Developing nations are losing $100 billion in annual tax revenues due to the investors using offshore hubs for tax avoidance, a UN report has said. The report by the United Nations Conference on Trade and Development (UNCTAD) also supported India's call for plugging the loopholes.
"Tax avoidance practices are responsible for significant leakages. An estimated $100 billion annual tax revenue loss for developing countries is related to inward investment stocks directly linked to offshore investment hubs," said the UNCTAD's World Investment Report 2015.
"... the more investment is routed through offshore hubs, the less taxable profits accrue. On an average, across developing economies, every 10 percentage points of offshore investment are associated with a one-percentage point lower rate of return."
Tax avoidance can be tackled while promoting investment in sustainable development, it stressed.
UNCTAD supported India's plans to replace bilateral investment protection treaties with a new pact that seeks to plug gaps and enhance legal protection of foreign investors in India as well as Indian investments abroad.
"India made available its new draft model, the Bilateral Investment Treaty (BIT). The new model includes several innovative provisions," the report said.
Multinational enterprises employ a range of tax avoidance tools, many of which take advantage of investment structures in these hubs.
"Tax avoidance practices by multinational enterprises are a global problem because investments from offshore hubs are made in developing and developed countries alike," UNCTAD said.
Arguing that the ongoing anti-avoidance discussion pay limited attention to investment policy, the report made a case for additional measures to support sustainable investment.
The need for a review of Bilateral Investment Promotion and Protection Agreement (BIPA) framework arose after several multinational companies invoked the treaty against the government.
Under the new model of BIT, investors who have substantial business activities in the home state would be protected by the treaty. The proposed BIT would remain in force for 10 years.
The model stipulates that investors must first submit their claim before relevant domestic courts or administrative bodies for the purpose of pursuing domestic remedies, wherever available.
After exhausting all judicial and administrative remedies, if a resolution of the problem remains elusive, the investor may commence proceedings under the investor-state dispute settlement (ISDS) article.
This year's report shows that foreign direct investment (FDI) inflows in 2014 declined 16 per cent to $1.2 trillion.
However, recovery is in sight in 2015 and beyond. FDI flows today account for more than 40 per cent of external development finance to developing and transition economies.
The report is particularly timely in light of the Third International Conference on Financing for Development in Addis Ababa – and the many vital discussions underscoring the importance of FDI, international investment policy making and fiscal regimes to the implementation of the new development agenda and progress towards the future sustainable development goals.
The World Investment Report tackles the key challenges in international investment protection and promotion, including the right to regulate, investor-state dispute settlement, and investor responsibility.
Furthermore, it examines the fiscal treatment of international investment, including contributions of multinational corporations in developing countries, fiscal leakage through tax avoidance, and the role of offshore investment links.