The Control of Multinational Enterprises:
A Challenge for Developing Tax Administrations
Andrea Lemgruber
Deputy Division Chief
Revenue Administration 2 Division
Fiscal Affairs Department
2015 CIAT Technical Conference, Rome, Italy
Outline
• A brief profile of MNEs
• The current debate on international taxation: what is not
working?
• BEPS and the collaborative effort to improve the
international tax framework
• Some administrative challenges to implement the BEPS
action plan
A Brief Profile of MNEs
A Brief Profile of MNEs
GDP for countries
Revenue for MNEs
(all in US trillion)
20
18
16
14
12
10
8
6
4
2
Sources: IMF and
www.statista.com
0
US
China
20 MNE
Japan
Germany
UK
A Brief Profile of MNEs
Top 100 Companies by Market Capitalization,
2015
Spain
2%
Japan
2%
Others
8%
Swiss
3%
Australian
3%
French
4%
German
6%
American
53%
British
8%
Chinese
11%
Source: PwC 2015
Global 100 companies
A Brief Profile of MNEs
A Brief Profile of MNEs
Out of companies over $100 billion in revenues…
Oil and
Gas
…
…
Natural Resources
Taxation in Developing
Countries
Source: McKinsey (2010)
An Illustration of the Role of US Multinational
Companies in the American Economy
1%
• share of the total number of US companies accounted for by US multinationals
19%
• share of the private sector work force employed by US multinationals
23%
• share of the US private sector GDP accounted for by US multinationals
25%
• share of total US private sector gross profits earned by US multinationals
37%
• multinational's share of total US goods imports
48%
• multinational's share of total US goods exports
74%
• share of the US private sector R&D spending made by US multinationals
90%
• share of US multinational's intermediate inputs purchased from other US-based firms
The current debate on international taxation
• Taxation at the forefront of the public debate
• Debate on taxation is NOT NEW…
• …and reflects interplay of various factors
– Business and technology: digital and PE; financial engineering and
equity/debt (interest deduction)
– Policy design: incentives schemes, 3,000 treaties, intangibles
– Administrative: limitations on EOI; weak procedures (e.g. sanctions,
dispute resolution); transparency
– Geo-political: promotion of international insertion of companies
The current debate on international taxation
Implications from aggressive international tax avoidance:
•
•
•
•
Reduces government revenues
Increases tax administration costs
Undermines perception of integrity (overall compliance)
Distorts location of investment
The current debate on international taxation
Some recent papers:
• CIT losses not negligible and seem more relevant for
developing countries
IMF (2015): estimated losses due to BEPS around 0.9% GDP
(OECD economies) and 1.2% GDP (developing countries)
• Current international framework is weak and outdated
IMF (2013 and 2014)
The current debate on international taxation
International framework is weak and outdated
Digital; global and
virtual presence;
high on
intellectual
property
“Bricks and
Mortar”; physical
presence; low
intangibles
Apple Case
Established
in 1977
#33 in
2009
#1 in 2015
Market Cap
What means “being global”?
Not only selling
globally…
…but also
producing
globally.
The current debate on international taxation
A picture summarizing the public discussion (and perception) nowadays
BEPS Project and Collaborative Effort
• “Global Problems = Global Solutions”
• OECD/G-20 BEPS project
– 15 action plans
– Different levels of “bindingness”: minimum standards, common
approaches, guidance based on best practices
– Final phase before presentation to G20 leaders
• Welcome initiative to advance the international debate,
aiming at coordinated action
• Implementation: next phase…challenges
Challenges of Implementation
• Developing countries: heterogeneity; different capacity levels
• Relevant issues for developing countries:
– Who? Wider and deeper discussion on costs and benefits of implementing BEPS
agenda in developing countries
– How? Revisions will require changes in domestic law (CFC rules, hybrid
mismatches, country by country reports); cross-country consistency is a challenge
– What is (is not) included in the BEPS agenda? (e.g. managing expectations, public
debate)
– Monitoring? (E.g. peer review, associated costs, coordination across countries)
Challenge 1: Ensure the administration of international tax operations is
embedded in a coherent, sound, and wider policy/procedural design
The design of the tax system sets the base of good tax administration
• The internalization of BEPS agenda: requires coordination and political will
• BEPS agenda can only effectively work if the faulty design of current tax
systems is addressed, such as:
 Complexity arising from exceptional regimes (e.g. incentives for FDI attraction,
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, special rules for natural resources companies:
different payment rules, different rules for dispute resolution).
Challenge 2: Implement BEPS agenda in a sustainable way that is
supportive of foundational tax administration reforms
Fundamental administrative reforms is the building block for improved
overall tax administration, including the control of international operations
• Avoid the risk of implementing short-term solutions (e.g. outsourcing)
• BEPS should be part of a MT TA engagement that builds capacity:
 Recognize that the control of an MNE cannot be dissociated from the overall
control a tax administration is able to exercise over the universe of taxpayers
 Develop HR, infrastructure, and analytical capacity in tax administration (e.g. EOI
is as good as the quality of the information being exchanged, processing capacity,
and effective use of information)
 Build on and enhance tax administrations’ approaches to segmentation and risk
management
Distribution of Taxpayers by Size and International Exposure
(Illustrative)
International Exposure
Global
International
Domestic
Small
Medium
Size of Taxpayers
*Each dot represents 1% of the taxpaying population
Large
Revenue Distribution by Major Tax Categories in Low
Income Countries
7.00%
Tax revenue as a prcentage of GDP
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2004
2005
2006
Taxes on goods and services
2007
Social security
2008
2009
Taxes on international trade
2010
2011
Personal income tax
2012
2013
Corporate income tax
2014
Challenge 3: Initiate an inclusive discussion on specific issues and
circumstances faced by developing countries
• BEPS implementation will provide an excellent opportunity to:
 Discuss initiatives to help countries assess their overall tax systems
and formulate wider tax reform priorities (e.g. IMF/WB initiative)
 Discuss whether more objective and/or specific measures for
developing countries are needed (e.g. transfer pricing, natural resource
sector)
Challenge 4: Improve developing countries’ ownership and capacity to
manage reforms
• Tax authorities will need to interact with different stakeholders to
build political consensus:
 at the domestic front (e.g. lawmakers, judicial system,
business associations, MNEs, media)
 at the international level (e.g. TA providers, international and
regional organizations, other administrations, donors).
• However, capacity and resource constraints to manage reforms
should not be underestimated.
Conclusions
• Relevance of BEPS initiative
• Next step: effective and inclusive implementation is critical
for success
– Current misaligned incentives will not change overnight
– Changes require broader political consensus
– Improving capacity of tax administrations in developing countries
requires time, resources, coordinated efforts
– Identification/clarification of benefits and costs to developing countries
Controlling MNEs is part of the overall compliance control exercised by a
tax administration
Controlling MNEs is controlling both its international and domestic
transactions
A successful implementation will depend on:
Cooperation, Inclusiveness, and Coordination
Thank you
alemgruber@imf.org