This new ActionAid report explores how developing countries collect much less corporate tax than they could as a result or corporate tax avoidance – revenue that could help to pay for public services and the fight against poverty.

The status quo in international corporate taxation is broken and archaic and current attempts to fix it are tinkering around the edges. We need a new approach: countries acting for themselves to boost their own corporate tax revenues, and in the long term a new global agreement to curb tax competition and tackle tax avoidance. This will benefit all countries, but especially developing countries, which currently lose out the most.

Corporate tax avoidance scandals around the world have underlined the extent to which some multinational companies have been able to slash their tax contributions, sometimes close to zero. Developing countries, where most of the world’s poorest people live, are particularly vulnerable to corporate tax dodging; yet they badly need tax revenues to provide public services and are more dependent on corporate taxes than developed countries.

International corporate taxation is governed by a multitude of rules and treaties between countries, some of whose underlying principles date back nearly a hundred years. Some multinationals have become skilled at legally exploiting them – often in conjunction with tax breaks offered by governments – so as to pay less tax. Tax rules are also commonly shaped by lobbying from big business. In addition, the network of tax treaties tends to favour the residence countries of multinationals over the source countries where they invest, which include most developing countries.

The result of all these problems is that developing countries collect much less corporate tax than they otherwise could – revenue that could help to pay for public services and the fight against poverty. Foreign direct investment stock in low-income countries has more than doubled since the 1990s as a share of GDP but corporate tax revenues have not kept up. The United Nations Conference on Trade and Development (UNCTAD) has estimated that the amount of tax avoided in developing countries may be equal to nearly half of the amount of corporate income tax revenue collected.

Against a backdrop of public anger, governments have recognised that the status quo is deeply flawed, but the official response, as embodied in the Base Erosion and Profit Shifting (BEPS) Project run by the Organisation for Economic Cooperation and Development (OECD), falls far short of what is needed.

It is even possible that current efforts to crack down on tax dodging could have some success, yet could still fail to ensure that effective tax rates paid by multinationals are higher in the long run than they are at present, because of new tax cuts and tax breaks granted by governments around the world. Tax competition is a global problem: the proliferation of tax holidays and other incentives across developing countries has its counterpart in the spread of tax breaks, notably for intellectual property, in many higher-income OECD countries. The OECD cannot meaningfully address this problem, however, given that the tax-cutting practices of some of its member countries are a major cause of it.

Key messages

• International corporate taxation is broken and archaic and it harms all countries, especially developing countries.

• The Base Erosion and Profit Shifting (BEPS) Project will not solve tax-dodging and is not addressing the deeper problems associated with tax rules and treaties which harm poorer countries.

• Developing countries can’t wait for global agreement. Some have taken action to protect their corporate tax revenues. Others could do the same.

• In the long term, a new global deal is needed to curb tax competition between countries and tackle tax avoidance.