Statement of
Brian Garst
Director of Policy and Communications
Center for Freedom and Prosperity
House Committee on Ways & Means
Hearing on the Global Tax Environment in 2016 and Implications for International Tax Reform
February 24, 2016
Chairman Brady, Ranking Member Levin, and Members of the Committee on Ways and Means, thank you for looking into these important issues.
My name is Brian Garst, and I am the Director of Policy and Communication for the Center for Freedom & Prosperity (CF&P). The primary mission of the Center for Freedom & Prosperity is to defend tax competition as an important principle that helps ensure a prosperous global economy.
The need for U.S. corporate tax reform is by now well established. Yet as members of Congress turn their attention toward building a more competitive and pro-growth tax code, international organizations are pushing in the other direction.
The OECD’s work on Base Erosion and Profit Shifting is merely the organization’s latest assault on U.S. interests. The failure of the U.S. to lead on the international stage has resulted in the interests of tax collectors being placed above those of taxpayers and economic growth.
To explain why BEPS poses a greater threat to U.S. interests than even many of its opponents realize, I have included an abridged version of my paper, “Making Sense of BEPS: The Latest OECD Assault on Tax Competition,” as well as a related coalition letter from representatives of 22 free-market and taxpayer protection organizations.
BEPS Has Tax Competition in the Crosshairs
Brian Garst, Center for Freedom and Prosperity
Originally published October 2015 by Offshore Investment
The OECD’s work on Base Erosion and Profit shifting is completing after what can only be described as an extremely rushed process by global policy standards. In an effort to understand the broader implications of the project and what it means for the future of international taxation, I authored a study published June 2015 by the Center for Freedom and Prosperity titled, “Making Sense of BEPS: The Latest OECD Assault on Tax Competition.”1 The following is an abridged version of the paper:
Introduction
Under direction of the G20, the Organization for Economic Cooperation and Development (OECD) began two years ago a major initiative on “base erosion and profit shifting” (BEPS). The project has garnered little interest from U.S. policymakers to date, yet its ever expanding scope and profound implications for the global economy should demand their attention.
In February 2013 the OECD released a report titled, “Addressing Base Erosion and Profit Shifting” (BEPS Report), declaring that, “Base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike.” The OECD followed up with a plan in July 2013, “Action Plan on Base Erosion and Profit Shifting” (Action Plan), that identified 15 specific areas to address.
Through the BEPS project, the OECD is continuing its war against tax competition. Its proposals would enable endless global fishing expeditions and provide cover for governments to choke the economy with new taxes.
The Threat to the Economy
The OECD and other supporters of the BEPS initiative argue that there are economic benefits to preventing legal tax avoidance techniques. Namely, they contend that activity undertaken in response to tax policy represents a market distortion. In the narrow sense this is accurate, but as a justification for the OECD’s current activities it falls short.
Typically ignored in the BEPS discussion are the broader implications of proposed reforms on the political economy. If all differences in tax policy were successfully minimized, to some extent it would indeed reduce profit-shifting aimed at suppressing tax burdens. So too would reducing taxes to zero, but policymakers have a variety of objectives to weigh and ought not elevate ending profit-shifting above all other national interests.
BEPS would lead to an overall higher tax environment as politicians freed from the pressures of global tax competition inevitably raise rates to levels last seen in the early 1980s, when reforms by Reagan and Thatcher sparked a global reduction in corporate tax rates that has continued to this day. Through tax competition, the average corporate tax rate of OECD nations declined from almost 50% in 1981 to 25% in 2015.
Taxes themselves distort the market by shifting resources away from market driven activities and toward politically driven activities, and higher rates, all else being equal, increase the effect of the distortion. Poorly designed tax systems – the global norm – introduce yet more distortions through the common practice of double taxing capital, which is of particular importance when discussing BEPS given that corporate taxes are often identified as the most destructive form of capital taxation, as even OECD affiliated economists have acknowledged.
Governments necessarily need taxes to fund essential functions, but ideally should seek to minimize the economic footprint of taxation as much as possible. Political incentives, however, often work in opposition of this goal. Politicians face pressure to demonstrate to constituents that they are performing and to please the interests that support their campaigns, and that in turn encourages taxes to rise above and beyond the level of optimum growth, or where new spending no longer provides net economic benefits.
Tax competition thus provides one of the main sources of push-back against the drive to spend and tax.
Tax collectors and finance ministers have inordinate say in the activities of the OECD, so it’s expected that the BEPS initiative would represent their views above all else. The Action Plan thus considers the benefits of tax competition to be the real problem, explaining that “there is a reduction of the overall tax paid by all parties involved as a whole.” The prospect of there being less money to be spent by politicians is perceived as a problem to be solved, rather than as a positive for the global economy.
The Threat to Privacy
Several BEPS action items raise serious privacy concerns. Proposed recommendations for transfer-pricing documentation and country-by-country reporting, for instance, feature broad reporting requirements that go far beyond what is required for purposes of immediate tax assessment.
