The IMF will gather views from governments, civil society, academics, and private sector stakeholders for its analysis of economic ”spillovers” in international taxation—meaning the impact that one country’s choices in this area may have on other countries. Interested parties are asked to submit comments by March 31, 2014.
IMF staff will prepare a paper on the topic—with particular focus on the impacts for low-income countries—for discussion by the institution’s Executive Board in early May.
International tax issues are now prominent in public debate and are attracting considerable attention from policymakers. They also recur repeatedly in the advice given by the IMF to its member countries, notably in its technical assistance work.
There are broadly two sets of spillover issues that arise: the opportunities for tax avoidance (sometimes referred to as “base erosion and profit shifting”) by multinational companies that are created by the interaction between national tax regimes and practices, and (illegal) tax evasion by high net wealth individuals using low-tax jurisdictions. The current IMF work on which the consultation is being launched relates to the first area.
“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,” said Michael Keen, Deputy Director in the IMF’s Fiscal Affairs Department. “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 others.”
Particular areas of focus
The opportunities for avoidance that are now being made so visible are just one part of the spillovers problem, as corporations and individuals exploit gaps and inconsistencies arising from the interactions of national tax systems. 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 IMF’s spillovers analysis is expected to focus on, in particular, the impact of bilateral double taxation treaties on low-income countries; the impact of the trend to shift from worldwide (residence-based) taxation toward a territorial (source-based) system among many industrial countries; issues arising from the distortion in the treatment of debt and equity for tax purposes; increasing use of methods of income splitting within multinational enterprises that differ from the classic “arm’s length” method based upon comparable transactions—where within that broad framework, methods such as profit-splitting are coming increasingly to the fore.
The IMF work will explore these areas, relying on the organization’s experience in advising its member countries on these issues over the past several decades. It will also reflect the increased importance of international corporate tax issues for the lower-income member countries in recent years.
The Group of Twenty (G20) industrialized and emerging market economies and the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project is a two-year 15-point action plan addressing tax planning opportunities that now arise in the context of multinational enterprises. The IMF’s work is intended as a complement to this work, reflecting the differing mandates, expertise, and membership of the two institutions.
“The G20-OECD BEPS project addresses many highly technical issues—hybrid instruments and entities, valuing intangible assets, possible multilateral revisions to the international treaty network—which the IMF’s work will not explore directly,” said Keen. “The IMF project is intended to assess as far as possible the consequences of the existing, and some currently proposed new, aspects of the international regime, in particular, for lower income ‘source’ countries.”
Other groups are looking, too, at more fundamental changes to the current system of laws—unitary taxation or formulary apportionment methods of splitting the tax base; destination-based income taxation; and, less radically, retention of worldwide taxation but the ending of deferral. The IMF work will draw on all of this to inform its analysis.