Tax and development: Some essential reading on taxation of multinationals

If you need a better understanding of the controversy surrounding taxation of multinationals – and why the OECD is working on what one tax professional has called “a lifetime opportunity for governments to change the international tax landscape” – here is some essential reading.

Martin Hearson is a doctoral researcher at the London School of Economics and Political Science, focusing on the political economy of international taxation in developing countries. Working with the Norway-based U4 Anti-corruption Resource Centre, he set out to provide an “even-handed summary” of views on how tax-motivated illicit financial flows (IFFs) undermine efforts to help developing countries reduce their reliance on foreign aid.

The outcome is a 50-page guide for development practitioners, but the paper is likely to be very useful for “non-specialists” who may find – to quote the abstract – that “the complex discussion on taxation and IFFs is further complicated by the lack of clear definitions of relevant concepts, and by the often polarized nature of policy debates”.

Some tax professionals argue that the “aggressive tax planning” that is being addressed by the OECD’s action plan on “base erosion and profit shifting” is not technically “tax avoidance”. Such planning exploits gaps in the international tax system, and the only lasting solution is to change the law.

But for the purposes of the paper Martin has adopted (see 1.1) a broad definition of IFFs to incorporate “practices such as lobbying for tax incentives, transfer mispricing, trade mispricing, and exploiting tax treaties for tax avoidance”.

Martin’s paper is a timely, measured and informative contribution to the tax debate and it deserves wide circulation.