction or the other, depending on multiple factors. Each country is sovereign and free to make their choice.
2. Is it true that business competition is distorted?
It can be agreed that multinationals have better ways to take advantage of BEPS opportunities. However, nowadays, the same opportunities are also available to small businesses. Small businesses, while respecting the local laws (e.g. CFC rules) can use legal entities in different countries. Their owners could choose to relocate.
Furthermore, small businesses can increasingly adopt similar business models that are available to the multinationals and were not available for anyone 10 or 15 years ago.
In reality, the competitive advantages that MNEs do enjoy, are more the outcome to size and scale, rather than better taxation opportunities.
The current way the BEPS scenario is framed, sets two opposing sides in the playing field.
On one side are governments, their citizens, and small businesses.
On the other side are MNEs who exploit the system, and the countries labeled as Tax Havens by OECD countries.
Nevertheless, the scenario appears more complex.
Some OECD countries, despite sharing the BEPS initiative, keep producing legislation to improve their own attractiveness taxation-wise. Some of them are Tax Havens in their own right.
Citizens do not, or may not, want to depend on their government for their needs. They could possibly develop an entrepreneurial spirit, and use the same opportunities multinational use to be more competitive with their businesses.
Clever small business owners could adopt internationalization strategies that support a greater competitive advantage in a way similar to what the multinationals do.
The quality with which governments make use of the taxpayer money varies. In some cases, real or perceived corruption, produces distortions that are much more significant than those produced by the BEPS phenomenon.
Countries who do not belong to OECD, often smaller and less powerful, are (or should be) free to legislate and express their sovereignty. Since they suffer ongoing threats of being included in one or the other black list, it is clear that their views differ from those of the main OECD countries. And these are not coherent among themselves either.
Deveraux and Vella state that the current BEPS Initiative addresses the BEPS problem within the current taxation framework, and as a consequence it does not provide solutions.
I would go even further and take two steps back.
1. Which is the problem? And who has stakes into the problem?
2. Who should take part in the debate that frames the problem and its solutions?
A solution to the BEPS problem, or better, a different taxation framework designed to overcome the problem, as invoked by Deveraux and Vella, will benefit from a coordinated effort involving all the interested stakeholders. Involving all of the stakeholders appears to be fair, and it is also a guarantee for a more stable outcome that relies on stronger support.
The entities taking part in this effort should not be limited to the most powerful OECD countries.
They should include governments (not only OECD countries), each with equal rights, a representation of smaller businesses, and citizens, and the multinationals.
Such coordinated effort should aim to a more articulated and solid definition of the problem, and it should design coherent solutions.
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