OECD tax deal ignores the wishes of the world’s poorest countries

OECD tax deal ignores the wishes of the world’s poorest countries

October 7th 2021

On the eve of technical talks to thrash out the final details of the Organisation for Economic Cooperation and Development’s (OECD) corporate tax deal, Oxfam is calling for world leaders to bring fairness and ambition back to the table and deliver a tax plan that won’t leave developing countries with “next to nothing”. As it stands the deal on the table means that if you’re a nurse in Mexico, a market vendor in Thailand or a small business crippled by COVID-19 in Kenya, this deal will not deliver for you.

This proposed agreement is the OECD’s effort to update the century-old flawed rules for taxing multinational companies. According to the G20 the proposed deal will create a ‘fairer international tax architecture’. Unfortunately, the fine details of the agreement indicate that this will not be the case. While Oxfam acknowledges that the deal will introduce two major new features in the international tax system – formulary apportionment and a global minimum tax – which could dent both tax avoidance and extreme tax competition- this is an agreement made by the world’s richest countries, for the rich.

What could have been an historic agreement to enable developing countries to access their fair share of corporate tax revenue, to help them achieve the Sustainable Development Goals (SDGs), is rapidly becoming a rich country stitch-up instead. As the final details of the deal are being ironed out it is hugely disappointing that the legitimate and strong concerns coming from a broad coalition of developing countries are being ignored. IMF data indicate that proportionally speaking, low- income countries lose the most tax revenue due to tax avoidance. Oxfam believes that it is impossible to develop long term solutions to global poverty and inequality as long as the current international tax system continues to drain essential financial resources from developing countries.

Ireland has recognised that changes to this global tax system are necessary and over the last decade has supported the OECD’s Base Erosion and Process Shifting (OECD BEPS) process, and engaged with various ongoing initiatives at EU level to address corporate tax avoidance. Oxfam recognises that Ireland has made some important changes to close the more egregious forms of tax avoidance that Ireland has facilitated. However, none of these aforementioned processes have succeeded in fundamentally transforming the global tax system.

140 countries are currently negotiating a two-pillar tax deal under the OECD-G20 umbrella. The first ‘pillar’ aims to make the world’s largest corporations pay more taxes in the countries where they earn profits. Based on current proposals, Oxfam estimates that it will affect only 69 multinationals and would only apply on ‘super profits’ above 10 percent. Loopholes could let the likes of Amazon and ‘onshore’ secrecy jurisdictions like the City of London off the hook. Extractives and regulated financial services are excluded from the deal.

According to the OECD Pillar 1 of the agreement aims to “ensure a fairer distribution of profits and taxing rights among countries” but our analysis shows that it delivers almost no meaningful revenue for developing countries, while forcing them to sign away their right to tax multinational corporations through unilateral measures and submit to mandatory arbitration. Our impact assessment suggests that Pillar 1 could result in a loss of revenue for developing countries when the gains of Pillar 1 are compared to the taxing rights they would have to give up.

This means that countries most in need of more tax revenue will get next to nothing for hospitals and schools and social care under these new corporate tax rules. Nigeria, Africa’s biggest country in terms of its population and size of its economy has refused to sign up to the OECD deal to date, as it stands to receive as little as 0.02 percent of its GDP in additional money each year —equivalent to 48 cents per citizen.

The second ‘pillar’ of the agreement is about defining a global minimum corporate tax rate. An updated draft of the OECD tax plan this week dropped "at least" from a proposed minimum global corporate tax rate of "at least 15 percent".

Only large multinational companies with a turnover of more than €750 million would be subject to the new minimum tax, which according to the OECD will exclude 85-90% of the world’s multinational companies. It is also important to stress that the 15% rate is a starting point which can end up being much lower due to the so-called ‘substance carve-out’ in the OECD agreement

The 15 percent rate is well below the UN Financial Accountability, Transparency and Integrity (FACTI) Panel recommendation made earlier this year, which called for a 20- to 30-percent global corporate tax on profits. The Independent Commission for the Reform of International Corporate Taxation (ICRICT) has called for a 25 percent global minimum tax to be applied. 

A 25 percent global minimum corporate tax rate would raise nearly $17 billion more for the world’s 38 poorest countries (for which data is available) than a 15 percent rate. These countries are home to 38.6 percent of the world’s population. Ireland’s position on this issue, is in direct contradiction to its stated commitments to human rights and the anti-poverty goals of its Overseas Development Aid (OAD) Programme.

The UN is so concerned about Ireland’s approach to corporate taxation that it is currently investigating the impact of Ireland’s international tax policy on the ability of countries of the Global South to raise revenue and fulfil their human rights obligations, in particular those that relate to children.

Moreover, Ireland’s continued opposition to tax reform being addressed at the UN rather than at the OECD, where developing countries would have a more equal say in any agreement, undermines the world’s most important multilateral institution at a time when Ireland is trying to revitalise the UN through its membership of the UN Security Council. Although Ireland claims to be defending the rights of small countries against richer countries, it has continued to ignore the stated wishes of poor countries.

The fixed 15 percent rate will overwhelmingly benefit rich countries and increase inequality. The G7 and EU will take home two-thirds of new cash that it will bring in, while the world’s poorest countries will recover less than 3 percent, despite being home to more than a third of the world’s population.

Developing countries are more heavily reliant on corporate tax. In 2018, African countries raised 19 percent of their overall revenue from corporate tax, compared to just 10 percent for OECD nations.

You may ask why developing countries are supporting a deal that is not in their interests? It is important to understand the political economy realities of these negotiations whereby low-income countries can be effectively bullied through threats of trade sanctions, blacklists etc. unless they sign up. There is no place in the twenty-first century for such gun-boat diplomacy and unequal treaties.

It is shameful that while the majority of the world struggles with scarce vaccine supply and worsening hunger and poverty, rich nations are grabbing for an ever-bigger slice of the pie. But developing countries can still fight for a fairer tax deal. If the agreement fails to reflect their interests, they should have no qualms about leaving the negotiating table and chucking this one-sided money-grab onto history’s scrap heap.

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