Fri, Jun 27, 2014 - Page 15 News List

Corporate tax schemes hurt developing nations: IMF

‘RACE TO THE BOTTOM’:Corporate tax incentives are cutting into the tax revenue of developing nations, undermining their ability to fund government plans, the IMF said


Developing economies are increasingly hurt by the way global corporations exploit taxation differences and move profits to low-tax locations, an IMF report said on Wednesday.

However, few countries can protect themselves in a competition for direct investment that increasingly appears like a “race to the bottom” in setting corporate tax rates, the IMF said.

Companies are also increasingly able to shift and relocate more intangible assets — like intellectual property — to avoid taxes, it said.

The IMF said that the more countries give in to investors’ requirements on taxes, the more they are hurting the global community.

In addition, tax-cutting and legal tax avoidance by corporations are having an impact on countries’ fiscal strength, undermining their ability to fund government just at a time when many are fighting deficits, the IMF said.

Incentives are “significantly undermining revenue in developing countries,” the IMF said, adding that “overall fiscal performance is more vulnerable to pressures on these receipts.”

“The amounts at stake in a single tax-planning case now quite routinely run into tens or hundreds of millions of dollars. These sums may be small relative to total tax revenue in sizable advanced economies, but are large for the developing countries,” the report said.

That is especially the case in countries reliant on extractive industries like mining. Mining companies frequently load up on debt to reduce the tax they pay to the host country.

As important in denying countries tax receipts are corporate schemes like transfer pricing.

“Identifying the country that is the ‘source’ of income ... is increasingly problematic,” the report said. “It has been made more difficult, conceptually and practically, by the increased importance of intra-firm transactions.”

It also said that companies increasingly exploit intangible assets like patents, trademarks and other intellectual property “which can be much more easily relocated than can the bricks-and-mortar facilities of the world.”

The report showed how foreign direct investment is handled through low-tax locations as a strategy.

Half of outgoing direct investment from Brazil goes to havens like Austria, the Cayman Islands and the British Virgin Islands, before it goes to the final destination.

Two-thirds of outgoing direct investment from Russia goes first to havens like Cyprus and the Netherlands, the report said.

The IMF spelled out the need for a “global architecture” for taxation in the way that trade is increasingly governed by international treaties.

However, it warned that fixes can bring their own difficulties in how taxable income might be apportioned.

The IMF report comes at a time when the issue of tax avoidance is strong even in the most advanced countries.

Some of the largest US companies, including Apple Inc, Google Inc and IBM Corp, have come under attack for stashing global profits in havens like Ireland to avoid higher taxes elsewhere.

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