Guidance for Action 13 recommends a three-tiered approach to transfer-pricing documents consisting of a master file, a local file, and a country-by-country (CbC) reports. Information contained in the local and master files are particularly vulnerable, since it would take a breach in only a single jurisdiction for it to be exposed. The OECD makes assurances for the confidentiality of these reports, but they are empty promises. Such government assurances of privacy protection are contradicted by experience and the long history of leaks of taxpayer information. In the United States alone tax data has frequently been exposed thanks to inadequate safeguards, or even released by officials to attack political opponents.
Even without malicious intent, governments are ill equipped to protect sensitive information from outside access. According to the U.S. Treasury Inspector General for Tax Administration, 1.6 million American taxpayers were victimized by identity theft in the first half of 2014, up from just 271,000 in 2010. Chinese hackers were blamed for a breach that exposed the data of four million current and former federal employees, and the massive new collection effort and reporting system being established to enforce the Foreign Account Tax Compliance Act has also been faulted for its insufficient privacy safeguards.
As poor as the United States has proven at protecting privacy, there are likely to be nations even more vulnerable. Through the master file and other reporting mechanisms, BEPS will demand of corporations propriety information and other sensitive data that they have every right to keep private and out of the hands of competitors. When it takes a breach of only a single national government to expose this information, there will no longer be such expectation of privacy.
Is BEPS a Serious Problem?
The OECD’s website describes BEPS as “tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.” The BEPS Report further claims that, “it may be difficult for any single country, acting alone, to fully address the issue.” Or as the website more succinctly describes, BEPS “is a global problem which requires global solutions.”
No significant evidence for these assertions is provided, however. The OECD’s BEPS Report itself undercuts the argument that there is a pressing need for a global response when it acknowledges that “revenues from corporate income taxes as a share of GDP have increased over time.”
Academic research on the impact of BEPS is far less certain than the rhetoric of the G20 and the OECD. The strongest analysis yet to date comes from Dhammika Dharmapala, whose survey of the literature reports that recent studies tend to find lower levels of shifting than earlier works. It also challenged arguments that “point to the fraction of the income of MNCs that is reported in tax havens or to various similar measures as self-evidently demonstrating ipso facto the existence and large magnitude of BEPS.” Simply identifying money in other jurisdictions, even those with low tax rates, is not evidence of a BEPS problem. It should be expected to see more money being earned where tax policy is less hostile.
Part of the reason there exists little evidence of a significant global BEPS problem is that domestic policy solutions are already available to address legitimate areas of concern when they arise. More importantly, the best solution available for preventing base erosion is the adoption of a competitive tax code. Pro-growth tax policy that eschews double and worldwide taxation not only won’t cause capital flight, but will attract investment instead.
Broader Aims of the OECD
To fully understand the significance of the BEPS effort, it’s necessary to place the current agenda within the broader context of the OECD’s work in recent decades. In 1998 the OECD declared war on tax competition with a report entitled, “Harmful Tax Competition: An Emerging Global Issue.” Its authors worried that, among other things, tax competition “may hamper the application of progressive tax rates and the achievement of redistributive goals.”
The organization was eventually forced by political opposition to back away from explicit condemnations of all tax competition, but has not abandoned its views. Rather, it has adopted new tactics toward the same end. To make this point clear, the Action Plan favorably references Harmful Tax Competition as justification for its recommendations. It also repeats a popular but baseless theory among left-wing academics and politicians about tax competition – that it promotes a ‘race to the bottom.’
The ‘race to the bottom’ theory has claimed for decades that tax competition would force zero rates on mobile capital. It hasn’t happened. One review of common such claims finds: “there can be little doubt that history has proven wrong the prediction of a complete erosion of capital tax revenue. Comparative data on corporate and capital tax rates demonstrate that governments in all economies continue to tax mobile sources of capital, effective capital tax rates have not changed much compared with the mid-1980s, when tax competition was triggered by the 1986 US tax act, and tax systems are as varied as countries and political systems themselves, with no visible sign of converging.”
Nevertheless, the BEPS report notes: “In 1998, the OECD issued a report on harmful tax practices in part based on the recognition that a ‘race to the bottom’ would ultimately drive applicable tax rates on certain mobile sources of income to zero for all countries, whether or not this was the tax policy a country wished to pursue.” Reality, essentially, is an unwarranted intrusion on the desire of policymakers to act without consequence. The BEPS report goes on: “It was felt that collectively agreeing on a set of common rules may in fact help countries to make their sovereign tax policy choices.” Unless, that is, their sovereign choice involves something other than raising taxes.
Nations that opt for little to no taxes on capital are a problem for this quixotic theory of sovereignty – where the rest of the world must be brought to heel in order to ensure that politicians ought not have to consider the economic consequences of their policies – hence why the primary indicator for determining whether a nation is to be identified as “potentially harmful” is that it has “no or low effective tax rates.”
