A new IMF staff paper criticising the global economic impact of tax avoidance identifies Ireland in the top ten of US outward foreign direct investment.
Corporate tax avoidance has a negative impact on all economies, particularly those of developing countries, the paper reports.
According to GDP-weighted averages, Ireland comes second to Bermuda as a conduit for the relocation of taxable income from alternative factors for US multinational enterprises.
Prepared by staff from the IMF’s Fiscal Affairs Department, the paper criticises tax avoidance practices, saying that identifying the source of income or the residence of companies complicate taxation procedure, as do disparities between global and domestic tax issues:
There is a distinction between worldwide tax systems, under which a country taxes the income of companies resident there wherever that income arises, but gives a credit for taxes paid abroad, and territorial systems, under which the residence country exempts business income of resident companies arising abroad—but, in practice, there is a spectrum between these extremes.
It warns that tax arrangements “that are felt to result in unfair allocation of the tax base” could, if not addressed, increasingly “undermine the coherence of the international system”.
The paper says that the spread of tax incentives in developing countries which undermine revenue to those countries “may to a large extent be a spillover reaction to policies pursued in other countries: a clear instance of tax competition”. Because developing countries typically derive a large proportion of their income from FDI, allowing tax breaks and incentives on such revenue is particularly harmful to their economies.
The staff paper suggests redefining ‘immovable property’ to cover mining and petroleum rights and then ensuring that the direct or indirect disposal of such property is taxable under domestic capital gains tax systems. “Such provisions would appropriately cover only significant changes of ownership (of, say, at least 10 percent), to avoid having to identify small transactions,” it adds.
It also calls for challenges surrounding the discovery of offshore transactions and tax collection to be addressed by ensuring that the relevant regulatory authority be advised of indirect ownership changes. This information should also be shared with the revenue authority.