bEPS, G20, IMF, International Monetary Fund, international tax reform, International taxation, OECD, OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, OFCs, tax avoidance, tax evasion
(Christine Lagarde, Managing Director of the IMF)
I suppose depending on your view of the International Monetary Fund (‘The Fund’) you could say that the last month’s release of a paper by its Fiscal Administration Department (FAD) on the role of the Fund in matters of international taxation is better late than never.
It does however beg the question that given the Fund’s conspicuous and long-standing absence from the policy and regulatory dialogue on international tax, what has finally piqued the Fund’s interest in this area of global economic concern?
An obvious secondary question may also arise as to whether the Fund’s late arrival will advance the debate any or will it take us ten steps back?
Put differently, what will be the value of the Fund’s contribution to the dialogue given that it is supposed to act in the interest of its’ near universal membership to foster global growth and economic stability?
To be fair however, one should not believe that the IMF has been unconnected to the global preoccupation with international tax. Indeed the paper makes the point that the Fund has been an ‘observer’ at various meetings of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. In fact, by all public accounts, until now, the Fund has done just that, ‘observe’.
Nonetheless some clues to the Fund’s likely new orientation to the issues of tax evasion, tax avoidance, tax competition, and the OECD’s Action Plan on Base Erosion and Profits Shifting may be found in this paper of June 28, 2013, titled Issues of International Taxation and the Role of the IMF.
Interesting is it not, that more than two decades after the OECD’s first attempt at rule-making and enforcement of their international tax rules ended in failure, the Fund has now found it necessary to define its role in this area of obvious concern to 188 members.
Nonetheless as I mentioned, better late than never right?
The FAD’s paper proposes a work plan on international taxation which focuses on macro-relevant spillovers, exploits the Fund’s comparative advantages, and complements the work of other institutions, most notably the OECD.
Importantly the FAD asks four questions of the Fund’s directors, namely:
- Do Directors agree that the Fund‘s involvement in international tax issues should focus on macro-relevancy, spillovers, and TA-related aspects?
- Which areas of work set out in Section IV (Areas of Future Work) do Directors see as priorities?
- Are there issues not raised in the paper that require staff‘s attention?
Perhaps anticipating a positive response to the first query, the FAD sets out in paragraphs 34-36 ‘three proposed areas of ‘Future Work‘ based on the Fund’s mandate and comparative advantage.
The FAD makes it clear that the Fund will “complement and enlighten, not supplant, the current initiatives described above”.
These initiatives principally relate to the work of the OECD, about whom the FAD had this to say:
“The OECD, by its history and expertise, is well placed to lead technical work on international taxation. Through its Committee on Fiscal Affairs (CFA), it has traditionally set consensual standards for its members—and indirectly for other countries—most notably for bilateral treaties and standards for avoiding abusive transfer pricing, though in other related technical matters as well.”
This ringing endorsement of the OECD by the FAD may give rise to some early alarm bells for those non-OECD members of the Fund given their experience of the ‘history and expertise’ of the OECD in this area; and its methods to ‘indirectly set consensual standards for non-members of the OECD.
But I digress.
About the proposed future works’ relevancy to the Fund’s overall mandate “to foster global growth and economic stability”, the FAD makes the point that :
“International tax issues are important for the Fund‟s mandate, given their significance for macroeconomic stability at both the national and international levels. In particular, the Fund, in its surveillance, assesses whether members are pursuing policies that promote their own domestic and balance of payments stability, and whether their policies give rise to spillovers that may undermine global economic and financial stability. The impact of international tax policies on revenue mobilization—both directly and indirectly through effects on the rest of the tax system—as well as on investment and capital movements can have important implications for these assessments.”
