Tax and the Developing World: What are Corporations Getting Right and Wrong?

by .

Corporate Citizenship 

  • There is both ‘good’ and ‘bad’ behaviour amongst corporates.
  • A clear tax strategy setting out the approach to policy, planning and compliance is key.
  • The balance between source and residence taxation is a political decision but corporates should be open to discussing it.
  • Corporates should provide sufficient information on tax liabilities and payments in all countries in which they operate.

Mola art, Columbia

MNEs play an important role in the developing world. We bring investment, employment, technology, and goods and services that benefit governments and people where we operate. We can also represent a significant source of revenue for governments through the payment and collection of taxes on profits, sales, and employment. There is, however, a view that multinational enterprises (MNEs) don’t pay their fair share of taxes in the developing world. When challenged, as we increasingly are, most reply that we pay what the law requires – anyone who suggests otherwise doesn’t understand tax law or business.

It can appear that the developing world gets a smaller share of the global corporate income tax take than it might if our taxable income were apportioned, say, on the basis of revenues earned. I am not suggesting – at this stage – that we could or should move to a global apportionment system, but we can explore other ways that might lead to developing countries securing a larger share. The current outcome seems unsustainable.

The issue of tax and the developing world, and our role in that issue, is complex and contested. Many factors contribute to the present state, and we need to work together if we want to change that. The following focuses on the things we do right and the things we do wrong that have an impact on the tax take in the developing world, in the areas of policy, compliance and administration, structuring, and behaviour generally.

The problem begins with tax policy; we may often actively seek to influence policy to suit our own ends, and exploit the advantages we help create through tax holidays and other incentive regimes. Sometimes incentives are necessary for material investment to take place, because the general tax code is faulty or uncompetitive, but incentives are also often sought and obtained in other situations. On the international front, some would argue that our enthusiastic support for the preservation of the OECD framework, with its residence bias and arm’s length principle, is designed to maintain a status quo that tends to favour corporations at the expense of developing countries.

Tax administrations in developing countries often lack capacity to effectively discharge their responsibilities and collect the taxes that are due. Sometimes we support the development of sustainable tax administrations through practical knowledge sharing and education about industry sectors and business models; sometimes we may exploit weaknesses through uncooperative approaches, opaque practices and even by poaching experienced staff from the administrations.

Some of us have published our tax strategies or codes of conduct. These tell our stakeholders what they can expect from us in areas such as tax planning, profit attribution, and compliance behaviour. The problem here is that stakeholders often lack information or mechanisms to properly hold us to account.

Some of us provide information about tax payments and activities in the countries in which we operate, others lobby against requirements of this nature on the grounds of confidentiality, competitiveness, cost and general utility.

Historically, many have limited our exposure to weak legal systems in developing countries, using business models that concentrate activities and asset ownership in core jurisdictions. This impacts the amount of profit arising in developing countries. Some have adopted pricing approaches that limit income in developing countries to a commission or processing return, with all value-adding activities undertaken elsewhere.

So what might be the solution – how can we build on the things we are doing right, reduce the number of things we are getting wrong, and improve tax outcomes in the developing world? That is not a difficult question to answer in principle, even if the practical implementation and consequences are far from straightforward.

I believe we should have a clear tax strategy setting out our approach to policy, planning and compliance. This needs the explicit support of our Boards, and to be made public; it should state whether different approaches or standards are used in developing countries, and, if so, why.

At the international policy level, we need to be open to consider a tax framework with a different source/residence balance than the one we have today. This is a matter for governments to agree on, but business support can help facilitate such a shift. On domestic policy, we should exercise restraint in seeking bespoke deals and incentives, and instead help governments see that simple, stable, and well-designed tax regimes are beneficial for everyone over the longer term.

We need to work together with governments to put in place cooperative compliance programmes that enable efficient administration of the tax system, deliver certainty of outcomes to all, and have robust governance structures to ensure public trust can be built and maintained. Participation in such programmes means we act transparently and proactively to discuss areas of uncertainty in the law, and to agree pricing approaches in areas of significant value – ideally on a multilateral basis. This also means that we have well-functioning tax control frameworks providing assurance internally and externally over the proper calculation, reporting and payment of our tax liabilities.

We need to provide sufficient information on our tax liabilities and payments in all countries in which we operate, together with simple information on how those amounts are determined, to enable communities in the developing world to understand our tax contribution to each country.

We then need to introduce mechanisms that allow us to discharge our accountability to stakeholders beyond government. This remains a challenge both conceptually and practically, requiring a careful balance between meeting legitimate interests and maintaining a proportionate and efficient response.

Simple in principle, hard in practice, but more sustainable in the long term.

 

Alan McLean is Executive Vice President for Tax at Shell 


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