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News : Global Economy Last Updated: Jun 27, 2014 - 3:38 PM

IMF: Developing economies are victims of corporate tax avoidance
By Michael Hennigan, Finfacts founder and editor
Jun 26, 2014 - 4:55 AM

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Developing economies are increasingly victims of corporate tax avoidance by multinationals according to a paper issued Wednesday by the International Monetary Fund (IMF).

The paper [pdf] says that there is increasingly strong evidence of strategic interactions in tax setting. For example, the dramatic worldwide decline in statutory CIT (corporate income tax) rates over the last three decades is well-known: most significant in Europe and Central Asia, somewhat less in Sub-Saharan Africa and Latin America.

The paper says: "The recent spread of IP (intellectual property) boxes .. is...highly suggestive of strong strategic spillovers, which one would indeed expect to be most marked for the  most mobile elements of tax base. And the econometric evidence increasingly confirms that, as policymakers’ rhetoric often suggests, this reflects deliberate competition. For OECD countries (34 mainly developed countries), Devereux and others (2008) find that a one percentage point decrease in the statutory CIT rates of others generates, on average, a cut of 0.7 percentage points in response.

For developing countries too, there is evidence that their setting of incentives responds to the incentives available in neighbouring countries; and that a race to the bottom has become evident among special regimes - - most notably in Africa where tax burdens under these regimes have fallen to almost zero."

Some 16% of outward investment from Brazil, goes (at least initially) to the Cayman Islands. Russia's top recipients are Cyprus, the Netherlands and Switzerland.

Diarmid O'Sullivan, ActionAid's Tax Justice Policy Adviser said on Wednesday: "The IMF analysis raises some very worrying concerns about the impact of tax rules and practices in rich countries on the ability of poor countries to raise their own revenues.

"We see a clear message to the UK and other major capital-exporting countries to review their tax rules and make sure they are not harming the ability of poor countries to raise the revenues they need for their development."

Last year Bono, the U2 frontman and anti-poverty campaigner, called on resource companies working in Africa to introduce transparency on payments to governments but the musician uses Dutch tax haven facilities to avoid taxes as those companies do.

Bill Gates, the Microsoft co-founder, like Bono, could also be termed a hypocrite.

Last September, the Netherlands government said it would suggest to Zambia that a tax treaty dating from 1977, should be renegotiated to include anti-abuse provisions. The Netherlands said it would also approach the other low-income countries and low middle-income countries to see if they wish to add anti-abuse clauses to the existing treaties. In concluding new treaties, what anti-abuse clauses they could incorporate will be given careful consideration in close consultation with the partner countries.

As a follow-up to a study by IBFD, an international tax advisory group, the tax treaties with other developing countries will be reviewed to see if they might be conducive to unintended risks of tax evasion.

According to a report, published by SOMO (Centre for Research on Multinational Corporations) titled "Should the Netherlands sign tax treaties with developing countries?", Dutch double taxation treaties (DTA's) lead to huge revenue losses in developing countries because they reduce taxation on passive income.

"This is in contradiction to the Dutch government's policy coherence for development," SOMO said in a statement in 2013.

Research showed that out of the 36 researched countries, 28 countries together lose €771m (US$1.02bn) on dividend and interest tax income alone every year.

But SOMO thinks that the total revenue loss resulting from Dutch DTAs is much higher. "This is because tax avoidance through profit shifting with the use of royalties and capital gains are not included in the calculations," the statement said.

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