Other factors are said to be considered, but without clear indication of how they are to be weighted any calculation will be arbitrary and open to excessive emphasis on the “gateway criterion” that is a low tax rate. When a low-tax scourge is identified, the OECD benevolently provides that, “the relevant country will be given the opportunity to abolish the regime or remove the features that create the harmful effect.” To make perfectly clear that this is the sort of offer a nation cannot refuse, they warn: “Where this is not done, other countries may then decide to implement defensive measures to counter the effects of the harmful regime, while at the same time continuing to encourage the country applying the regime to modify or remove it.”
The OECD’s previous aggressions against low-tax jurisdictions in pursuit of its quest to abolish tax competition make clear just what “defensive measures” it has in mind, and how its members will go about trying to “encourage” compliance. In the years that followed release of Harmful Tax Competition, the OECD used threats of blacklists, peer pressure, and intimidation to cajole low-tax jurisdictions into adopting various policies presented under the auspices of increasing tax transparency and combating evasion. In practice the changes were intended to undermine the attractiveness of low-tax jurisdictions and protect high-tax nations from base erosion due to capital flight.
Of particular relevance for understanding the BEPS initiative is the pattern demonstrated by the OECD during the course of this campaign. After each recommendation was widely adopted – typically under duress in the case of low-tax jurisdictions – the OECD immediately pushed a new requirement that was more radical and invasive than the last.
The fact that the OECD is always ready with a new policy after one is implemented suggests either that the organization’s goal is not merely what is stated, or that it is horribly ineffective. In either case it should serve as a blow to its credibility and a reason to question its work on BEPS.
Conclusion
Were the OECD merely a research institution, its work could be dismissed simply as a bad idea that no nation need adopt. Unfortunately, Europe’s dominant welfare states use the OECD’s work as a benchmark when coercing other nations through use of political and economic leverage. For the low-tax jurisdictions, and now multinational businesses, caught in the OECD’s crosshairs, the ride truly never ends. The BEPS project is a continuation of the OECD’s well-documented effort to eliminate tax competition, and will likely follow the same pattern of consistently moving goalposts.
The BEPS project began at the behest of a tiny few, without open and public debate regarding the assumptions motivating the effort, its goals, or the most appropriate methods to achieve them. There is a lack of accountability, reflected in the activities of the BEPS initiative, that can only be rectified through real public debate and more direct political oversight.
END NOTES:
1. The full version is available at www.freedomandprosperity.org/2015/publications/making-sense-of-beps.
Coalition for Tax Competition
July 14, 2015
Dear Senators and Representatives:
The Organization for Economic Cooperation and Development (OECD) is rapidly working to rewrite global tax rules in the name of combating base erosion and profit shifting (BEPS). We the undersigned organizations are deeply concerned that this process lacks oversight and will result in onerous new reporting requirements and higher taxes on American businesses, and are urging Congress to speak up for U.S. interests by adding its voice to the process.
The OECD has a history of supporting higher tax burdens and larger government, and the BEPS project represents just the latest salvo in a long-running campaign by global bureaucrats to undermine tax competition and its restraining force on political greed.
Because the OECD is populated by tax collectors and finance ministers, new rules being drafted through the BEPS initiative are necessarily going to be skewed in their favor. Businesses are given only a token voice, while other interests are not considered at all. Consumers, employees, and everyone that benefits from global economic growth are not able to make their preferences known.
The inevitable prioritizing of tax collection over every other political or economic interest ensures that the result of the BEPS project will be economic pain. And based on the OECD’s own acknowledgement that corporate tax revenues have not declined in recent years, that pain will provide little to no real gain to national treasuries.
BEPS recommendations already released further show a troubling trend toward excessive and unnecessary demands on taxpayers to supply data not typically relevant to the collection of taxes. This includes proprietary information that is not the business of any government, and for which adequate privacy safeguards are not and likely cannot be provided.
The Treasury Department should not be the only voice representing U.S. interests during this critical process. We urge members of Congress to get involved before it is too late, and to protect American interests by ensuring that the voices of tax collectors are not allowed to speak for everyone.
Sincerely,
Andrew F. Quinlan, President
Center for Freedom & Prosperity
Grover Norquist, President
Americans for Tax Reform
Pete Sepp, President
National Taxpayers Union
Michael A. Needham, CEO
Heritage Action for America
Tom Schatz, President
Council for Citizens Against Government Waste
Seton Motley, President
Less Government
Wayne Brough, Chief Economist and Vice President of Research
FreedomWorks
J. Bradley Jansen, Director
Center for Financial Privacy and Human Rights
Phil Kerpen, President
American Commitment
David Williams, President
Taxpayers Protection Alliance
Bob Bauman, Chairman
Sovereign Society Freedom Alliance
Karen Kerrigan, President
Small Business & Entrepreneurship Council
Sabrina Schaeffer, Executive Director
Independent Women’s Forum
James L. Martin, Chairman
60 Plus Association
Heather Higgins, President
Independent Women’s Voice
George Landrith, President
Frontiers of Freedom
Lew Uhler, President
National Tax Limitation Committee
Terrence Scanlon, President
Capital Research Center
Tom Giovanetti, President
Institute for Policy Innovation
Andrew Langer, President
Institute for Liberty
Eli Lehrer, President
R Street Institute
Chuck Muth, President
Citizen Outreach
