Base Erosion, Profit Shifting and Developing Countries

Abstract

International corporate tax issues are now prominent in public debate, most notably with the current G20-OECD project addressing Base Erosion and Profit Shifting ('BEPS'). But, while there is considerable empirical evidence for advanced countries on the cross-country fiscal externalities at the heart of these issues, there is almost none for developing countries. This paper uses panel data for 173 countries over 33 years to explore the magnitude and nature of international fiscal externalities, with a particular focus on developing countries and applying a new method enabling a distinguishing between spillover effects through real investment decisions and through avoidance techniques-and quantification of the revenue impact of the latter. The results suggest that spillover effects on the tax base are substantially larger in developing countries than in advanced, and that they imply a likely loss of revenue from BEPS that is both substantially larger for them.

The second Renaissance

“…The use of off-shore tax havens -notably by companies at the frontier of technological change -as well as competition by governments to attract increasingly mobile individuals and companies by reducing taxes, together with austerity policies, have reduced the capacity of governments to invest in health, education, infrastructure, social security, research and other expenditures 11 . Lower investment leads to lower growth and political gridlock, as politicians fight over the allocation of fixed or diminishing resources.…”

Implications of Tax Havens on Government Revenue

“…The argument of how much taxes to charge on income then come to a consensus that if international capital flows are becoming more sensitive to the variations in the levels of taxation, tax reductions are then very likely to serve as a stimuli of domestic and foreign investments in the same direction. Countries that continually have the intention to overtax or impose higher taxes on profits earned by large domestic and foreign investors will have reduced levels of income from taxes, which evidently will be lower than those who did not [9] In another study, Crivelli, De Mooij and Keen [10] used a panel data for 173 countries over a 33 year period and focused mostly on developing countries. The study explored the extent to which the impact of one country's tax policy was affected by the tax bases of other countries through real decisions and through avoidance.…”

Informal economies, state finances and surveyors

“…3). Apart from this, currently is tax evasion by global companies using tax heavens at the top of the agenda (loss for emerging countries estimated at 212 billion US$ (Crivelli et al, 2015)). This is a matter of base erosion and profit shifting, all said to be legal, thus not so much a matter of black economies, though severe.…”

“…This dodging (officially called 'base erosion and profit shifting') causes a loss of 212 billion US$ annually (Crivelli et al, 2015). When emerging countries are successful in bringing back both such large sums of money to where they belong, then they generate funds, almost equal to the transmitted remittances, the mainstay of many countries today.…”