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OECD Should Draw Line Between Good And Bad Tax Competition
By Naresh Minocha
Dec 29, 2017

Naresh Minocha, a veteran journalist, specializes in governance, polity, macro-economic issues, telecom, energy, chemicals and agriculture. He has been working as Consulting Editor with taxindiaonline.com since 2004. He writes and speaks with authority on any issue he picks up. In-depth research is his passion. In his over 37-years journalistic career, he has worked in different capacities for both Indian and foreign media organizations. He continues to enjoy endless, learning journey that he started during his university days in the seventies. He believes his quest to be a ‘Know-All’ is boundless.

It Also Needs To Craft Pact On Lobbying Regulation Law

"Lobbying Frenzy Begins on Tax Bill". "Lobbyists Swarm Congress to Protect Interests in GOP (grand old party/Republican party) Tax Bill". "The 4 companies that lobbied most on tax overhaul - and what they got for it". "We know more details about the final GOP tax bill - thanks to a lobbyist who sent it to a top Democratic senator".

Such Hard-hitting headlines have been splashed by the US media during November and December 2017 to highlight how legalized lobbying works for facilitating tax incentives and for blocking/delaying/diluting any potential adverse taxation.

The media coverage of Tax Reforms initiated by Trump Administration should spur debate over corporate lobbying for tax expenditures that goes across the world. Such practice also goes on in 22 countries that regulate lobbying and in other nations that don't.

The debate is necessary to turn the torchlight on prospects of the new US law, Tax Cuts and Jobs Act (TCJA), triggering similar tax reductions by other investment-attracting countries. The possibility of new wave of tax competition is on the horizon.

As put by Gavin Ekins,an economist at the US-based Tax Foundation, "The international corporate tax landscape changes as several of the countries with the highest rates have announced their intention to or are in the process of reducing their corporate tax rates".

Mr. Ekins continues: "The top three countries with the highest rates in the OECD-United States, France, and Belgium-have announced steep cuts in their corporate rates. If all these proposed corporate tax cuts are passed and fully phased in, then Germany will have the highest statutory corporate tax rate, with Japan a close second".

He adds: "The United States would end up in the middle of the pack, 13th highest tax of the 35 OECD countries…. This could change multinational corporations' decisions of where to locate new operations or expand existing operation in the coming years. It would guarantee that taxes would not be a barrier to companies investing in the U.S. economy and hiring U.S. workers".

Prima facie, TCJA's provisions don't come under the ambit of harmful tax practices listed under Action 5 of Base Erosion and Profit Shifting (BEPS) project of Organisation for Economic Co-operation and Development (OECD).

According to Mindy Herzfeld, Professor of Tax Practice, University of Florida, TCJA "take a uniquely U.S. approach to combating base erosion and profit shifting by U.S. multinationals".

In an article headlined 'News Analysis: The U.S. Congress Does BEPS One Better' at taxnotes.com, Herzfeld says: "The legislation proposes the most dramatic changes to U.S. international tax rules since those rules were first enacted. For the most part, the bills offer a solution that will give the United States - rather than the many other countries that thought they would profit from BEPS - the first cut at taxing the profits of both U.S. - headquartered companies, and foreign companies operating in the country".

OECD has not yet indicated its response to emerging tax competition among its member countries. It ought to indicate whether the competition would trigger steep tax cuts in non-OECD countries.

To respect its own inclusive agenda, OECD should explain what impact emerging competition would have on BEPS. In any case, OECD should draw a line between healthy and harmful tax competition. It should add Action 16 to BEPS project, specifying minimum tax rates on incomes to promote fair tax competition.

It is here pertinent to remind OECD about what it wrote on this issue in its 1998 report titled 'Harmful Tax Competition, An Emerging Global Issue'.

It stated: "Tax competition and the interaction of tax systems can have effects that some countries may view as negative or harmful but others may not. For example, one country may view investment incentives as a policy instrument to stimulate new investment, while another may view investment incentives as diverting real investment from one country to another".

Tax competition, in the long run, neither benefits the country offering tax breaks nor the ones that join the race later. Tax cuts are simply transfer of resources from one segment of economy to another. The grant of corporate tax exemption, for instance, to bullet train company might lead to reduction in government expenditure on social infrastructure. After all, revenue expenditure by government is funded by tax and non-tax revenue it collects from different entities.

As put by the Tax Justice Network, "Tax cuts for corporations provide subsidies to them, at the expense of another essential wealth-generating mechanism: public spending on roads or courts or education, and so on. So it is not obvious how corporate tax cuts make any country any more 'competitive' – whatever 'competitive' may mean".

Each Government should present an exhaustive, annual report to its citizens on tax expenditures, explaining the rationale for giving tax incentives to some tax-payers including corporate and their impact on stakeholders left high and dry.

This is a job that must be taken up on high priority basis both at G20 and OECD. Many governments either don't disclose or make minimum disclosure on tax expenditures as part of annual budget documents. OECD/G20 should unveil a template for disclosure of tax revenue forgone for benefit of all governments.

Consider now the subject of registering and regulating lobbying. It is essential to minimize corruption and restrain the ubiquitous corporate hand in drafting of business regulations.

Should tax dodgers and their advisors craft tax policy? Should the car industry shape emissions regulation? Should big polluters be involved in climate policy?

Corporate Europe Observatory (CEO), a non-profit advocacy group, has raised such ticklish issues in its report captioned 'Lobby Planet: The Corporate Europe Observatory guide to the murky world of EU lobbying'.

Released in July 2017, Lobby Planet has identified all categories of lobbyist ranging from think tanks to NGOs. It says: "Think tanks can also play an important role in the ideological construction of political agendas that serve their corporate backers, e.g. the lowering of corporate tax rates, or cuts on social spending".

Very few countries have enacted lobbying regulation laws because the ruling political party and the bureaucrats are dead against the proposed law that turns torchlight on their dubious dealings.

The US perhaps pioneered in this realm by enacting Federal Regulation of Lobbying Act of 1946. This was later found to be ineffective and thus replaced by the Lobbying Disclosure Act of 1995 (LDA).

LDA mandates lobbyists to file quarterly lobbying disclosure reports and semiannual reports on certain political contributions.

Though LDA is considered one of the best lobbying governance laws, it has also attracted criticism from certain sections of the society. It needs to be tweaked like similar laws of other countries, keeping in view experience gained from their implementation.

It is here apt to bring in Transparency International's (TI's) report titled "International Standards for Lobbying Regulation" released in 2015. It specifies 38 standards as "best practice from existing lobby regulations and also reference various existing international standards on the matter".

The Standards are meant to help governments that are open to the idea of enacting their respective lobbying regulation law.

According to TI report, "the purpose of lobbying regulation is to ensure transparency of the impact of lobbying on the decision-making process, as well as accountability of decision-makers for policies and legislation enacted. Lobby regulation should aim to ensure a level playing field for all actors to participate in the decision-making process on an equal footing, and there should be specific mechanisms in place to prevent potential conflicts of interest that may arise from attempts to influence the decision-making process".

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