L7 - Global Tax Governance Flashcards
What is meant by ‘New Constitutionalism of the Neoliberal World Order’?
Since International Economic crisis 1970s: Neoliberalism (trade union power, state intervention, “high” taxes were blamed as the causes of the crisis)
Institutional framework of national and international neoliberal laws that prioritised capital and its mobility and allowed it
Binds future generations (withdrawing is riskier than staying in it) will not simply dissipate entirely in times of crisis (hegemonic order, Gramscian idea)
E.g. Marrakesh (1994), which led to WTO, Maastricht Treaty as neoliberal EU constitution (free movement of capital within the EU)
What kind of issues (give some detail) are addressed by global taxation governance?
- The world’s wealthiest individuals and multinational corporations can use international loopholes and tax havens to dodge taxes (Apple/Ireland state aid case Tax avoided: €13 billion (2003-2014) Effective corporate tax rate in 2014: 0.005%, Luxleaks Luxembourg: 340 multinationals had in some cases paid taxes lower than 1%)
- unlike consumers, workers, small and medium enterprises etc.
- Extreme, and growing inequalities worldwide – both an economic, social and democratic problem
- Lack of funding for development and environmental protection
- Developing countries are not able to participate on an equal footing when global tax rules get decided – Unequal footing (Fundament)
- Thousands of bilateral tax treaties have reduced taxation on cross-border financial flows (often lower the taxes charged on transaction)
-The corporate tax system is extremely complex
Discuss the ‘turf war’ between UN and OECD on global taxation governance?
Reasons for the ‘turf war’: Source vs. Residence Taxation:
Developing Nations (UN Focus): Prefer source-based taxation, ensuring they can tax multinational corporations (MNCs) for profits generated in their territories.
Developed Nations (OECD Focus): Often support residence-based taxation, which benefits countries where MNCs are headquartered.
Minimum Corporate Tax and Profit Allocation:
The OECD spearheaded the Two-Pillar Solution to address global tax challenges, particularly from digitalization:
Pillar 1 reallocates taxing rights to some extent, but not enough for many developing nations.
Pillar 2 introduces a global minimum corporate tax rate of 15%.
Developing countries (supported by the UN) argue that these reforms are insufficient and fail to adequately address their revenue need
The OECD implementing it, might be better than nothing, but it is probably not the most inclusive framework and might not contribute to combat global inequality
State of play:
OECD hosts the negotiations, but all countries can join if the commit to following the OECD/G20 standards from 2015.
Over a third of the world’s countries have decided not to join.
The new track under the UN is moving forward – the negotiating process for a new UN Convention on International Tax Cooperation is set to start in February 2025.
In what sense was the 2007-2008 Global Financial Crisis a pivotal moment for global
taxation governance?
U.S. and European Central banks had to make monetary interventions to address the crisis
Distrust in banks (who were less controlled due to Neoliberalism), leaks from former bank employees raised awareness for the public & state about tax havens
Destablised Neoliberalism/ the hegemonic institutions and the consensus > governments gained interest again in taxation
Which revolutionary changes have we seen in global taxation governance in recent years
at the level of G20/OECD?
G20 Adopted the automatic information exchange norm, enacted through CRS (Common Reporting Standard) wanted to stabilize their balance of payments through better capital flow control - Has generated 114 billion € in extra tax revenue -
The BEPS initiative: G20 and OECD launched 15 actions against (!) BEPS (Base Erosion and Profit Shifting) (base=Steuerbasis) (Profit shifting= Gewinne so legen, dass es steuerlich günstig ist)
BEPS action 1 pillars:
- Pillar 1 tax paying, also if not physically there (Netflix etc.) ensures taxes are paid where customers are (fair share for all countries) companies, exceeding 20 billion €
- Pillar 2 minimum tax rate of 15% for MN with >750 million € stops the “race to the bottom,” where countries lower taxes too much to attract businesses
But:
Arms length principle remains intact
Many will not implement all BEPS actions
Weakend and not yet implemented in the US
Disadvantegous for smaller countries (products produced there and not sold)
FATCA and global Automatic Information exchange
FATCA Foreign Account Tax Compliance Act: Foreign banks were required to disclose American citizens’ financial information to the US (end of bank-secrecy for US-clients)
Also paved the way for information exchange for EU
Bank secrecy eroded
Why is ‘scale politics’ a useful paradigm to study global taxation governance?
