Multinational corporations (MNCs) often declare profits in low-tax jurisdictions, maximising returns but depriving countries hosting their subsidiaries of much-needed revenue. Despite having production operations and employees in these countries, MNCs can report zero profits while declaring significant profits elsewhere.
This issue is particularly pressing for low-income nations. Encouragingly, the upcoming United Nations Framework Convention on International Tax seeks to address this by ensuring MNCs “pay taxes where they play,” meaning they would be taxed in the locations where they operate.
If implemented, these proposals could shift from the contentious “transfer pricing” system, where companies choose where to declare profits, to a fairer “unitary tax” system that treats MNCs as a single entity. This change would empower countries to better enforce their taxation rights, reducing instances of tax avoidance.
The current “race to the bottom” in corporate tax rates may also lessen, as the risk of profit shifting declines, leading to a fairer corporate tax landscape. A decade ago, the African Union/UN Commission on Illicit Financial Flows, led by Thabo Mbeki, noted that corporate tax abuse is among the largest illicit financial flows from Africa.
Research by the Tax Justice Network and Public Service International estimates that a shift to a unitary tax system could have generated an additional $300 to $500 billion in revenues worldwide between 2016 and 2022. While high-income countries would see a significant boost of $140 billion annually, lower middle-income and low-income countries could still greatly benefit, with potential annual increases of $61 billion and $4 billion, respectively.
For developing countries in the G77, the additional revenue could match their total debt to the IMF. European nations could gain an equivalent of over $13 billion, adjusted for inflation, which matches the Marshall Plan aid received post-World War II.
MNCs would benefit from simplified compliance under a unitary system, avoiding the complexities and costs associated with transfer pricing. The only “losers” would be tax havens reliant on profit shifting, as well as countries where MNCs report unreasonably large profits at low tax rates.
The proposed system aims to eliminate exploitation of tax rules, asserting that taxing rights should correlate with actual economic activity. It also necessitates reliable data from MNCs and tax authorities for transparency.
Moreover, the analysis highlights potential benefits for low-income countries in accurately accounting for natural resource wealth. It suggests that profits from natural resource extraction should not be included in the redistributable pool, thereby safeguarding existing claims and boosting revenues by up to 35%.
This drive for a unitary corporate tax system stems from the understanding that disconnecting taxing rights from actual economic activity allows profit shifting, highlighting the importance of robust national tax rights in an increasingly globalised economy.
Atieno Ndomo is a Social Policy Analyst with a focus on Political Economy.
