Speech

Opening Remarks by Christine Lagarde on Corporate Taxation in the Global Economy

March 25, 2019

AS PREPARED FOR DELIVERY

Good afternoon everyone. Thank you for inviting me to join you today. It has been a little while since I have been to the Peterson Institute, and it is my pleasure to see both old friends and new faces.

I last had the honor of being here in September 2012, and not long after that, Adam Posen took hold of the baton as president of the Institute.

More than ever, we need an institution like Peterson. We need a lively intellectual debate and pragmatic solutions for the key issues facing the global economy.

Adam: you and your colleagues have led the way here, and we are all the richer for your work. Thank you.

Restoring Faith in the System

Our issue today is international corporate taxation. Albert Einstein once said that “the hardest thing in the world to understand is the income tax.”

It may be difficult, but it is possible to create a corporate tax system that better reflects the changes in the global economy.

I believe we need new rules in this area. Why?

The public perception that large multinational companies pay little tax has led to political demands for urgent action.

It is not difficult to see why.

A New Approach

Let me highlight three reasons why a new approach is urgent.

First, the ease with which multinationals seem able to avoid tax, and the three-decade long decline in corporate tax rates, undermines faith in the fairness of the overall tax system.

Second, 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.

Advanced economies have long shaped international corporate tax rules, without considering how they would affect low-income countries.

IMF analysis shows, for example, that non-OECD countries lose about $200 billion in revenue per year, or about 1.3 percent of GDP, due to companies shifting profits to low-tax locations.

These countries need a seat at the table. The Platform for Collaboration on Tax, a joint effort by the IMF, World Bank, OECD and the UN is helping on this front.

Third, an impetus for rethinking international corporate taxation stems from the rise of highly profitable, technology-driven, digital-heavy business models.

These business models rely heavily on intangible assets, such as patents or software that are hard to value.

They also demonstrate that assuming a link between income and profits and physical presence has become outdated.

This in turn has sparked fairness concerns. Countries with many users or consumers of digital services find themselves with little or no tax revenue from these companies. Why? Because they have no physical presence there.

So, we clearly need a fundamental rethink of international taxation.

Yet this means countries must work together. Making progress requires coordination among all, and in the right direction.

This is difficult, but possible.

The primary vehicle for coordinating multilateral work on international tax is the OECD’s Inclusive Framework, which now includes over 125 country members. This is impressive progress on multinational participation, but vulnerabilities remain.

IMF Role

What about the IMF? I believe we have a role in helping countries craft a solution that offers stability and fully incorporates the interests of developing countries.

New IMF research published two weeks ago analyzes various options in the context of three key criteria: better addressing profit-shifting and tax competition; overcoming the legal and administrative obstacles to reform; and ensuring full recognition of the interests of emerging and developing countries.

The paper also gives a broad review of leading options, along with empirical analysis that can inform the critical discussions now underway.

How else are we helping?

We also give technical support on tax issues to more than 100 countries every year. We also have expertise to assess the economic impact of tax reforms.

Perhaps best of all, we have a near-universal membership, which gives us an understanding of the particular problems facing developing countries.

I would like to leave you with a single, clear clarion call for your discussions.

The current international corporate tax architecture is fundamentally out of date. By rethinking the existing system and addressing the root causes of its weakness, all countries can benefit, including low-income nations.

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.

Thank you.