The implementation of tax reform regulation and tackling the problem of tax evasion has been a central goal for the Russian Presidency of the G20 St. Petersburg Summit. The G20 Finance Ministers communiqué, released in February 2013, pledged to combat tax avoidance by multinational enterprises (MNEs). This promise was renewed in July when Finance Ministers and Central Bank Governors formally supported the Organization for Economic Co-operation and Development’s (OECD) strategies for the automatic sharing of information for tax purposes (AEOI).
These tax reforms are relevant to the wider Russian Presidency’s objectives, including the development of new principles for financial regulation, greater coordination in economic policy, and the reshaping of the international financial architecture. Furthermore, the introduction of tax reforms will be beneficial for increasing growth through trust and transparency – a top priority outlined by the Russian Presidency.
This has not been the first time that the need to eradicate tax evasion has been discussed at a G20 Leaders’ Summit. At the G20 Summit in Pittsburgh in 2009, leaders highlighted the need for global standards regarding information sharing. Similarly, at the earlier London Summit, Leaders concluded that it was time to put an end to bank secrecy. The missing revenue from Base Erosion and Profit Shifting (BEPS) could have assisted governments to bailout banks amidst the global financial crisis. Additionally, the communiqué from the 2012 Los Cabos Summit referenced the importance of preventing tax evasion. Prime Minister David Cameron made the issue a fundamental part of the G8 agenda in Northern Ireland.
Why tax reform is an issue worth addressing
Tax avoidance by multinational enterprises is a subject that has received considerable media attention in the past year. The financial activities of companies such as Starbucks and Apple have come under increased scrutiny from analysts and commentators after government committees revealed that these corporations were paying minimal tax in the nations where a large quantity of their operations were undertaken. This led to the “perception that the rules for the taxation of cross-border activities are regularly broken” (Saint-Ammans and Russo 2013). Unsurprisingly, public protests followed in various countries in an attempt to pressure such corporations into paying their fair share.
BEPS have a range of adverse effects on economies. Firstly, it causes governments to generate less annual revenue, reducing their ability to invest in public services. The lack of available funds and resources in areas such as health and education also has a negative impact on the individual, who consequently carries “a greater share of the burden” (OECD 2013), as they are expected to compensate for the missing financial resources by paying higher personal taxes. In addition, the notion of fair competition is undermined, as smaller businesses are unable to finance the advanced methods used to shift profits to offshore zones, putting them at a competitive disadvantage. Lastly, loopholes and the lack of transparency in the tax system reduces confidence in financial markets, an essential element in encouraging growth.
There is concern that developing countries are the most likely to be adversely affected by these problems. For example, the Tax Justice Network has estimated that developing countries lose an estimated $120-160 billion a year due to tax avoidance (Tax Justice Network/Henry 2012). This would equate to the G20 nations “having a $1.2 trillion hole in their budget” (Oxfam 2013), and is more money than “developing countries receive in aid from developed countries” (Tax Justice Network/Henry 2012). Oxfam has also estimated that the amount of national income lost by African Nations due to tax avoidance (2%) is the equivalent to the total amount of money spent on health by national governments in sub-Saharan Africa (BBC News 2013). Thus, it is understandable that G20 leaders have been under increased pressure to act on the issue of tax evasion, since these lost billions are vital in addressing deep-rooted economic and social problems in these countries.
What the G20 aims to implement
G20 Finance Ministers asked the OECD to compile a plan of action to address BEPS. Underlying the plan was the desire to enable AEOI by as many national governments as possible, thereby creating a multilateral version of the United States’ Foreign Account Tax Compliance Act (FATCA) that requires US taxpayers to report all financial accounts held outside the United States.
The first goal of the OECD was to gain political consensus for the plan. This has now largely been achieved, with China recently signing the Convention on Mutual Administrative Assistance in Tax Matters. As a result, all G20 countries have now signed the agreement. More importantly, all G20 leaders strongly endorsed the OECD plan at the 2013 St. Petersburg Summit and emphasized the importance of reducing the number of tax evaders in order to expand budget revenue.
The program agreed upon by the leaders of the summit signaled the need to improve international coordination on taxes to ensure that MNEs were no longer able to exploit hybrid mismatches (the differences in national tax rules and treaties) to minimize taxation. Furthermore, it recognized that tax regulation has been unable to keep pace with digital technology that has significantly altered the economy. Digital technology has made it difficult to determine the jurisdiction in which a company’s value is being created, due to factors such as intangible assets.
The G20 has supported the OECD’s intentions for a more thorough examination of how business operations enhance market value and create profit, so that these unique features will be covered by OECD reforms. Enhanced data collection has also been called for, to allow for better analysis of company and individual activity. This will be necessary if the OECD is to fulfill its obligation to provide compliance ratings in November 2013, which are designed to expose states that are failing to adhere to regulatory standards.
