International tax avoidance is recognized by international organisms that have proclaimed the search for global transparency in the last years. They identify that this problematic particularly affects developing countries in need of fiscal resources to provide essential public services.
In July 2013, within the framework of OECD (Organization for Economic Cooperation and Development), at the request of G20 countries, the BEPS Action Plan (Base Erosion and Profit Shifting) was developed which identified 15 actions needed for palliating such problematic. Action 13 of this plan includes the Country-by-Country reporting (CbC). It requires that multinational enterprises that have consolidated incomes over 750,000,000 Euros annually report in each jurisdiction where they operate disaggregated information regarding total income, pretax earnings, income tax paid, number of employees, accumulated profits and tangible assets, with the objective of limiting the erosion of the tax base through transfer pricing.
Beyond these specific actions, it is worth mentioning that OECD represents the interests of its member countries, which are the beneficiaries of the opacity of the international architecture. The BEPS action plan does not solve the essential mistakes of the system, such as the notion of “separate entity,” an arm’s length criterion that allows related entities from the same economic group that share a community of interests to operate as if they were independent entities, what enables the use of abusive fiscal-planning schemes, nothing other than tax avoidance.
Thanks to expert advice, multinational enterprises use multiple techniques to erode tax base in medium-size taxation countries such as Argentina. Current architecture of international tax and financial system enables multinational groups to locate companies and different legal structures and instruments in tax havens, what allows for minimizing global tax results. Moreover, they use transfer pricing (intra-group prices) to arbitrarily transfer incomes to tax havens, through the manipulation of these prices, or, directly, through the creation of fictitious services, intangibles (trademarks, rights, etc.), indebtedness, among others. They exploit treaties to avoid double taxation and profit from loopholes that exist between different national legal systems that, in some cases, allow the double no taxation.
A recent OECD report “Corporate Tax Statistics SECOND EDITION,” which analyzes the aggregate information from “Country-by-Country Reports” of almost 4,000 groups of multinational companies provides new data on international tax avoidance and tax havens.
OECD exposes that there is a dealignment between the place where earnings are reported and where economic activity takes place, as multinational companies inform a relatively high participation in profits from certain “investment hubs”—a subtle way for naming tax havens—that does not match the participation of employees and tangible assets.
The so-called “investment hubs” referred by OECD are jurisdictions with a total level of direct foreign investment (DFI) above 150% of their GDP, Bahamas, Barbados, Bermuda, British Virgin Islands, Ca
iman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong, China, Hungry, Ireland, Isla de Man, Jersey, Liberia, Luxemburg, Malta, Marshall Islands, Mauritius, Mozambique, Netherlands, Singapore and Switzerland.
From data revealed by the Country-by-Country report, the OECD says that in the “investment hubs:”
- Multinationals inform a relatively high participation in the earnings of those countries
- Profits are disproportionate taking into account the number of employees
- Prevailing economic activity declared by entities based there is “holding shares and other equity instruments” what allows us to infer the abusive use of tax planning structures.
From our own analysis of the aggregated data of the Country-by-Country report published by OECD, we find that multinational companies whose controlling firms are outside of Argentina but have controlled entities in this country, had global earnings of around 86.8 billion dollars in fiscal year 2016, of which 15.8 billion were generated through transactions between related entities of the same economic group. That is, 18% of total gross revenues of these multinational groups are generated through intra-group operations. They represent more than double net profits before taxes for these groups, which were around 7.4 billion dollars.
Countries where the controlling firms of multinational groups with related firms in Argentina are located are Australia, Belgium, Chile, Denmark, France, Italy, Luxemburg, Mexico, United States, Bermuda, Brazil, China, India, South Africa. To mention some examples, in the case of groups whose controlling firms are located in Bermuda, 75% of total revenues were generated from transactions with related parts. Also, groups with controlling firms in United States obtained more than 25% of their total revenues through intra-group operations. It is not possible to know the disaggregated data for each economic group, as the information is presented aggregated and anonymously. Despite that, these preliminary data reveal the significant weight of operations within these multinational groups and, therefore, warn about the importance of controls over these operations and transfer prices between related entities of the same economic group in countries of the periphery, such as Argentina.
Thus, the reconstruction of the economy during and after the pandemic should not focus on reducing fiscal pressure over large enterprises to favor investments. On the contrary, it has been demonstrated with Argentina’s experience during the last years that policies favorable to large entrepreneurial groups do not carry the desired economic or social results. It is time to address the drastic problem of international tax avoidance and evasion of multinational companies, transnational economic groups, and wealthy people and with high incomes, giving way to an integral progressive tax reform that eliminates the loopholes that today enable international tax avoidance, taxing large companies and social strata with higher incomes more heavily, reallocating resources towards vulnerable sectors.
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