Top economists condemn IMF arm-twisting countries to adopt harmful OECD tax deal

Renowned economists Joseph Stiglitz, Jayati Ghosh, Gabriel Zucman and other commissioners of the Independent Commission for the Reform of International Corporate Taxation (ICRICT) have called out the International Monetary Fund (IMF) for abusing its role in debt renegotiations to force countries to adopt OECD tax rules – rules that the IMF’s own research shows would further constrain the revenue-raising ability of these fiscally stressed countries, and rules that even OECD members are increasingly unlikely to implement.

In an open letter¹ to IMF head Kristalina Georgieva published today, the commissioners highlighted the IMF’s “alarming” and “unacceptable” treatment of Sri Lanka in current debt renegotiations.² Sri Lanka has the highest external debt payments this year of any country in the world, amounting to 75 per cent of total government revenue.³ Along with many others facing global shocks, Sri Lanka needs desperately to renegotiate its debt – a process in which the IMF plays a central role.

The attention on Sri Lanka being coerced to accept OECD proposals follows a weekend of turmoil for the OECD after the Financial Times confirmed reports from CICTAR and the Tax Justice Network that the OECD heavily lobbied Australia to weaken breakthrough measures against corporate tax abuse.⁴ The OECD was forced to release an unprecedented statement late Saturday evening in response.⁵ ICRICT’s open letter and the Financial Times’ reporting are increasing public attention on the undemocratic ways in which international tax rules are set under OECD tax leadership ahead of a vote at the UN General Assembly this winter that could see leadership over global tax move from the OECD to the UN.

In the letter, the commissioners reveal that instead of helping Sri Lanka to find a sustainable fiscal path, the IMF is actively pushing the country to sign up to the as-yet unfinalised OECD ‘two pillar’ proposals on corporate tax reform. As the commissioners write, however:

“The current outcome of the OECD tax negotiations is unlikely to yield meaningful or sustainable revenues for developing countries, so they should not be restricted from pursuing alternative measures. We believe that developing countries must retain their sovereign rights to set domestic tax and fiscal policies, while awaiting a more comprehensive reform based on a fairer reallocation of taxing rights.”

The commissioners go on to say: “the IMF should not put pressure on any country to drop any such alternative measure to raise much-needed public resources in the absence of any legal requirement to do so under an agreed international convention.”

The IMF’s own research has shown that the benefits of the OECD’s proposals for most non-OECD countries are small at best⁶ – making it all the more disturbing that the IMF would seek to pressure fiscally constrained countries into committing to the OECD deal.

The open letter also cites evidence from the intergovernmental South Centre and the African Union’s Coalition for Dialogue on Africa, that Sri Lanka’s proposed digital sales tax⁷ would generate four times as much revenue as they could hope for under Pillar One.⁸ Researchers at the EU Tax Observatory estimate that Sri Lanka would actually lose revenues through OECD implementation in a number of scenarios.⁹

Findings from all these studies, including the IMF’s, were corroborated last week in a report by the BEPS Monitoring Group, the widely recognised tax reform watchdog that has been tracking and evaluating the OECD’s reform process since 2013.¹⁰ The BEPS Monitoring Group criticised the OECD’s proposal as “fundamentally flawed”, finding that the OECD’s proposals will not curb corporate tax abuse to any significant degree, and that benefits for lower income countries are at best highly questionable. The watchdog urged countries to reject the OECD’s proposals, and to pursue alternative measures.

The IMF’s actions are the latest episode in an escalating power struggle over global tax leadership. Countries unanimously agreed at the UN last year to open the door to negotiations on moving leadership on global tax from the OECD, where it has sat for over sixty years, to the UN. The historic resolution was adopted despite unprecedentedly aggressive attempts by the OECD to prevent the resolution from coming before the UN General Assembly.¹¹ The UN General Assembly will debate the prospect of negotiations this September and vote on whether to formally begin the negotiations this winter.

Europe, Africa and Latin America have recently announced or are preparing to shortly announce support for UN tax leadership.

The European Parliament recently backed negotiations on a UN tax convention, which would move leadership on global tax to the UN.¹² The Parliament upheld the argument that rulemaking at the OECD has not been inclusive. The influential African Union Commission reaffirmed this month the commitment to UN tax leadership made by the Africa Group at the UN last year.¹³ The resolution adopted at the UN last year to open the door to negotiations on a UN tax convention was put forward by the Africa Group. Latin American and Caribbean nations will be meeting at a first-of-its-kind regional summit¹⁴ later this month on international tax rules, where the countries are expected to agree regional consensus and negotiation positions largely in favour of moving leadership on global tax to the UN.

The UN tax convention could create a globally inclusive intergovernmental tax body for future rule-setting – with the potential to curb the international tax abuse of both multinationals and wealthy individuals. Pressure from the IMF on non-OECD members to adopt the OECD tax rules is seen by tax justice campaigners as another in a series of attempts to protect multinational corporations from more effective taxation by the rich countries who host the majority of multinational corporations’ headquarters, and who make up the membership of the OECD and are among the more powerful members of the IMF.

