Making multinationals pay a fair share

IT’S NOT a particularly familiar phrase. Had Parliament not passed, last week, with non-partisan input from all sides, legislation designed to combat what is called “base erosion and profit shifting,” few might have ever heard that expression.

They should get used to hearing it.

Simply put, base erosion and profit-sharing, or BEPS, refers to the culture of giant multinational corporations and other entities that shift their profits around, on paper, between different jurisdictions to pay the lowest tax rate possible.

It is akin to what is called, in other contexts, forum-shopping – firms with the luxury of multiple subsidiaries scattered across the globe can effectively choose which country’s tax rate will apply, regardless of where the meat and bones of their operations truly reside. The practice is of note within industries that revolve around intangibles like intellectual property – patents, designs, trademarks, tech and so on.

What does this have to do with anybody?

It turns out: a lot. This kind of manipulation allows big corporations to get away scot-free with avoiding taxation without contributing in a meaningful way to the jurisdictions they operate in.

Smaller, local businesses are placed at a relative disadvantage. Treasuries lose out, especially those in the developing world that rely more heavily on corporate tax to fund government. Ordinary citizens lose, while unseen actors far away thrive.

The legislation passed in Parliament last week Wednesday aims to combat this.

But the new law is no quick fix. The Base Erosion and Profit Shifting Inclusive Framework (Country by Country) Reporting Bill, 2023 – the unwieldy title hints at the challenges – achieves two modest yet significant things.

First, it helps this country comply with international regulatory requirements.

Second, it introduces a reporting mechanism to shine light on the operations of entities here and abroad.

The law, which is to take effect on a date to be determined by the Cabinet, applies only to multinationals with revenues in excess of US$850 million or TT$5.8 billion.

Such entities will have to tell tax authorities here about the details of their country-by-country operations, including their parent company and subsidiary entities.

Sunlight, it is often said, is the best disinfectant. The idea of the reporting requirement is that it will allow authorities better powers of scrutiny and, in the process, discourage unfair practices or dissuade the activities of entities liable to engage in them.

However, the latter points to a potential pitfall.

An entire industry has developed in the Caribbean when it comes to providing tax havens that do not have transparency.

BEPS measures might hit some countries that are fond of offering such refuge in exchange for a share in profits.

Further, it’s not difficult to imagine incredibly well-resourced and powerful multinationals simply changing tactics.

For instance, if the revenue threshold is high, an entity might simply contrive to stay below the radar by limiting operations or, alternatively, voluntarily paying fines. And the usual bugbear applies, namely lack of enforcement.

Still, the new law marks, potentially, an important shift in corporate culture. Governments and local stakeholders should deepen collaboration in order to fulfil its promise.