IMF launches consultation on tax ‘spillover’

In a welcome step, the International Monetary Fund has announced it will be researching the consequences of existing and proposed changes to corporation tax regimes for lower income “source” countries.  In particular this ‘spillover’ analysis is expected to focus on how bilateral double tax treaties effect low income countries, the gradual shift away from worldwide (residence-based) taxing of TNCs  towards a territorial (source-based) system, and issues arising from how preferential tax treatment distorts the treatment of debt and equity.

It is now widely recognised that the tax policies of one country – the UK’s patent box policy for example – impact on other countries.  The OECD’s work on base erosion and profits shifting [BEPS]  is a response to civil society concerns about corporate tax avoidance through offshore tax havens, the latter deliberately using their tax sovereignty to undermine tax policies of other countries.  For the greater part spillover impacts are negative as countries rush ever-onwards in a self-harming race-to-the-bottom.

Tax policy spillovers have massive consequences for global development.  As the IMF notes:

The current set of national laws and practices potentially affect macroeconomic outcomes in terms of tax revenues, the level and direction of investment flows, and incentives to adjust national systems in response to the decisions of others.

The majority of these negative spillovers relate to the taxing of capital which, once liberated from the capital controls of the Bretton Woods era, became able to evade and avoid taxes with great ease, while also gaining power over democratic governments to demand tax concessions and promote tax wars.

An entire global political economy, which we know as Offshore, has been created by (largely) western governments – the City of London is a key player here – to assist capital with re-shaping tax regimes to its advantage.  We are all familiar with the consequences, including a significant shift away from progressive taxes, mounting inequality and, as the IMF has itself conceded, significant harm to the global economy.  A new financial architecture is required, which extends also the global tax architecture.  The IMF’s Mick Keen:

It is widely recognized that the current international tax architecture, designed for a very different world of a century or so ago, is under considerable strain.  With that in mind, the IMF work will consider both the operation of the current architecture and more fundamental reforms that have been proposed by academics, civil society, and other.

The deadline for submissions to the IMF consultation is 31st March 2014, so get sharpening those pencils now.