Interestingly, haven already extolled the technical competence of the OECD, even in the face of sustained criticism, and confirming that the OECD remains well placed to do the technical work in this area; about the Fund’s own comparative expertise in international tax the FAD writes:
“The Fund’s comparative advantage in relation to international tax issues comes from its unparalleled TA (technical assistance) experience on these issues, recognized expertise in their economic analysis, and the near-universal Fund membership. Progress on these sensitive issues requires a firm grasp of the technicalities, a strong analytical basis, and an understanding of the impact on widely differing countries, which the Fund is well equipped to provide.”
You may well ask the question why the Fund failed to recognise and act on these comparative advantages in 1998 and again 2008 when the OECD sought to foist a one-size-fits all solution to the issues of transparency and tax information exchange on its widely differing membership given its self-confessed ‘sensitivity’.
But again I digress.
On the issue of ‘spill-overs’ which the FAD argues falls within the Fund’s competence, the paper makes five (5) key points:
- International avoidance and evasion problems are instances of the cross country spillovers arising from interactions between national tax systems. Aggressive tax planning and evasion imply that tax measures adopted in one country—the provision of regimes favoring the use of conduit companies, for instance, or low withholding taxes combined with reluctance to share information with other tax authorities—may undermine the revenues of others tax base thus shifts between countries, and in some cases almost entirely disappears.
- In the process, taxpayers and tax authorities often incur significant administrative costs, investment flows may well be distorted, and considerable talent is allocated to tasks of questionable social value the fundamental problem is the failure of national policies to take full account of the spillover effects on other countries—„tax competition‟ in a broad sense.
- Countries naturally seek to protect or expand their own tax bases, and attract or support economic activity in light of the policies pursued by others. The consequent strategic interaction between them in setting their tax policies—one country reacting to the policy choices of others (of which there is now ample evidence)—implies a risk of mutually damaging ‗beggar thy neighbour‘ outcomes.
- Tax competition has some potential merit, but fiscal consolidation needs have sharpened policy-makers‟ appreciation of its potential costs. The argument that international tax competition has a beneficial effect in constraining governments from raising too much revenue has a long intellectual pedigree,though why this should be superior to other and more explicit fiscal constraints is unclear.
- The case for tax competition is weaker the greater is the marginal social value of tax revenue,and to that extent will have become less persuasive given current needs for fiscal consolidation, with a greater recognition that reducing revenue losses from this source may be a relatively efficient and fair route to much-needed revenue. Differing national circumstances and interests can make it difficult to reverse collective damage from tax competition in such a way that all benefit, but this is not necessarily impossible: there are circumstances, for instance, in which minimum tax rates can benefit even those obliged to raise their tax rate.
Against this background which, frankly, flies in the face of contemporary thinking on tax competition and recent remarks by the OECD Director of Tax Policy which instead suggest a downward movement of national corporate tax rates to remove existing market distortions, the FAD has set out the following three -pronged work programme for the consideration of the Directors:
- the preparation of a paper on “Spillovers in International Taxation” which will identify the nature and extent of the cross-country impact of national policies and practices in international taxation, and assess current and possible responses.While the focus will be on international corporate taxation, the strong links with elements of national tax systems mean that aspects of domestic policy will also need to be recognized.
- The FAD should inform and contribute to technical discussions drawing on its fiscal expertise and technical assistance to encourage and inform debate on technical tax issues.
- The FAD should encourage and contribute to the wider debate arising from the extensive consultation and outreach in preparing the „spillovers‟paper and technical materials, and in communicating the results. Existing dialogue on these issues with country authorities, other organizations active in the area, academics, civil society, and business will be intensified y the FAD while stressing the collaborative intent of the Fund‘s work with the; intention is that a good part of this work would be developed in combination with the OECD and others.
While we await public reaction by the Fund’s Directors to the proposed work programme,given the tenor of the FAD’s commentary on the OECD and propriety (or otherwise) of tax competition, one has to wonder what in the end will be the real worth of the IMF’s contribution to the discourse on international tax reform; and to whom will it redound.
Indeed, non-OECD/G20 OFCs members should carefully reflect on whether the present orientation of the FAD portends meaningful progress or represents ten steps backwards in the area of international tax cooperation.