The next step for the OECD will be to ensure that national governments have the material necessary to carry out their commitments by 2014. The OECD has pledged that the measures will be officially put into practice in 2015, after the necessary laws are passed — an ambitious goal considering the complexity of their intentions.
Tax avoidance in developing countries
Although the problem of tax evasion and avoidance has gradually moved up the G20 agenda, it remains unclear whether the needs of low-income nations are being treated with the same urgency as attempts to eliminate tax avoidance in the nations of the leaders and ministers who are formulating these policies.
In 2009, procedures that would “make it easier for developing countries to secure the benefits of the new corporate tax environment” resulted in the OECD amending their Convention on Mutual Administrative Assistance (OECD 2013).
These reforms made the convention open to all low and middle income countries, a noteworthy move in altering the international environment. Since the amendment, more than 50 countries have either signed or stated that they intend to sign the convention, which facilitates international administrative cooperation in combating tax evasion (OECD 2013).
The Finance Ministers’ Communiqué in July 2013 also recognized that tax avoidance harms development in the poorest states. It was agreed that the Global Forum would coordinate with the OECD Task Force on Tax and Development and the World Bank to support developing nations “in identifying their need for technical support and capacity building” (G20 Finance Ministers and Central Bank Governors 2013).
However, developing nations have been largely absent from the negotiations on tax system reform, even though they are suffering from BEPS. The supposedly “truly global” framework agreed to may not account for the views of many low and middle income countries or take into account the clear differences between the financial environment in developed and developing states. For example, the Netherlands has one tax official for every 333 people; whereas Nigeria has one per 28,000 (Forbes 2013).
“Taxation Inspectors without Borders” is a possible solution to this dilemma. It is a scheme that was launched in 2012 and involves utilizing development agency funds to place OECD tax inspectors in developing nations to transfer knowledge and assist with tax auditing. Although leaders have strongly supported this arrangement, it is debatable whether this is a long-term solution. Once these specialists have left, the ratio of inspectors to people will still be grossly disproportionate. Moreover, there is no guarantee that OECD advice can be upheld unless efforts are made to build institutional capacity before the inspectors withdraw.
The 2013 St. Petersburg Summit failed in one significant aspect. The commitments failed to consider the eradication of phantom firms (companies that facilitate corrupt politicians and companies in making business transactions) through enforcing inclusion on company registers. Thus, for the foreseeable future, anonymous shell companies will continue to be able to avoid paying taxes in developing nations. Furthermore, MNEs have not been called upon to report their profits on a country by country basis, a requirement that would help produce clearer evidence of where companies are paying their taxes and reduce tax havens. As “poorer nations lose three times more money to havens a year than they get in aid” (Miller 2013), the absence of reform in this area is clearly inadequate.
Despite being hailed by the Russian Presidency as the “most prominent step towards modernization and coordination of our countries’ tax policies in a hundred years” (Putin 2013), further progress on reforms remains to be accomplished. The G20 forum represents 90 percent of global GDP; collectively these nations have the resources and power to enforce action that is supportive for low and middle income countries, including reducing poverty.
BBC News, Oxfam urges G20 to curb tax avoidance that harms Africa, September 4 2013,http://www.bbc.co.uk/news/uk-23954293
Forbes, Kate, How Africa can tackle its tax dodgers, September 5 2013, http://www.bbc.co.uk/news/world-africa-23965543
G20 Finance Ministers and Central Bank Governors, Communiqué – Meeting of Finance Ministers and Central Bank Governors, July 2013, www.g20.org/load/781659263
Miller, Richard, Tax havens are entrenching poverty in developing countries, May 14 2013, http://www.theguardian.com/commentisfree/2013/may/14/tax-havens-entrench…
Oxfam International, G20 must re-write tax rules and recoup Africa’s missing billions, September 5 2013 http://oxf.am/UL2
Putin, Vladmir, Address by Vladimir Putin on the occasion of the G20 Leaders’ Summit in St. Petersburg, August 28 2013, http://www.g20.org/news/20130828/782201775.html
Saint-Amans, Pascal and Russo Raffaele, What the BEPS are we talking about? 2013 http://www.oecd.org/tax/what-the-beps-are-we-talking-about.htm
The Organisation for Economic Co-operation and Development, Convention on Mutual Administrative Assistance in Tax Matters, August 2013 http://www.oecd.org/tax/exchange-of-tax-information/conventiononmutualad…
The Organisation for Economic Co-operation and Development, Action Plan on Base Erosion and Profit Shifting, 2013 http://dx.doi.org/10.1787/9789264202719-en,
Tax Justice Network and Henry James, The Price of Offshore Revisited, August 2012http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120…