International tax bureaucrats at the Organization of Economic Cooperation and Development (OECD) and elsewhere have waged a decades-long campaign to promote a one-size-fits-all approach to tax policy. They unambiguously favor larger and more intrusive government at the expense of individual economic freedom and privacy. President Donald Trump’s willingness to shake up international status quo opens the door for the U.S. to oppose all OECD-led efforts unless they are aimed at reducing the size and scope of government.
Once hailed for its efforts to liberalize the global economy, the OECD has been hijacked by pro-tax bureaucrats who use the OECD platform to advocate for higher and more intrusive forms of taxation. The OECD’s Centre for Tax Policy and Administration, in particular, has most recently focused on a multi-year initiative to promote its “Base Erosion and Profit Shifting” (BEPS) project, which is little more than the international tax regulators’ most recent attempt to increase taxes on multinational businesses – many of them American-based.
The BEPS project aims to centralize and harmonize global tax rules with the goal of increasing effective tax rates on international firms by restricting their ability to do tax planning. The project was born out of a renewed concern among some tax collectors that imperfect and at times mismatched international tax systems might allow some corporate profits to go untaxed.
The sometimes porous tax systems around the world, however, have fostered international pressures that act as a restraint on ever-higher taxes on business. If one country’s tax rates are too high, a company can more easily protect its shareholders and customers by finding another country with lower tax rates or more favorable tax rules. Decades of research and the recent reduction of the U.S. corporate tax rate show that competitive pressures among countries’ tax policies and procedures have served as a stimulus for economic growth and global investment. The benefits of these competitive pressures, however, are undermined by efforts (such as BEPS) to crack down on tax planning.
New taxes: The bitter fruit of the BEPS project
Although the world is not in danger of full implementation of the OECD’s BEPS project anytime soon, the real-time impact of BEPS has actually been worse than if it had been fully implemented. The OECD’s work serves as thought leadership; it gives cover to tax administrators around the world to propose and implement new, overly intrusive, and extraterritorial “fixes” to the supposed problem of tax planning that is more often than not legal.
One prominent outgrowth of the BEPS project is an interim digital-transactions tax proposed by the European Commission. Aimed at the same perceived problem as the BEPS project, the new digital tax would be a 3 percent levy on revenues from online advertising, sale of user data, and facilitated user interactions. The proposal is nothing more than a poorly disguised attempt to extract additional revenue from large U.S. firms, notwithstanding the negligible presence they may have in any given country.
Lacking global buy-in on a BEPS strategy, the European Commission is proposing a go-it-alone strategy. The new digital tax, however, is given legitimacy by and builds upon the work completed through the BEPS project.
More intrusive reporting
During the Obama Administration, the United States declined to sign the Multilateral Convention that would have implemented the BEPS project in the U.S., but the Treasury Department did promulgate regulations to comply with new Country-by-Country (CbC) reporting, a recommendation of the BEPS project.
Country-by-country reporting is a new international system to implement the centralization and automatic exchange of country-specific taxpayer information with sovereign country tax jurisdictions all over the world. The treasure-trove of confidential taxpayer information on multinational businesses provided by the United States has furnished to potentially unfriendly, but revenue-hungry, states the information necessary to raise taxes unilaterally on American companies.
Concerns in the United States over the potential for abuse of this new, granular source of confidential information is so great that American defense contractor firms were recently awarded an exemption by Treasury from the full reporting requirement. The rest of the private sector, though, is still vulnerable to the threat that their trade secrets and proprietary business structures could be used for purposes other than tax compliance.
In its fervent pursuit of the elimination of tax planning, the OECD may also be inadvertently opening the door to global double taxation. The information included in the CbC reports could serve as grounds for a country to implement new taxes, along the lines of the digital transactions tax. Ironically, curbing double taxation was one of the OECD’s most important and beneficial early international tax contributions.
Even more intrusive than the CbC rules is the OECD’s new Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The Protocol is one element of a new and complicated international tax information-sharing regime devised by the OECD. It would mandate that the U.S. Internal Revenue Service automatically share bulk taxpayer information with governments worldwide, many of which (e.g. China, Russia and Nigeria) are corrupt or hostile to the U.S. and other Western countries.
Fortunately, as in the case of the full BEPS treaty, the U.S. has not fully implemented the Protocol. Automatic bulk exchanges of sensitive taxpayer information with other countries will largely end financial privacy and would lead to increased identity theft, industrial espionage, and political suppression of opposing views. Tax administrators claim that the information is secured and only available to vetted parties, but the IRS is largely unable to secure their own domestic electronic systems, let alone vet and monitor those of every other country that is party to the Protocol.
