Intense debate is ongoing in the international community on the fiscal contribution of multinational enterprises (MNEs). The focus is predominantly on tax avoidance – notably in the G20/OECD project on Base Erosion and Profit Shifting (BEPS).

Policymakers and experts at work in the BEPS process have so far not quantified the value at stake for government revenues, nor have they established a baseline for the actual contribution of MNEs. We estimate the contribution of MNE foreign affiliates to government budgets in developing countries at $730 billion annually. This represents, on average, around 10% of total government revenues. Contributions through royalties on natural resources, tariffs, payroll taxes and social contributions, and other types of taxes and levies are twice as important as corporate income taxes.

Notwithstanding their overall role as contributors to government revenues, MNEs, like all firms, aim to minimize taxes. MNEs build their corporate structures through cross-border investment. They will do so in the most tax-efficient manner possible, within the constraints of their business and operational needs. The size and direction of foreign direct investment (FDI) flows are thus often influenced by MNE tax considerations, warranting an investment perspective on tax avoidance.

Such an investment perspective puts the spotlight on the role of offshore investment hubs as major players in global investment. Around one-third of cross-border corporate investment – FDI, plus investments through Special Purpose Entities (SPEs) – is routed through offshore hubs before reaching its destination as productive assets. (UNCTAD FDI data excludes SPE investments.)

The root-cause of the outsized role of offshore hubs in global corporate investments is tax planning, although other factors can play a supporting role.MNEs employ a wide range of tax avoidance levers, enabled by tax rate differentials between jurisdictions, legislative mismatches, and tax treaties. MNE tax planning involves complex corporate structures which often rely on entities in offshore hubs.

Tax avoidance practices by MNEs are a global issue relevant to all countries: the exposure to investments from offshore hubs is broadly similar for developing and developed countries.However, profit shifting out of developing countries can have a significant negative impact on their sustainable development prospects. Developing countries are often less equipped to deal with highly complex tax avoidance practices because of resource constraints or lack of technical expertise.

The leakage of development financing resources is significant. An estimated $100 billion of annual tax revenue losses for developing countries is related to inward investment stocks directly linked to offshore hubs. The estimated tax losses represent around one-third of corporate income taxes that would be due in the absence of profit shifting.

The aggregate figures disguise country-specific impacts. Tax avoidance practices by MNEs and international investors lead to basic issues of fairness in the distribution of tax revenues between jurisdictions that must be addressed. At a particular disadvantage are countries with limited tax collection capabilities, greater reliance on tax revenues from corporate investors, and growing exposure to offshore investments.

However, in tackling tax avoidance, policymakers should be aware that the potential value at stake – taking into account the total contribution of MNEs as well as the fiscal discounts actively provided by governments in the form of incentives to attract investment – is almost ten times larger than the revenue leakage. This is not considering the value at stake in terms of much needed new productive investments.

Taking action on tax avoidance will have effects on international investment that must be considered carefully. Ongoing anti-avoidance discussions in the international community pay limited attention to investment policy. On the one hand, the role of investment in building the corporate structures that enable tax avoidance is fundamental. Therefore, investment policy should form an integral part of any solution. On the other, any policy initiative tackling tax avoidance by international investors is likely to affect national and international investment policies.

A set of principles and guidelines for Coherent International Tax and Investment Policies may help realize the synergies between investment policy and initiatives to counter tax avoidance. Key objectives of the 10 guidelines we propose for discussion include: removal of aggressive tax planning opportunities as investment promotion levers; mitigation of the impact on investment of tax avoidance measures; recognition of shared responsibilities between investor host, home and conduit countries; acknowledgement of links between international investment and tax agreements; and understanding of the role of both investment and fiscal revenues in sustainable development.

» Read a summary of the new UNCTAD report by Alex Cobham: UNCTAD study on corporate tax in developing countries