Market promotion was entrenched at a global scale, while policies to correct the market remained to the national level, you have to look at both to understand threads and incentives to challenge them
Discuss the role of global civil society in global tax governance.
whistle blowers + political pressure
What is the issue of transfer pricing by multinational corporations about? And how is
it/can it be addressed internationally?
Transfer pricing is about how multinational corporations (MNCs) set the prices for goods traded between their own subsidiaries in different countries. it becomes problematic when MNCs manipulate it to avoid taxes. Here’s a breakdown:
Why Is This an Issue?
Tax Avoidance:
By artificially shifting profits to low-tax or no-tax countries, MNCs avoid paying their fair share of taxes in high-tax countries where they actually generate value.
Example: A tech company might license patents or trademarks to a subsidiary in a tax haven and charge high fees to its subsidiaries in higher-tax countries, reducing profits there.
Erosion of Tax Revenue:
High-tax countries lose out on significant tax revenues, which could have been used for public goods like healthcare or education.
Unfair Competition:
Local businesses that can’t manipulate transfer prices face a disadvantage, as they must pay full taxes on their profits.
Developing Countries Suffer Most:
Many developing nations rely heavily on corporate taxes for their budgets, and they lack the resources to monitor or combat aggressive transfer pricing strategies.
~ 36% of multinational profits are shifted to tax havens globally through that
How Transfer Pricing Works:
Imagine a company called “GlobalTech Inc.” with:
A subsidiary in Country A (high taxes).
Another subsidiary in Country B (low taxes).
Internal Transactions:
Country A produces a product and “sells” it to the subsidiary in Country B.
Since it’s the same company, GlobalTech sets the price of the product internally (the “transfer price”).
Manipulation:
If GlobalTech sets the transfer price too low, most of the profits from selling the product will show up in Country B (the low-tax country), reducing taxable profits in Country A (the high-tax country).
Why is there demand for a UN Tax Convention, and who has been advocating/proposing this? Also tell something about the negotiations in the UN.
The Africa group is proposing it, since they are unhappy with the BEPS actions
OECD’s tax rules primarily benefit wealthy nations and do not adequately address the needs of developing countries,
Short version:
Negotiations were suprisingly successful, still a way to go, some industrial nations still opposing in votes
Longer version:
UN General Assembly, 2nd committee
October 2022:
Africa Group puts forward a zero draft resolution calling for a UN Tax Convention
Renames it “framework or instrument”
Adopted by consensus
Africa groups proposal UN GA
Adopted by a vast majority, some rich countries, France, Germany against it -> shall stay a rich club competency
February 2024: Start of the negotiations – all UN Member States show up and engage!
Major points of disagreement:
Decision-making rules (OECD countries want veto rights, OECD countries wer there to make sure that the other countries do not team up)
Africa wants easy majority, OECD countries 2/3
What to do with the existing OECD standards – complement or replace?
Should the corporate tax rules be changed?
Which countries should be allow to tax multinational corporations?
Taxation of high-net worth individuals? (Brazil wanted it G20 not)
How many new legally binding UN tax agreements should we have?
August 2024: Draft terms of Reference finalized after 3 intense weeks of negotiations at the UN Headquarters.
But disagreements remain – a consensus adoption was not possible.
Start 2025 – finish by the end of 2027
The new track under the UN is moving forward – the negotiating process for a new UN Convention on International Tax Cooperation is set to start in February 2025.
The OECD track: EU and some other OECD countries are implementing Pillar 2, but the future of Pillar 1 is uncertain, and the OECD tax deal is unlikely to reach global implementation