1 in 5 multinational corporations around the world were spared from having to publish reports that could reveal any profit shifting behaviour and tax abuse they were conducting, after the Australia was heavily lobbied by the OECD, business lobbyist and the big four accounting firms against breakthrough legislation.¹⁵ Due to the nature of multinational corporations international operations, the Australian legislation – which has broad support from experts, civil society and investors with trillions of dollars in assets under management – would have applied to 21 per cent of multinational corporations around the world.¹⁶ This would have consisted of over 2000 multinational corporations, including the world’s biggest household names. Conservative estimates show that at least 1 out of every 4 tax dollars lost to multinational corporations shifting profit into tax haven can be prevented if all multinational corporations were required to make these reports public.¹⁷ Multinational corporations are estimated to shift over US$1.1 trillion into tax havens every year, costing the world over US$312 billion in lost corporate tax a year.¹⁸

Tax Justice Network chief executive Alex Cobham said:

“It is unconscionable that the IMF would use its power in debt negotiations to force countries to give up urgently-needed revenue-raising capacity – instead of doing everything possible to support their fiscal recovery. The fact that the IMF is pushing on non-OECD countries a deal which its own research shows is no good and which many OECD members are unlikely to implement themselves is incomprehensible.

“This is the point of democratically deciding tax rules at the UN. So that countries can’t be coerced into rules they have no say on and rules that do them harm.”

Global Alliance for Tax Justice executive coordinator Dereje Alemayehu said:

“We have to question the timing of this strange move by the IMF. At a moment when the UN General Assembly has agreed to begin intergovernmental discussions on a globally inclusive tax body to replace the rich countries’ club at the OECD. This appears to be a last-ditch attempt to force countries to accept the OECD rules anyway – to create obstacles in the negotiating space even before negotiations can begin. Countries should stay united to continue their collaborative struggle to bring international tax rule-making and standard-setting back to the UN, and to defend their tax sovereignty. The IMF should be ashamed to have let itself be used in this way, arm twisting and extracting concessions from countries under duress.”

-ENDS-

Notes to editor

1. The ICRICT open letter is available here.
2. News of the IMF pressuring Sri Lanka was reported this morning by the Financial Times.
3. Analysis from Debt Justice can be found here.
4. Read more about the FT’s frontpage news this past weekend confirming that the OECD heavy lobbied Australia against tax transparency measures here.
5. Read our statement on the inaccuracies in the OECD’s response here.
6. IMF research on the revenue returns to the OECD proposals can be found here (see Figure 1 and Figure 5 on Pillar 1 and broader revenue impact), and here (a comparison of Pillar 1 with digital sales taxes for Asian countries).
7. Digital sales taxes may not be optimal but remain useful to defend countries’ tax base against profit shifting, until a globally inclusive tax deal is in place through UN negotiations.
8. The South Centre and CoDA study can be found here.
9. The EU Tax Observatory report can be found here. More information about the failure of the OECD’s “two pillar” proposal is available hereand here. More information is available here on how the global minimum tax rate, which was could have been a speed limit for tax havens, is now a reward programme for corporate tax havens and tax abusers.
10. More information about the BEPS Monitoring Group’s report is available here.
11. The OECD was reported to have used unprecedented language in letters to ambassadors to question the UN’s fitness to oversee international tax discussions. Sources told the Tax Justice Network that the move has backfired in some quarters as it was seen as “undiplomatic” and “highly unusual” to attack another international institution in this way, and may actually have bolstered support for the UN resolution. The letters the OECD sent to ambassadors have been discussed with the Tax Justice Network by multiple people who have seen them. The OECD did not respond to media requests at the time to make the letters public. More information on the historic UN vote is available here.
12. More information on the European Parliament backing a UN tax convention is available here.
13. Watch the statement by the African Union Commissions’ acting head of division for economic policy here.
14. Read more about the Latin American summit here.
15. See note 3.
16. We calculate that at least 21 per cent of the world’s multinational corporations will be affected by Australia’s public country by country reporting requirement. Based on 2018 statistics from the OECD’s confidential country by country reporting data, there are 132 multinational corporations for which Australia is as an ultimate parent jurisdiction, and another 1,997 multinational corporations that have a subsidiary operating in Australia. This makes a total of 2,129 multinational corporations which the law would apply to. This number represents a lower bound of what the scope of the law will actually be, as some countries (like, notably, Ireland and the United Kingdom) do not provide a country breakdown for these statistics for Australia and any multinational corporation’s headquartered in these countries with subsidiaries in Australia are not included in this number. There are also other countries that similarly host the headquarters of multinational corporations with subsidiaries in Australia, but which do not participate in the OECD standard. These multinational corporations are also left out of this number. According to the same 2018 statistics, there are 10,102 multinational corporations across the world. 2,129 multinational corporations covered by Australia’s law / 10,102 total multinational corporations = 21 percent.
17. See the State of Tax Justice 2022 for more information.
18. See the State of Tax Justice 2021 for more information on how much tax countries lose to tax havens annually.

About the Global Alliance for Tax Justice

The Global Alliance for Tax Justice (GATJ) is a South-led global coalition in the tax justice movement. Together we work for a world where progressive and redistributive tax policies counteract inequalities within and between countries, and generate the public funding needed to ensure essential services and human rights. Created in 2013, GATJ comprises regional tax justice networks in Asia (Tax & Fiscal Justice Asia), Africa (Tax Justice Network Africa), Latin America (Red de Justicia Fiscal de América Latina y el Caribe), Europe (Tax Justice-Europe) and North America (Canadians for Tax Fairness & FACT Coalition), collectively representing hundreds of organisations.