The road to hell
Actions taken with good intentions sometimes have the effect of backfiring disastrously. Politicians somehow have a knack of pulling off this feat more than most
In my last blog I mentioned how world economies are integrating, bringing into focus the treatment of corporate taxation; especially following the advent of the digital economy.
Multinational enterprises have taken lawful advantage of the opportunities to minimise their tax burden by structuring their business in jurisdictions where they are either more favourably taxed, or not taxed at all.
Last December the Organisation for Economic cooperation and development (OECD) released its annual report of revenue statistics which revealed a decline in average revenues from corporate income taxes, as a percentage of gross domestic product during the 2007-2014 period.
This prompted Pascal Saint-Amans, the OECD's director of the Centre for Tax Policy and Administration, to comment that 'the urgency of the efforts to ensure that corporations pay their fair share' has become apparent.
Mondel?z UK, Cadbury UK and Cadbury plc are owned by Mondel?z International, a multinational confectionary, food and beverage conglomerate based in America.
Mondel?z International did not pay a penny of UK corporation tax in 2014, even though sales of over £2m generated profits just shy of £150m. One sweet deal, literally, for Cadbury's.
More than a developed nation's game
The 'fair share' doctrine has not been exclusively embraced in the developed countries. In November last year, a second meeting of the Regional Network on Base Erosion and Profit Shifting (BEPS) was held in Costa Rica.
The meeting was organised by the OECD, the Inter-American Centre for Tax Administrations, the Inter-American Development Bank and Costa Rica's Ministry of Finance, which allowed 49 participants from 16 countries in Latin America and the Caribbean to be involved in the development of mechanisms in support of the BEPS project aimed at strengthening their tax systems.
Latin America's two biggest economies, Brazil (the larger of the two) and Mexico, have enthusiastically supported the BEPS initiative but, as we know, the road to hell is often paved with good intentions.
The OECD's Common Reporting Standard is all about transparency, an anathema for Latins, and is not diminished in any way under BEPS; an initiative which, in its purest form, has a three-tier approach to transfer pricing documentation comprising a master file, a local file and a country-by-country report.
Dilemma for Dilma
Economically, Mexico is surviving whereas Brazil is struggling and Dilma Rousseff, the country's president, could suffer a BEPS backlash from Brazilian businessmen. The UN Economic Commission for Latin America and the Caribbean (ECLAC) predicts a contraction of 2.8 per cent for Brazil's GDP in 2015 (which still isn't as bad as Venezuela's at 6.7 per cent) versus anticipated Mexican growth of 2.2 per cent.
The BEPS programme is, frankly, far from being among Brazil's top priorities in 2016. This is assuming that a rebellious congress, prompted by the business lobby, will even entertain a crackdown on corporate taxation. BEPS can also stand for Brazil's Economic and Political Stumble (!).
Joaquim Levy resigned as financial minister last December and has been replaced by Nelson Barbosa, the planning minister, who commentators believe will be less aggressive on fiscal austerity measures and more accommodating towards interventions by President Rousseff. Levy's attempts to raise taxes were met with hostility not only from congress, which the president has lost control of, but from the government also.
The central bank has surveyed local economists, some of whom expect economic growth to contract 2.7 per cent this year, with an inflation rate of 6.8 per cent. That's before considering the effects of the Petrobras scandal, which alleges that politicians from the president's ruling Workers' Party received some US$4bn from contracts awarded by the state oil company.
Dilma Rousseff is the most unpopular president in Brazilian history. Normally, you pour oil on troubled waters, but in this instance oil is the trouble.
Derek R Sambrook is managing director of Trust Services, SA and has served as both treasurer and chairman of the British Chamber of Commerce in Panama
He writes a regular blog about Latin America for Private Client Adviser