Steps to be taken
The study also explains that the first step in initiating the necessary paradigm shift would be a global consensus among OECD governments to apply, with the necessary rigour, the OECD guidelines on transfer pricing.
While this would be a step in the right direction, the disconnect between MNCs functioning in a global economy, and national governments, each endeavouring to apply their own rules and procedures to their own advantage, remains an underlying dilemma. It is not surprising that MNCs will continue to exploit this disconnect in their favour.
Global Corporate Taxation and Resources for Quality Public Services acknowledges eliminating loopholes will require changing mentalities, as well as political will. It means changing the widespread acceptance of tax avoidance as a legitimate goal of MNCs. To close these loopholes is to take a step towards a paradigm change, a change that would take us off the path where ultimately everybody loses, and put us onto a path where most have an opportunity to win. Isn’t that what democracies and market economies are all about?
Different techniques to avoid taxation
MNCs operate alongside national ones, but often do not pay the same levels of taxation. MNCs may play countries off against each other, moving, or threatening to move, to countries that either have a low tax level or offer them special tax incentives.
Techniques for ‘minimisation’ of corporate tax, analysed by Global Corporate Taxation and Resources for Quality Public Services, include the use of offshore tax havens, setting up competition between localities and countries for tax advantages (‘arbitrage’), and the little-known technique of ‘transfer pricing’.
It is estimated that several trillion U.S. dollars of tax revenues are lost to national budgets annually through the use of such techniques. This is enough to provide the resource needs for the achievement of the UN Millennium Development Goals and the budget requirements for social services in industrialised countries.
This can and should be corrected!
Even without changing the tax laws, closing just some of these loopholes would make a huge difference to public financial resources.
MNCs themselves use public services provided by the state. They benefit from a state’s transportation infrastructure – the roads, railways, airports, and harbours used to receive materials and to move products to market.
MNCs further depend on the public school systems to produce an educated workforce – an especially important role in the information society of the 21st Century. High-quality school systems also help create qualified employees.
This money is not being collected through taxation, because multinational corporations (MNCs) have used their global reach to avoid their responsibility to contribute to national and community social needs through fair and responsible taxation.
Societies lose trillions of U.S. dollars
According to the EI Research Institute’s study, offshore deposit holdings in secret-type jurisdictions have expanded at an average of 9% per annum, outpacing the rise of world wealth in the last decade. An estimated 60% of all global trade is actually routed through tax havens. A similar situation can be found in the European Union: tax evasion is in fact estimated at 2-2.5% of European gross domestic product (GDP).
The study notes the real tax contribution from the corporate world to public finances and society in general is declining in spite of its rising share of profit. Whether through political pressures, or simply via tax evasion, the actual revenue from corporate income tax has fallen from about 4.2% of global GDP in 1985 to about 2.4% of global GDP in 2008. However, over this same period, corporate profits have increased their share of GDP in the major OECD countries, so that it now represents about 35% of GDP in this geographical area, compared with only about 25% in the early 1980s.
If corporations were still paying at the same effective rate as in 1980, they would be contributing the tax equivalent of about 5% of global GDP. Instead, half of that amount of revenue is lost, and has to be found from other sources.