By
Tom Odhiambo
Title: Corporate Income Taxes under Pressure
Author/Editor: Ruud A. de Mooij, Alexander D Klemm, Victoria J Perry; Publisher: IMF Publication Date: 26 February 2021; Pages:388 Electronic Access: Free Download. Use the free Adobe Acrobat Reader to view this PDF file.
Many governments struggle with taxing large corporates. Big business organizations have the capacity to resist or undermine government efforts to have them pay what would be seen as fair tax by smaller businesses or the ordinary taxpayer.
But why should big corporations be expected to pay more taxes? After all, aren’t they just like any other taxpayer, just that they are a larger body? Why should they be charged a higher tax rate when they are simply doing business, and, therefore, creating employment, paying, and sustaining other business that supply them, contributing to economic growth, guaranteeing the government a given amount of income over years etc?
Well, evidence suggests that big corporates do not necessarily play fair all the time when it comes to paying taxes. Thus, how to tax the income of corporates has become a big issue in the recent past, especially as economies are battered by slow growth and poor investments whilst having to serve a growing population.
The IMF, one of the biggest advisors to governments all over the world is naturally an interested party in matters to do with taxation. Therefore it is interesting to read a collection of essays, drawn from cases from around the world, on the subject of corporate income tax.
The book, Corporate Taxes Under Pressure: Why Reform Is Needed and How It Could Be Designed (IMF, 2021) edited by Ruud de Mooij, Alexander Klem and Victoria Perry, is divided into 3 parts: Fundamentals of International Corporate Taxation; Problems of the Current International Tax Architecture; and Reform Options.
Essentially, it is about the history, the practice, and the future of international taxation regimes in relation to corporates.
The one reason this topic is troublesome is because, for instance, for developing and underdeveloped nations, direct foreign investment (DFI) is always touted as a means of raising capital and establishing industrial production locally.
It is generally argued that without DFI most developing and underdeveloped economies would lag behind industrial progress elsewhere and continue to be dependent on loans and donor aid.
Consequently, foreign corporates are encouraged to invest in countries where raw resources and labour are cheaper. These companies receive tax breaks and holidays. Tax breaks and tax holidays may accrue to both the company that is investing locally or to individual employees of such a company.
But in these arrangements and incentives often lie a series of problems for both the native country of the company doing the DFI and the country receiving the DFI. The theory is that the local economy should have a series of economic, technological, technical, managerial and product spinoffs from DFIs.
In some cases, the investments work leading to better skilled locals, improved products, technological and technical-know-how transfers. There could be better products. More diversified goods and services. The locals may enjoy better jobs and improved incomes.
In practice, though, even where there are significant benefits to the local economy, there is always a question mark about the income declaration and taxation of foreign corporates, especially in countries with poor tax regimes and practices.
What Corporate Taxes Under Pressure offers is a series of provocations on how to deal with multiple tax regimes and practices in different countries but which affect corporations with investments across international borders.
How is a multinational corporation (MNC) that invests in different countries and at different times affected by the (home and away) tax practices, bilateral and multilateral trade treaties, or even (international and domestic) financial regimes?
Considering that taxation practices may change without prior warning to the companies concerned, such as in a case when the government desires to raise income urgently, how are MNCs supposed to respond to such reality?
What should happen in a case where one country exploits a harsher tax regime in one country to incentivize companies to relocate to it?
If we shift attention away from corporates, how should countries go about taxing its residents who work or have invested abroad?
What should happen to the income of an individual whose company is located across the border from their home country, but who also works for the same company, earning a direct income, and dividends too at the end of the financial year?
If both countries wish to incentivize the individual and the company to continue investing in the foreign market (because her company will bring back profits to her home country as much needed foreign income; and because she has created employment in the foreign country), how do they treat the company income, the investor’s income, and the dividends the investor earns?
The broader question that Corporate Taxes Under Pressure raises and seeks to answer is: how can countries be prepared to deal with the complexities of international tax framework. This question is more urgent for poor countries, which often rely on DFI for economic growth.
How can they keep their markets open for foreign investments but still raise income from taxing the investors, fairly, in a manner of speaking?
Whatever way one looks at the question of corporate taxation, it will always be to the disadvantage of weaker, developing, or underdeveloped countries. Take the example of how difficult it may be to tax an MNC.
Theoretically, and more so because of easy financial flows across international borders, a company may be headquartered in the US (residence); manufacturing in Kenya (source), and selling its products, say jeans, in Taiwan (destination).
Such a company could have personnel in the three countries, all earning (actively or passively) from the company’s activities and sales. Now, consider that there are more than “3000 bilateral double taxation treaties” that govern how such a company may be taxed.
However, there are individual domestic tax laws and practices that will naturally overlap with the many bilateral (or even multilateral) treaties to which many countries are signatories. How does a country, say, Kenya, whose tax structure is still evolving deal with such a situation as described above?
Yet, consider that in the example we gave above we were dealing with tangible goods: jeans.
How does a country that is still at a lower stage of technological adoption and adaptation or capability deal with, say, financial products (think of fintechs) or digital products? How does one tax digital services, for instance, which, though offered locally are wholly delivered (and charged) from a source beyond the local borders?
It is undeniable that technological advancements and the easy flow of money across borders, has posed innumerable challenges to poor countries where it concerns taxing the incomes of multinational investors.
Technology makes it easier to transfer income across borders. The repatriated money can be invested in another country immediately, without much loss. Tax avoidance has, in fact, become a multimillion-dollar industry employing lawyers, tax experts, retired politicians and government employees among others.
They are aided by the fact that the global tax regimes and practices are generally aligned to the standards set by the OECD and the UN. Inevitably, poorer countries from the Global South enter the international tax(ation) order as poorer cousins of their counterparts from the Global North.
Despite the goodwill and sound advice offered in the pages of Corporate Taxes Under Pressure: Why Reform Is Needed and How It Could Be Designed, it can’t be lost on any reader or policy maker or taxperson from Africa, for instance, that it will take immense if not revolutionary effort to make the global financial and international taxation systems beneficial to poorer countries.
Tom Odhiambo teaches at the University of Nairobi. He can be reached at: tom.odhiambo@uonbi.ac.ke or +254720009155.
