Tax Co-operation: A Primer

The modern world is globalized. This means that free movement of goods, services, people as well as capital is allowed across the globe. This has important implications for governments. A globalized system means that tax systems can no longer work in a vacuum. The tax systems are continuously interacting with other tax systems, whether the governments like it or not. The relationship between the tax systems can be one of competition or one of co-operation.

In the previous couple of articles, we have discussed about tax competition, its benefits, and drawbacks. At the present moment, tax competition is the most prevalent system in the world. However, many organizations are trying hard to bring about tax co-operation as well. In this article, we will have a look at the other alternative i.e., tax co-operation.

What is Tax Co-operation?

Many large and influential countries of the world are fed up, losing tax revenues to developing nations who are willing to offer multinationals a better deal. This is the reason they are trying to co-operate amongst one another and form a group of countries. The basic premise here is that multinational corporations have more bargaining power when they deal with one single country. However, if nations bargain collectively as a block, then they can force multinationals into a truce. Some of the salient features of tax co-operation have been written below.

• Setting of Minimum Tax Rates: European countries like Germany and France are actively trying to bring about tax co-operation. They realize that they cannot completely hand over their autonomy. Each country wants some flexibility when it comes to taxing its people. Hence, instead of fixing one common rate, the countries are proposing a minimum rate of taxation. The minimum rate will ensure that all countries tax within the same range and that competition cannot significantly undercut other countries.

• Market Entry: These countries are fully aware of the fact that just like the competition, co-operation cannot work until all countries start taking part. However, they know that they have some of the largest markets in the world. Hence, they are planning to use this bargaining power to enforce co-operation in other countries. If any country does not agree with the tax co-operation rules, then the companies from that country will be denied entry into markets. In this way, the co-operations itself will force errant nations to co-operate with the others.

• Assistance in Collecting Tax Debt: The idea is that countries should act as one single entity. Hence, if a company owes tax debt in one nation, the government of another nation should help in realizing that tax debt. This can be done by seizing the property of the company and then paying the creditor government to which money is owed.

The stated benefit of tax co-operation is that it will put an end to all the non-productive activities which companies have to undertake in order to evade tax. There will be no need to hire expensive accounting and legal firms in order to find loopholes in tax systems. Also, governments will be able to better plan their expenditures since their revenues will be somewhat stable.

However, tax co-operation also has many disadvantages, some of which have been listed below:

Information Sharing: The governments of the world are simultaneously moving towards tax co-operation and privacy laws. Tax co-operation is a basic infringement on privacy laws. This is because it depends upon the government extensively sharing information with other countries with or without the consent of the corporation involved.

Equitable Share: Proponents of tax co-operation state that nearly 50% of the global trade nowadays happens between related companies. Hence, multinationals are able to evade taxes by using transfer pricing. The proposal is that going forward, all the legal entities owned by a multinational should be taxed as one single group. After the taxes are collected, they should be shared between participating countries. The problem is that it is impossible to determine the proportion in which participating countries should share the revenue. Regardless of which parameter is chosen, some countries will always believe that they are receiving a smaller share.

Cartelization: Tax co-operation seems like a euphemism for a tax cartel. Just like cartels, the intention of these governments is to gain monopoly power over other economic entities. Once they do so, they will have no incentive to be efficient or prudent. European governments are already known for wasteful expenditure. Tax co-operation will only exacerbate the problem instead of solving it.

Loss of Autonomy: Lastly, the idea of tax co-operation only sounds good until the external environment is conducive. Once a recession hits, every government will be on its own. In such cases, the incentive to break away from the cartel will be very high. Hence, the idea of tax co-operation relies on the collective action of many parties with varied interests. It is unlikely that such a system would sustain over the long run.

The bottom line is that tax co-operation is still a concept. Countries have not been able to implement it since it seems to be far-fetched. Competition is the natural state between multiple parties. There are very few examples of long-standing multilateral examples in the world.