UNITED Nations Conference on Trade and Development (UNCTAD) has proposed that tax avoidance especially by multinational enterprises (MNEs) should be tackled without hurting foreign direct investment (FDI).
In its World Investment Report 2015 titled ‘Reforming International Investment Governance' released last week, UNCTAD says: “action must be taken to tackle tax avoidance, carefully considering the effects on international investment.”
The Report notes that tax havens and special purpose entities in other countries collectively referred to as offshore investment hubs (OIHs) play a systemic role in international investment flows. They are part of the global FDI financing infrastructure.
It suggests: “Any measures at the international level that might affect the investment facilitation function of these hubs, or key investment facilitation levers (such as tax treaties), must include an investment policy perspective.”
Observing that ongoing anti-avoidance discussions in the international community pay limited attention to investment policy, it says the role of investment in building the corporate structures that enable tax avoidance is fundamental. Therefore, investment policy should form an integral part of any solution to tax avoidance.
The Report points out that MNEs' tax avoidance practices cause substantial loss of government revenue in developing countries. It contends: “The basic issues of fairness in the distribution of tax revenues between jurisdictions that this implies must be addressed. At a particular disadvantage are countries with limited tax collection capabilities, greater reliance on tax revenues from corporate investors, and growing exposure to offshore investments.”
According to the report, tax avoidance practices are responsible for a significant leakage of development financing resources. An estimated $100 billion of annual tax revenue losses for developing countries is related to inward investment stocks directly linked to OIHs .
It says: “There is a clear relationship between the share of offshore-hub investment in host countries' inward FDI stock and the reported (taxable) rate of return on FDI. The more investment is routed through offshore hubs, the less taxable profits accrue. On average, across developing economies, every 10 percentage points of offshore investment is associated with a 1 percentage point lower rate of return. These averages disguise country-specific impacts.”
A set of guidelines for coherent international tax and investment policies may help realize the synergies between investment policy and initiatives to counter tax avoidance.
As put by the Report, “Key objectives include removing aggressive tax planning opportunities as investment promotion levers; considering the potential impact on investment of anti-avoidance measures; taking a partnership approach in recognition of shared responsibilities between host, home and conduit countries; managing the interaction between international investment and tax agreements; and strengthening the role of both investment and fiscal revenues in sustainable development as well as the capabilities of developing countries to address tax avoidance issues.”
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