Together with other reporting requirements such as the CbC, the already-voluminous compliance costs imposed on financial institutions would only increase under the Protocol.
What can be done
President Donald Trump should continue to shake up the international status quo as he did at the recent G-7 meeting in Canada, where he declined to sign a joint Communiqué with the other country’s leaders. Admittedly, the clash at the G-7 over the shape of future trade relations among G-7 and EU nations is troubling. When it comes to tax policy, however, the president was well-advised to continue his disruptive tactics and oppose the G-7 Communiqué’s support of “international efforts to deliver fair, progressive, effective and efficient tax systems.”
Such international efforts may seem innocuous, but they are quite the opposite. The G-7, like the OECD and other international bureaucracies, promotes initiatives that systematically undermine both institutional diversity and national tax systems that promote privacy and economic freedom. Organizations such as the G-7 and OECD often wax eloquent on the virtues of freedom, democracy, and the rule of law – all valuable and worthy goals – but then quickly pivot to policies that are directly at odds with these universal goals. The actual policy work coming out of the OECD promotes the implementation of international standards and efforts to address base erosion and profit shifting.
To date, fortunately, the U.S. has largely resisted the constant push by the OECD to increase worldwide tax revenue. However, the American taxpayer continues to foot the bill for a large portion of the OECD research. Although it is only one of 34 member states, the U.S. provides more than 20 percent of the OECD’s budget. As the largest funder of its research, the U.S. should direct the OECD to turn its focus towards a more diverse set of policy goals such as ways to streamline and shrink the size of government and lower taxes.
By its aggressive, persistent, and lop-sided pro-taxation advocacy, global bureaucracies such as the OECD have demonstrated beyond the shadow of a doubt that they have disconnected themselves from the original goals of that organization, which was established to execute the Marshall Plan after World War II.
These rogue international bureaucracies have been emboldened by a few member states to pursue a high-tax European centric agenda that continually undermines U.S. policy objectives. Past U.S. administrations have been either complicit in the pro-tax research agendas or reluctant to disrupt the existing state of affairs. The European Commission’s digital tax and the expanded information sharing are vivid examples of these anti-American policies that are funded to a significant degree by U.S. taxpayers.
In the absence of a new research agenda and tax policy focus, the U.S. delegation to the OECD should continue to shake up the international landscape. It should announce that the United States will block any new U.S. voluntary contributions that could be used to fund OECD tax work. The Trump Administration’s Department of Treasury should also take the necessary steps to rescind the country-by-country regulations and remove the U.S. as a signatory to the Protocol.
To follow up on the momentum from the enactment of historic and positive tax reform in 2017, the U.S. should also continue to lean into the strategy of making businesses want to grow and produce in America. The new, lower corporate tax rate and other business reforms, such as “expensing,” have combined to make the U.S. one of the most attractive new investment locations in the world.
The U.S. could lead the international community by repealing domestic examples of intrusive and burdensome international tax laws. Congress could start by repealing the Foreign Account Tax Compliance Act (FATCA), which was signed into law in 2010 and is intended to make it harder for Americans to keep money overseas and out of the reach of the IRS. The law requires that foreign financial institutions to identify and report to the United States Government most types of transactions for all American clients, a requirement that creates an intrusive and burdensome system that likely does not actually raise any net revenue.
The OECD’s base erosion project and the overreaching goals of globally harmonized tax policy would be a step backwards for America, reducing the attractiveness of the U.S. to investors. Rather than attracting commerce with business-friendly policies, OECD policy solutions such as BEPS create new barriers, making it more difficult for businesses and incentivizing them to leave the U.S. and do business elsewhere.
President Trump must continue to make it clear to the world that America does not support the OECD’s or international tax bureaucracy’s goal of raising business taxes. The outgrowths from decades of the OECD’s international tax work have only served to protect and give cover to high tax European welfare states. The U.S. must send a strong message in support of less intrusive governments that protect individual economic freedom and privacy.
Adam N. Michel is Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies, at The Heritage Foundation. James M. Roberts is Research Fellow for Economic Freedom and Growth in the Center for International Trade and Economics, of the Shelby and Cullom Davis Institute for National Security and Foreign Policy, at The Heritage Foundation.