T

he more globally integrated economy, aggravated by the increasing expertise of tax planners in recognizing and exploiting legal arbitrage opportunities and the boundaries of acceptable tax planning, provides multinational enterprises (MNEs) with more confidence in taking aggressive tax positions.

CNNMoney (London) reported recently how despite its substantial profits in the UK, Starbucks, the world'€™s largest coffee chain, has managed to pay corporate tax only twice since commencing its business in the country in 1998. How McDonald'€™s, the fast-food giant,  is facing scrutiny by European authorities after reporting taxes of just ¤16 million for ¤3.7 billion of revenue over five years, attributed to a Luxembourg-based entity that employed just 13 people; and how Amazon, the online retailer, has not paid taxes anywhere in Europe apart from Luxemburg for years. The EU is looking into whether the retailer purposely shifted its money between European countries to avoid paying higher tax rates.

The most notorious case is probably that of Apple. The company is reported to have successfully sheltered US$44 billion from taxation all over the world from 2009 to 2012. Apple'€™s strategy has been to avoid taxes by means of ownership arrangements and utilizing tax-regulation loopholes.

Knowing that MNEs are best placed to practice income shifting to avoid taxes, the Organisation for Economic Co-operation and Development (OECD) released a report titled Addressing Base Erosion and Profit Shifting (BEPS) in February 2013. BEPS refers to MNEs'€™ strategies to exploit gaps and differences of tax rules in various countries to shift profits to locations with lower corporate tax.

Despite BEPS being mostly legal, OECD identifies several substantial disadvantages that it creates. First, it distorts competition: MNEs may gain competitive advantage from BEPS opportunities that domestic companies do not have. Second, it may cause inefficient allocation of resources by distorting investment decisions toward activities that have lower pre-tax rates of return, but higher after-tax returns.

Finally, it discourages voluntary compliance of the majority of taxpayers since they are aware that MNEs legally avoid income tax. These three reasons, compounded by the importance of income tax revenue for most of developing countries has positioned efforts to address BEPS as important, not only for advanced economies, but also for developing countries.

Consequently, on May 29, 2013, 39 countries, including Indonesia and European Union members adopted the declaration on BEPS. One of the important points is that the signatory countries agree that national authorities should collaborate in evaluating the issues and developing potential solutions to address the challenges raised by BEPS.

However, the inherently conflicting domestic interests of most countries makes collaboration and solutions easier said than done. For example, Antony Ting observes that the US Government has been turning a blind eye to the fact that US MNEs have been avoiding paying foreign income taxes.

Even worse, his analysis also reveals that the US Government has knowingly facilitated the avoidance of foreign income tax by its MNEs. The Apple case is preposterous, yet it neatly demonstrates Ting'€™s point.

How should Indonesia react to this phenomenon? During a discussion with representatives of foreign investment and MNEs operating in Indonesia, Sigit Priadi Pramudito, the director general of taxes, stated that MNEs in Indonesia contributed more than 25 percent of the total tax revenue in 2014.

Despite the significant contribution, early this year, Finance Minister Bambang Brodjonegoro, claimed that there are about 4,000 foreign companies operating in Indonesia that have never once paid income tax and yet they were still running their businesses as normal. This indicates that giving more attention to BEPS matters is essential for the Indonesian tax authority.

Many experts suggest that transparency among tax authorities is an efficient tool for addressing the BEPS problem and that automatic exchange of tax information among countries is the best method of transparency. However, one should remember that each tax authority possesses a different level of expertise, information (data connectivity) and institutional power.

As a result, some tax authorities might be ready for full automatic exchange of tax information, while others are still encountering impediments collecting even the most rudimentary data such as the global structure of a multinational.

An idealistic solution recently proposed by Nobel Laureate Joseph Stiglitz is that all nations work together to agree on rules that would form a new worldwide tax system, starting with developed countries agreeing on a minimum rate of corporate tax and closing tax loopholes.

I argue that what tax authorities from developing countries such as Indonesia should do first is elevate expertise, raise data connectivity and gain more institutional power. Professional tax officials that are equipped with reliable data and sufficient institutional power do not only protect domestic interests, but also significantly help the country to prepare for global automatic exchange of information and thus transparency.
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The writer works for the Directorate General of Taxes of Indonesia and is a recipient of the Australia Awards Scholarship. He is studying for his PhD at the College of Business and Economics at The Australian National University, Canberra, Australia. The views expressed are his own.