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PS Say More

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José Antonio Ocampo
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This week, Project Syndicate catches up with José Antonio Ocampo, a professor at Columbia University, a board member of Colombia’s central bank, and Chair of the UN’s Committee for Development Policy.

Project Syndicate: You’ve praised the OECD’s framework for addressing base erosion and profit shifting (BEPS), including its most recent initiative, which aims to create a corporate tax system that is “fit for the digital economy.” But you’ve also made clear that the BEPS framework isn’t anywhere near enough. What do you think of the recent OECD proposal for taxing the digital economy? In lieu of unitary taxation of multinationals – the ultimate goal – which changes are most urgently needed?

José Antonio Ocampo: My major argument – backed by the Independent Commission for the Reform of International Corporate Taxation (ICRICT), which I chair – is that multinationals should be taxed as single firms, based on their worldwide operations. Under a system of formulary or fractional apportionment, the firm’s overall (or unitary) taxable profits would be divided among the jurisdictions in which it operates, based on objective criteria (such as sales, employment, and digital users), with each jurisdiction then applying its own tax rate. Some federal countries, including the United States, already employ such an approach.

The recent OECD proposal includes, for the first time, a fractional apportionment scheme. It also recognizes the need for companies to pay taxes not only in jurisdictions where they have a physical permanent establishment, but anywhere where they have “sustained and significant involvement.” That presence would be defined, most simply, by a revenue threshold (adapted to the market’s size).

But there are three major problems with the proposal. First, the apportionment scheme would include only “residual profits” – thus excluding basic (“routine”) profits – even though all of multinationals’ profits are ultimately based on their worldwide operations.

Second, the proposal bases the revenue allocation only on sales, ignoring criteria like employment or digital users, both of which the ICRICT recommends including. As the International Monetary Fund notes, if developing – especially low-income – countries are to benefit from the reform, accounting for employment is critical.

The third problem is that the OECD’s proposal would apply only to large multinationals in the consumer industry.

Given these weaknesses, it can be argued that the OECD’s proposal is not only narrow; it also puts developing countries at a disadvantage. Significant changes are thus needed.

Moreover, the OECD has yet to introduce a specific proposal for implementing a minimum global corporate tax rate – essential to end tax competition and prevent low-tax jurisdictions and tax havens from undermining international tax collection. ICRICT proposes a rate of 25%, the current developed-country average.

PS: You’ve advocated expanding the use of the Special Drawing Right (SDR), the IMF’s reserve asset, arguing that such a “true global currency” would strengthen the international monetary system. Some have suggested that a cryptocurrency – such as Facebook’s Libra, planned for release in 2020 – could fill a similar role. In your view, does that line of thinking have merit?

JAO: The SDR is the only true global currency, because it is issued by the IMF and thus backed by all members. Yet it is employed almost exclusively for payments among central banks, making it a woefully underused instrument of international cooperation.

In line with recommendations made several decades ago by the IMF economist Jacques Polak, my basic proposal is that all IMF lending be financed using SDRs (or a mix of quotas and SDRs). This means of creating global money would mirror the way central banks create domestic money. The best approach would be to eliminate the IMF’s dual “general resource” and SDR accounts, and treat the SDRs that countries hold as “deposits” that the Fund can use to finance its lending.

As European Central Bank President-elect Christine Lagarde, formerly the IMF’s managing director, has proposed, a digital SDR could also be created, to be used as global money in private international transactions. The digital SDR could fit into a larger system of central-bank-issued digital currencies, some of which could also be used internationally.

Such a system would be far superior to Libra, which, like other crypto-assets, will face monumental regulatory challenges, owing to doubts about whether it is a safe payment system for users and its lack of any mechanism for controlling money laundering and other illicit transactions. The fact that key partners – including PayPal, Mastercard, Visa, and eBay – have now pulled out of the initiative reflects a lack of faith in Facebook’s capacity to manage those challenges.

PS: You’ve argued that among the reforms that the IMF’s new managing director, Kristalina Georgieva, should pursue is the continued “review and streamlining of conditionality.” The Fund’s loan agreement with Ecuador, signed this past March, has been the subject of harsh criticism, with many warning that the fiscal tightening it demands will send the economy into recession. What specific changes would help to ensure that this and similar IMF loan agreements better serve recipient countries?

JAO: Two reforms are essential. The first is to increase the supply of IMF credit lines with no conditionality, such as the Flexible Credit Line that is currently accessible to countries with strong policy frameworks and proven track records in terms of economic performance. This is vital to eliminate the stigma associated with borrowing from the IMF, and should be pursued alongside the creation of additional prudential tools, particularly global swap arrangements, which can be financed by SDRs.

The second reform relates to regular lending programs: conditionality should focus not on structural reforms, such as privatization or trade liberalization, but on macroeconomic variables. The most difficult macro issue is fiscal consolidation, which requires either raising tax revenues or reducing government spending. The top priority – which the IMF has begun to advance – should be to avoid demanding fiscal adjustments that would have adverse social effects. It would also help if the IMF worked more actively to warn countries when they are building up unsustainable fiscal balances.

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Ocampo recommends

We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are Ocampo's picks:

  • The Art of Economic Catch-Up

    The Art of Economic Catch-Up

    One of Korea’s top economists offers a brilliant analysis of the “detours” that low- and middle-income countries can take to accelerate growth, combining economic theory with his own deep knowledge of East Asia’s development, including the performance of highly successful firms.

  • A World in Disarray

    A World in Disarray

    A PS contributor and the president of the Council of Foreign Relations examines how the post-World War II international order has broken down, delivering a particularly rich analysis of the major changes and challenges generated by US foreign policy.

  • Decidí contarlo

    Decidí contarlo

    The personal memoir of one of Colombia’s most important economists, who recently passed away, this book reflects Perry’s deep knowledge of major episodes in Colombia’s economic history since the 1960s – many of which he participated in. It’s an invaluable read for anyone interested in Colombian economics and politics.

From the PS Archive

From 2018
Ocampo explained why gradualism is no longer an option in the fight against global warming. Read the commentary.

From 2015
Ocampo made the case for increasing the use of SDRs and ending the US dollar’s dominant role in the global monetary system. Read the commentary.

Around the web

Ocampo, Martin Guzman, and Joseph Stiglitz argued that there are theoretical foundations for policies that guarantee competitive and stable real exchange rates. Read the policy paper.

In a 2014 interview, Ocampo described the damage that tax havens cause – and how to shut them down. Read the transcript.

In a 2016 speech, Ocampo identified opportunities for countries and businesses engaging with the developing world. Watch the video.

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