tax administration in developing economies - response to BEPS

1. tax administration in developing economies - response to BEPS Peter Mullins Tax Policy Division Fiscal Affairs Department 2nd International Tax Forum Manila, Philippines, October 27-28, 2016 This presentation represents the views of the author and should not be attributed to the IMF, its Executive Board, or its management.

2. International tax system is in need of reform Two intertwined issues: 1. Tax avoidance • Exploiting rules to reduce liability The focus of current policy initiatives 2. Tax competition • Strategic tax setting by governments to reflect and exploit real and/or avoidance responses • Competition can be on rates and base (e.g., tax incentives) Arguably the deeper issue—but not the focus

4. Developing countries more vulnerable? • Single cases can be large • High dependence on corporate tax—with few alternatives CIT in % total revenue High income Low income Lower middle income

5. Some speculative estimates … difficult to estimate for developing countries due to lack of firm-level data

6. Three key international policy issues for developing countries • Treaty shopping • Vulnerability for developing countries • Are treaties necessary? Evidence on investment impact of treaties is mixed 2. Arm’s length pricing • Requires not just capacity building but also clearer, simplified rules and guidance 3. Offshore transfers of interests • Especially, but not only, in the extractive industries • Issues for domestic law and treaties

7. BEPS and developing countries BEPS Action Plan is welcome; begins to address some key issues … but: • BEPS outcomes still leave work to be done on several issues • Scope does not cover all issues (e.g., offshore transfers of interests, so IMF-OECD work underway) • Concern that developing countries interests are not fully addressed in BEPS despite attempts to include them • Challenge for developing countries in implementing BEPS proposals, including due to capacity constraints and domestic revenue priorities • Concern that governments may overreact to international tax planning and take unilateral actions without understanding the implications

8. Challenges of Implementation • Developing countries are not all the same • Much diversity with different capacity levels • Key challenges: • Ensuring international tax is embedded in a coherent, sound and wider policy/procedural design • Ensuring BEPS agenda is implemented in a sustainable way that is supportive of foundational tax administration reforms • Initiating an inclusive discussion on specific issues and circumstances facing developing countries • Improving developing countries’ ownership and capacity to manage reforms

9. 1. Embed international tax in a wider policy/procedural design • The internalization of BEPS agenda: requires coordination and political will • Revisions will require changes in domestic law (e.g., CFC rules, country by country reports) … but BEPS agenda can only effectively work if the sometimes poor design of current tax systems is addressed, such as: • Complexity arising from exceptional regimes: e.g., investment incentives, network of treaties, stability clauses for natural resource companies • Weak and incoherent legal administrative frameworks: e.g., lack of/poor tax procedures code; weak legal powers

10. 2. BEPS implementation supportive of tax administration reforms • BEPS should be part of a medium term technical assistance engagement that builds capacity: • Recognize that the control of an MNE cannot be dissociated from the overall control a tax administration can exercise over the universe of taxpayers • Develop HR, infrastructure, and analytical capacity in tax administration (e.g., exchange of information is as good as the quality of the information being exchanged, processing capacity, and effective use of the information) • Build on and enhance tax administrations’ approaches to segmentation and risk management • Avoid the risk of implementing short-term solutions (e.g., outsourcing)

11. 3. Inclusive discussion on BEPS issues faced by developing countries • BEPS implementation will provide an opportunity to: • Discuss initiatives to help countries assess their overall tax systems and formulate wider tax reform priorities • Discuss whether more objective and/or specific measures for developing countries are needed (e.g., transfer pricing) • Platform for Collaboration on Tax (IMF, OECD, UN and World Bank) • Includes toolkits to support developing countries in addressing international tax issues (e.g., on incentives, taxing indirect transfer of assets, transfer pricing comparables) • Development of Tax Policy Assessment Framework • Joint IMF/World Bank initiative

12. 4. Improve developing country capacity to manage reforms • Tax authorities will need to interact with different stakeholders to build political consensus: • At the domestic level (e.g., lawmakers, judicial system, business associations, MNEs, media) • At the international level (e.g., TA providers, international and regional organizations, other administrations, donors) • Improving capacity of tax administrations in developing countries requires time, resources, coordinated efforts

13. Conclusion • Important to view BEPS as part of broader tax policy and administration reform agenda in developing countries • While international tax is an important part of domestic revenue mobilization agenda, don’t lose sight of other priorities: • Domestic tax reforms • General tax administration capacity building