Ensuring Fair Share: Financing Urban Services & Investment
Focus on financing urban services and infrastructure to support development, emphasizing the importance of fair contributions from multinational corporations through appropriate taxation methods. Address constraints in traditional funding sources and the necessity of enforcing tax payments by corporations for sustainable urban development in developing countries.
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Financing Urban Services and Investment: Need to Ensure a Fair Share from Multinational Corporations M. Govinda Rao Member, Independent Commission for the reform of International Corporate Taxation
Presentation Scheme Urban areas: Engines of Development. Critical role of urban services and infrastructure in development. Critical role in developing countries. Who should pay for urban services and infrastructure? Theory Traditional sources of financing urban services and infrastructure: user charges, property taxes, developmental charges. Constraints in generating required resources from traditional sources; Free riding by multinationals: Base erosion and profit shifting. Use if urban infrastructure for business development without paying taxes. ICRICT Recommendations to enforce tax payment by multinationals
Urban Areas: Engines of Development Three important reasons for focusing on urban finance: Innovation -key to prosperity; most innovations occur in large cities - interaction and exchange of ideas. Cities provide a critical mass to support high degree of division of labour, knowledge, business services, infrastructure, institutions and media. Globally competitive cities should provide a wide range of services to attract human capital: transportation, water, sewers garbage collection and disposal, police, fire protection, parks, recreation and culture, affordable housing and social assistance. All these require significant resources: Raising resources to finance these urban services holds the key to making urban centres a leading edge of economic dynamism. Most developing countries suffer from acute infrastructure and services deficit in urban areas.
Principles of Local Finance Revenue Assignment According to comparative advantage: Broad based taxes with the Centre; provision of Services at Local level. Transfers are inevitable but it is important to link revenue expenditure decisions at the margin. This requires assignment of independent revenue sources. Local taxes should satisfy the criteria of: Sufficiently productive and buoyant; Put the burden on the beneficiaries. Least distorting: Should mainly tax immobile bases. Should not create impediments for the smooth flow of commodities and people. Visible for accountability.
Inadequacy of Traditional Sources Traditional sources of financing urban services are user charges, property taxes. Urban infrastructure is financed through developmental charges and municipal bonds. The levy of property taxes un developing countries is abysmal. Difficulties in assessing market values. Municipal bond markets undeveloped. Transfers are inadequate as the tax/GDP ratios are low. Free-riding by multinational corporations. Reduce their payment for services, property taxes and BEPS. While these corporations use public services intensively to make large profits, they do not make commensurate payments in terms of user charges, property taxes and even the income taxes by creating branches in low tax jurisdictions and evading the tax.
Evasion and Avoidance of Taxes by Multinationals Tax evasion and wilful avoidance by multinational is a matter of concern in DCs. Robs them off critical resources. Tax avoidance is done by creating a web of complex subsidiaries located in tax havens by: Artificially allocating profits taking advantage of tax treaties; Manipulating prices in related party transactions; Intangibles- (goodwill, brand recognition, intellectual property right, patents etc) difficult to apply TP rules. Loans and interest payments.
Examples of Base Erosion UN Public Accounts Committee, 2011: Starbucks - 8.6 million since 1998 Amazon - 1.8 million in 207 million 1%. Google - $ 18 billion in revenues paid $.16 million during 2006-11. US Senate Committee: Microsoft avoided U. S Corporate tax on 47% of its US sales transferring intellectual property rights to Puerto Rico. Similar findings on Hewlett Packard, Apple and Caterpillar India- Corporation tax paid by multinationals were much lower than domestic companies. Vodafone case. Flipcart and other e-commerce companies. In the Southeast Asian region Singapore and Hong Kong are low tax jurisdictions
Measures to Tackle Base Erosion G-20: BEWPS programme 15 point recommendation relating to harmonizing the tax systems to avoid competition, international cooperation, information exchange etc. Many developing countries feel that the measures should go beyond. Initiative should be more inclusive. Coalition of Civil Society Organizations for tax justice - ActionAid, Alliance-Sud, CCFD-Terre Solidaire, Christian Aid, the Council for Global Unions, the Global Alliance for Tax Justice, Oxfam, Public Services International, Tax Justice Network and the World Council of Churches has appointed ICRICT which has important recommendations. 34 recommendations: http://www.icrict.org/declaration/
ICRICT Recommendations The multinationals to be taxed as a single unit. Model bilateral and multilateral agreement to apportion revenues and costs attributable to each subsidiary, even when they are taxed as unified entities; Ownership based on objective factors such as sales or employment to attribute intellectual property revenues. Avoid race to the bottom; declare tax preferences transparently. Strengthen administration and enforcement and make abusive tax practices a criminal offence. Evolve a model withholding system Force multinationals too file country by country reports on the businesses and advance pricing agreements greater transparency. Reform tax treaties to avoid restrictions on tax withholding, measures to prevent double non-taxation, and include general anti avoidance rules the model tax treaties.
Concluding Remarks Abusive tax practices is a matter of great concern for developing countries. Technological advances and emergence of e-commerce has posed severe challenges to tax administration. Developing countries are handicapped with poor tax administration and can not match the multinationals. Collective action need of the hour. Upgrade UN Committee of Experts into an international commission to oversee compliance We need a World Tax Authority.
