Last week, Christine Lagarde, managing director of the IMF, called for a new approach to international corporate taxation. Speaking at the Peterson Institute for International Economics in Washington at the launch of a new IMF policy paper, Lagrade used her platform to call for urgent action on corporate tax avoidance.

Three reasons for urgency:

Firstly, the ease with which large multinationals avoid taxes and the three decade long decline in corporate tax rates is undermining the fairness of the system.

Secondly, this trend disproportionately affects low-income countries by depriving them of much needed revenue to create higher economic growth and reduce poverty. The new IMF policy paper shows, for example, that non-OECD countries lose about $200 billion in revenue per year, or about 1.3 percent of GDP, due to companies shifting profits to low-tax locations.

Finally, current rules are quickly becoming outdated with the rise of new, digitally based, business models that are difficult to value and harder to tax. This is mainly due to a lack of physical presence caused by heavy reliance on intangible assets, such as software or patents.

All this has caused significant damage to public perceptions of the integrity of the tax system. The resulting pressure and outcry caused by those trends was directly acknowledged by Lagarde in her call for a new approach.

The role of the IMF

Lagarde believed the IMF has a role in helping countries craft a solution that offers stability and fully incorporates the interests of developing countries.

The new policy paper, Corporate Taxation in the Global Economy was published by the IMF two weeks ago. The paper analyzes various options in the context of three key criteria: better addressing profit-shifting and tax competition; overcoming the legal and administrative obstacles to reform; and ensuring full recognition of the interests of emerging and developing countries. The paper also gives a broad review of leading options, along with empirical analysis that can inform the critical discussions now underway.


Further reading

IMF Releases Policy Paper ’Corporate Taxation in the Global Economy’

Opening Remarks by Christine Lagarde on Corporate Taxation in the Global Economy at the Peterson Institute for International Economics

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