M Govinda Rao Member Independent Commission for the reform of International Corporate Taxation Presentation Scheme Urban areas Engines of Development Critical role of urban services and infrastructure in development Critical role in developing countries ID: 777997
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Slide1
Financing Urban Services and Investment: Need to Ensure a Fair Share from Multinational Corporations
M. Govinda Rao
Member, Independent Commission for the reform of International Corporate Taxation
Slide2Presentation Scheme
Urban areas: Engines of Development. Critical role of urban services and infrastructure in development. Critical role in developing countries.
Who should pay for urban services and infrastructure? Theory
Traditional sources of financing urban services and infrastructure: user charges, property taxes, developmental charges.
Constraints in generating required resources from traditional sources;
Free riding by multinationals: Base erosion and profit shifting. Use if urban infrastructure for business development without paying taxes.
ICRICT Recommendations to enforce tax payment by multinationals
Slide3Urban Areas: Engines of Development
Three important reasons for focusing on urban finance:
Innovation -key to prosperity; most innovations occur in large cities - interaction and exchange of ideas. Cities provide a critical mass to support high degree of division of
labour
, knowledge, business services, infrastructure, institutions and media.
Globally competitive cities should provide a wide range of services to attract human capital: transportation, water, sewers garbage collection and disposal, police, fire protection, parks, recreation and culture, affordable housing and social assistance.
All these require significant resources: Raising resources to finance these urban services holds the key to making urban centres a leading edge of economic dynamism.
Most developing countries suffer from acute infrastructure and services deficit in urban areas.
Slide4Principles of Local Finance
Revenue Assignment According to comparative advantage: Broad based taxes with the Centre; provision of Services at Local level.
Transfers are inevitable – but it is important to link
revenue–expenditure decisions
at the margin. This requires
assignment of independent revenue sources.
Local taxes should satisfy the criteria of:
Sufficiently productive and buoyant;
Put the burden on the beneficiaries.
Least distorting: Should mainly tax immobile bases. Should not create impediments for the smooth flow of commodities and people.
Visible for accountability.
Slide5Inadequacy of Traditional Sources
Traditional sources of financing urban services are user charges, property taxes. Urban infrastructure is financed through developmental charges and municipal bonds.
The levy of property taxes un developing countries is abysmal. Difficulties in assessing market values. Municipal bond markets undeveloped. Transfers are inadequate as the tax/GDP ratios are low.
Free-riding by multinational corporations. Reduce their payment for services, property taxes and BEPS.
While these corporations use public services intensively to make large profits, they do not make commensurate payments in terms of user charges, property taxes and even the income taxes by creating branches in low tax jurisdictions and evading the tax.
Slide6Evasion and Avoidance of Taxes by Multinationals
Tax evasion and wilful avoidance by multinational is a matter of concern in DCs. Robs them off critical resources.
Tax avoidance is done by creating a web of complex subsidiaries located in tax havens by:
Artificially allocating profits
taking advantage of tax treaties;
Manipulating prices in related party transactions;
Intangibles- (goodwill, brand recognition, intellectual property right, patents
etc
) difficult to apply TP rules.
Loans and interest payments.
Slide7Examples of Base Erosion
UN Public Accounts Committee, 2011:
Starbucks - £ 8.6 million since 1998
Amazon - £ 1.8 million in £ 207 million – 1%.
Google - $ 18 billion in revenues paid $.16 million during 2006-11.
US Senate Committee:
Microsoft avoided U. S Corporate tax on 47% of its US sales transferring intellectual property rights to Puerto
Rico. Similar findings on Hewlett –
P
ackard, Apple and Caterpillar
India- Corporation tax paid by multinationals were much lower
t
han domestic companies. Vodafone case.
Flipcart
and other e-commerce companies.
In the Southeast Asian region – Singapore and Hong Kong are low tax jurisdictions
Slide8Measures to Tackle Base Erosion
G-20: BEWPS programme – 15 point recommendation relating to harmonizing the tax systems to avoid competition, international cooperation, information exchange etc.
Many developing countries feel that the measures should go beyond. Initiative should be more inclusive.
Coalition of Civil Society Organizations for tax justice -ActionAid
, Alliance-
Sud
, CCFD-Terre
Solidaire
, Christian Aid, the Council for Global Unions, the Global Alliance for Tax Justice, Oxfam, Public Services International, Tax Justice Network and the World Council of
Churches – has appointed ICRICT which has important recommendations.
34 recommendations:
http://www.icrict.org/declaration/
Slide9ICRICT Recommendations
T
he
multinationals
to
be taxed as a single
unit.
M
odel
bilateral and multilateral agreement
to apportion revenues
and costs attributable to each
subsidiary, even when they are taxed as unified entities;
Ownership based on objective factors such as sales or employment to attribute
intellectual property
revenues.
Avoid race to the bottom; declare tax preferences transparently.
Strengthen administration and enforcement and make abusive tax practices a criminal offence.
Evolve a model withholding system
Force multinationals too file country by country reports on the businesses and advance pricing agreements – greater transparency.
Reform tax
treaties to avoid
restrictions
on tax withholding, measures to prevent double non-taxation, and include general anti avoidance rules the model tax
treaties.
Slide10Concluding Remarks
Abusive tax practices is a matter of great concern for developing countries.
Technological advances and emergence of e-commerce has posed severe challenges to tax administration.
Developing countries are handicapped with poor tax administration and can not match the multinationals.
Collective action need of the hour.
Upgrade UN
Committee of Experts
into
an international commission to oversee
compliance – We need a World Tax Authority.
Slide11THANK YOU