Christine Lagarde
French Finance Minister and G20 chair Christine Lagarde makes a statement at the G-20 Press Conference at the 2011 IMF/World Bank Spring Meetings at International Monetary Fund Headquarters (IMF), April 15, 2011 in Washington, D.C. IMF Staff Photographer/Michael Spilotro

Global corporate taxation requires an urgent reform, as low-income countries are losing significant amounts of revenue due to tax competition and profit-shifting, the International Monetary Fund (IMF) said in a paper on Monday.

According to the IMF, the countries outside the Organisation for Economic Co-operation and Development, commonly known as the OECD, lose about 200 billion U.S. dollars in revenue per year, or about 1.3 percent of gross domestic product (GDP), due to multinational companies shifting profits to low-tax locations.

Christine Lagarde, managing director of the IMF, said that the revenue thus lost to the low-income countries could jeopardize their efforts to fight poverty and meet development challenges.

“The current situation is especially harmful to low-income countries, depriving them of much-needed revenue to help them achieve higher economic growth, reduce poverty, and meet the 2030 Sustainable Development Goals,” said Lagarde.

Meanwhile, Lagarde also questioned “faith in the fairness of the overall tax system” due to “the ease with which multinationals seem able to avoid tax, and the three-decade long decline in corporate tax rates.”

“Advanced economies have long shaped international corporate tax rules, without considering how they would affect low-income countries,” said Lagarde. Besides, the IMF paper specially noted a taxation dilemma in the newly thriving digital economy, saying this new business model that mainly builds on intangible assets just proved how outdated the current tax system was. “Countries with many users or consumers of digital services find themselves with little or no tax revenue from these companies,” said Lagarde, “because they have no physical presence there.”

In order to address the key concerns regarding profit-shifting and tax competition and to preserve the interests of developing countries, the paper brought up several alternative tax architectures and called for more global cooperation. Lagarde advocated more cooperation in the global taxation system reform as well, saying that an up-to-date system would benefit all countries. “By rethinking the existing system and addressing the root causes of its weakness, all countries can benefit, including low-income nations,” said Lagarde.

The IMF, an organization of 189 member countries, would also promote the reform with its expertise in taxation, saying that it gives technical support on tax issues to over 100 countries every year. “At the same time, we can restore faith in the fairness of the international tax system that has eroded over the years. We can restore much-needed trust,” Lagarde said.

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