‘Spillover analysis’ as a frame of reference for tax and development policy

Last year, when Parliament’s International Development Committee was conducting an inquiry into tax and development, ActionAid (where I worked) was calling on the government to assess the impact of changes to the UK’s Controlled Foreign Companies (CFC) rules on developing countries. At the time, we were citing a report from the IMF, World Bank, OECD and UN to the G-20 [pdf], which recommended that:

It would be appropriate for G-20 countries to undertake “spillover analyses” of any proposed changes to their tax systems that may have a significant impact on the fiscal circumstances of developing countries…in moving, for instance, from residence to territorial systems.

The term ‘spillover’ is hardly new, appearing in the OECD’s famous 1998 Harmful Tax Competition report [pdf], which notes a concern that “countries may be forced by spillover effects to modify their tax bases, even though a more desirable result could have been achieved through intensifying international co-operation.”

When ActionAid raised the spectre of spillover analysis, the British government was adamant that it would be a useless exercise. But that didn’t stop the International Development Committee recommending that,

there should be an administrative or legislative requirement for the government to assess new primary and secondary UK tax legislation against its likely impact on poverty reduction and revenue-raising in developing countries, and to publish that assessment alongside the draft legislation

Since then, the Netherlands has decided to review its tax treaties with developing countries in exactly this light. And a few other publications lead me to wonder if the tide is turning against the UK government’s position.

The OECD’s BEPS action plan, for example, echoes precisely the argument we made at ActionAid, when it notes that:

While CFC rules in principle lead to inclusions in the residence country of the ultimate parent, they also have positive spillover effects in source countries because taxpayers have no (or much less of an) incentive to shift profits into a third, low-tax jurisdiction.

A recent IMF paper [pdf], which sets out a workplan on international tax issues, goes further still:

The work plan is focused on macro-relevant cross-country spillovers from national tax design and practices. The issues of tax avoidance by multinationals and evasion by individuals that are the focus of immediate concerns and initiatives are important instances of such spillovers. But there are many others too, and issues would arise even in the absence of compliance problems: for instance, the current trend among advanced countries away from residence-based taxation of active business income arising abroad and toward territorial taxation can have powerful spillover effects, including for developing countries.

I think the IMF’s thinking builds on a working paper from 2006 [pdf], which explores the implications were the US to move from a worldwide to a territorial system. It asks four questions:

(i) Will the territorial system change the level and/or location of U.S. FDI?

(ii) Will the territorial system encourage other countries to more aggressively pursue tax competition (i.e., lower rates or increase tax concessions) to attract U.S. FDI?

(iii) Will other countries follow the United States lead and move to a territorial system?

(iv) Will there be an impact on the tax revenues of other countries?

Finally for now, the UK’s Liberal Democrat party seems to have adopted the spillover policy recommended by the International Development Committee (which it chairs). A policy paper [pdf] for the party’s autumn conference last week says that it “would assess all new primary and secondary UK tax legislation against its likely impact on poverty reduction and revenue-raising in developing countries.”

With such a range of voices arguing for this, I’m hopeful that it will become more widely adopted. After all, it says nothing about the content of tax policy, just about the due diligence that should be done when it’s made.

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