Multinational companies often take advantage of weak tax legislation and tax administrations in developing countries to avoid tax obligations, the OECD said in a report, characterizing the problem as one that could discourage local taxpayers from compliance.
The report underscored the challenges developing countries face in enacting OECD measures to prevent base erosion and profit shifting — a strategy multinationals often use to avoid tax by taking advantage of different tax laws in different countries.
In an OECD-guided review last year of the quality of transfer pricing information in developing countries, only 10 of 63 nations were singled out as not needing to improve and better coordinate the use of transfer pricing documentation, the report said
That same peer review found that while developing countries had made progress in enacting measures designed to prevent multinationals from claiming inappropriate tax treaty benefits, treaty abuse still accounts for much base erosion and profit shifting.
Moreover, an OECD multilateral instrument used to enforce stronger tax treaty abuse measures has been ratified by only five of 47 developing nations, the report said.
Efforts to shore up revenue in developing countries have been improved by an OECD program meant to provide tax administrations with tax audit support, the report said. In Africa, the Tax Inspectors Without Borders initiative brought in $334 million from 2012 to 2019, the report said. Latin American and Caribbean countries had a $139 million gain.
The matter of tax revenue is especially important to developing countries, which often lack funds for development projects and bring in little revenue as a share of gross domestic product. A tax-to-GDP ratio among developing countries of about 17.5% is nearly half that of the OECD average, said Ben Dickinson, head of global relations and development in the OECD's Center for Tax Policy and Administration, in a blog post Thursday.
Michelle Harding, head of the OECD's Tax Data and Statistical Analysis Unit, told Law360 the tax-to-GDP ratio is "a foundational indicator of the tax revenues available to governments to implement their policy priorities and to support their citizens and economies." That ratio, the report said, has largely stalled in Africa, while showing a small increase in Latin American and Caribbean countries.
The outlook for developing countries has also been complicated by the novel coronavirus pandemic, Dickinson told Law360, posing a threat to revenue that could exceed the damage done by the global financial crisis.
"The crisis is amplifying calls for systemic changes going forward," Dickinson added. "Many developing countries are now looking at underutilized tax policy tools, such as carbon and property taxes. Many want step changes in the use of digital technology to make tax collection more efficient."
The OECD has tracked 58 measures implemented in 13 African countries in response to the pandemic, Dickinson said, nearly all of which involve a reduction in tax rates or deferred tax payments.
Beyond developing countries, the risk to governments of declining tax revenue as a share of GDP is evident. Last year an OECD report showed that the ratio stalled for the first time in almost a decade, largely driven by tax changes in the U.S. that lowered revenue.
The report Thursday came weeks after Pascal Saint-Amans, director of the OECD's Center for Tax Policy and Administration, said developing countries should lead efforts to reform the existing international tax system.
Addressing an online event about tax transparency in Africa, Saint-Amans said more needs to be done to change the current global tax system, which favors developed countries at the expense of developing ones.
Update: This story has been updated to include comment and information from the OECD.
--Additional reporting by Matt Thompson. Editing by Joyce Laskowski.
For a reprint of this article, please contact reprints@law360.com.