Profit-shifting and tax abuse by multinational corporations deprives developing countries of resources needed to combat poverty, says report by NGOs

The international corporate tax system is outdated, unfair and will continue to cost developing countries tens of billions of dollars in lost revenues each year unless it is completely overhauled, a coalition of charities and civil society organisations has warned.



In a report published on Tuesday, the Independent Commission for the Reform of International Corporate Taxation (Icrict), which was initiated by the charities and other organisations, argues that globalisation has rendered the century-old global tax system obsolete as more and more companies trade within related corporate structures.

“Tax abuse by multinational corporations increases the tax burden on other taxpayers, violates the corporations’ civic obligations, robs developed and developing countries of critical resources to fight poverty and fund public services, exacerbates income inequality, and increases developing country reliance on foreign assistance,” says the report.



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On a more basic level, it adds, the tax policies of one country can have a dire effect on other countries’ ability to raise taxes that could be spent on education, healthcare and safe roads.

The report calls for the abolition of the separate entity principle, arguing that it allows huge multinational companies to dodge their tax obligations by presenting their operations in different countries as completely independent of one another. The principle permits them to shift their profits to countries with low or zero tax rates – and to move their losses into countries where taxes are higher.

“The primary enabler of international corporate tax abuse is the separate entity principle – a legal fiction that enables the flow of vast amounts of taxable income away from the underlying business operations,” it says.



“We believe the only effective way to stop this abuse is to treat multinational corporations as single and unified firms and divide the taxable profits between the countries where the income generating activities are located. If multinational corporations were taxed as single and unified firms, there would be no transfer pricing because global corporate profits would be consolidated, and thus no profits would be gained or lost through intra-company transactions.”

The report, which was released as G7 leaders prepare to meet in Germany for their annual summit, also calls for rich countries to agree a minimum corporate tax rate to stop “the global race to the bottom”.

“While each country is responsible for its own tax system, no country is unaffected by the tax system of others,” it says. “In addition to evaluation of the effectiveness of tax preferences, countries should also examine spillovers caused by their tax preferences for multinational corporations.”



Toby Quantrill, principal economic justice adviser at Christian Aid – which is part of the Icrict coalition – said drastic action was required when it came to retooling the international tax system.

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“These ideas will be seen by many as radical,” he said. “Such changes will not be easy to implement and will not happen overnight. But as many people know, acknowledging the reality and severity of a problem can be the first step to recovery.”

Quantrill said that although the Organisation for Economic Cooperation and Development (OECD) had launched a plan to tackle multinational tax dodging, it was focusing on the symptoms rather than the causes.

“As a number of reports and analyses are showing, its work so far will be limited in its impact in richer countries and simply will not deal with the fundamental problem for poor countries,” he said.

“As an organisation often described as a ‘rich countries club’, it is hardly surprising that the OECD has not prioritised the problems faced by the poorest countries. And let’s be clear, these problems are significant.”

A recent report by the UN Conference on Trade and Development estimated that profit-shifting by multinational companies costs developing countries $100bn a year in lost corporate income tax. Another report, by IMF researchers, estimated that developing countries may be losing as much as $213bn a year to tax avoidance.

Oxfam – which published its own report on tax avoidance on Tuesday – says that corporate tax avoidance in the form of trade mispricing by G7-based companies and investors cost Africa $6bn in 2010 alone. According to the NGO, the sum is more than three times the amount needed to improve the healthcare systems in the Ebola-affected countries of Sierra Leone, Liberia, Guinea and at-risk Guinea Bissau.

Oxfam and others are calling for the British government to introduce a tax-dodging bill that would oblige UK companies to pay tax in the countries where they operate – and would also make it harder for big companies to avoid paying tax in the UK.

“Multinational companies, many with headquarters in the UK and other G7 countries, are cheating African countries out of billions of dollars in vital tax revenues that could help vulnerable people get decent healthcare and send their children to school,” said Nick Bryer, Oxfam’s head of UK campaigns.

“To fund the fight against poverty and to tackle worsening extreme inequality, we need action to ensure big companies pay their fair share, here and in the world’s poorest nations.”