Last years’ G-20 and G-8 meetings produced important commitments to bolster tax systems and to fight corruption. The upcoming G-20 meeting in Brisbane will show just how serious member countries are about delivering on them.
Here are the two top lines; details of each below.
Beneficial ownership transparency. The G-20 may be expected to announce a weaker—possibly much weaker—position than that implied by the existing OECD standard for tax-information exchange. An explicit G-20 commitment that is even equivalent to the latter seems likely to founder on the refusal of both the United States and China.
Corporate tax. The G-20 has a chance to address an important weakness of the ongoing OECD process, and to respond directly to the problem of countries competing to capture from each other the taxable profit of companies—without the underlying economic activity that gives rise to it.
A priority for the Australian host government of the G-20 has been the drafting and agreement on beneficial ownership principles, with a view to establishing a common position on the need to collect (and to be able to exchange) information on the ultimate ownership of companies and other legal structures such as trusts and foundations. (If you wonder why this matters, it’s a bit like caring whether you’re eating horse or beef.)
The UK-hosted 2013 G-8 meeting put this issue, and the related question of information exchange, at the top of its agenda. As a result, the OECD was mandated to produce a new standard for information exchange which is explicit about the need to collect information first (‘requiring financial institutions to look through shell companies, trusts or similar arrangements’)—that is, it is no longer acceptable to avoid exchanging information by claiming that the information is unavailable.
Sadly, according to Transparency International, China has sought to block the draft principles while it seems the United States has reversed its May commitment to put through comprehensive beneficial ownership legislation. Unless things change substantially in these two major powers, it’s hard to see how the G-20 can reach agreement on principles that are anything other than a weaker version of the OECD standard.
Corporate tax (wars)
In the area of corporate taxation, the OECD mechanism—the Base Erosion and Profit Shifting initiative, or BEPS—provides a less powerful benchmark. The 15 agreed BEPS actions largely point the direction to areas for progress, so that even at the halfway stage (it ends late-2015) there is a good deal of uncertainty over just how effective it will be.
A particular weakness is that BEPS is largely framed as a technical attempt to address weaknesses of international tax rules that companies can exploit. This overlooks what may be a more important dynamic: that states engage in ‘tax wars’ to attract not the real economic activity that gives rise to taxable profit, but instead this tax base alone.
The #luxleaks revelations exposing tax avoidance operations in Luxembourg will put particular pressure on G-20 members to confront this phenomenon. A damning Financial Times editorial put it this way:
[The leaks] reveal a bewildering array of convoluted corporate structures arbitraging subtle differences in the tax treatment of financial flows. The net effect is a large reduction in the tax paid on activity that effectively takes place elsewhere. Often any single tax authority would see only one facet of the arrangement, which would, according to its laws, be entirely legal and above board. But taken together, a company that would ordinarily expect to pay a hefty bill finds its effective tax rate much reduced, sometimes to as little as 1 per cent. Luxembourg, meanwhile, enjoys significant benefits from managing this activity within its borders.
Improved international tax transparency as part of BEPS—mainly through country-by-country reporting from multinationals—will promote greater scrutiny, but the underlying dynamic is not addressed. Progress has already been stymied because several countries (said to number four: the United Kingdom, Luxembourg, Netherlands, and Spain) are trying to protect their own preferred approach to attracting the tax base from elsewhere, in this case the ‘patent box’ (a special tax regime that applies a lower rate to revenues from intellectual property).
Depending on your point of view, the patent box is either a legitimate tool to encourage innovation or a mechanism to enable, through the manipulation of intangible assets, the reduction of taxation on profits earned elsewhere. The second view may be supported by discussions in Ireland and Switzerland to replace existing tax provisions with a patent box (or ‘knowledge box’).
A twist on this view was expressed by a well-placed source from a western European country not mentioned in the previous paragraph: that Germany’s keenness to have the patent box outlawed through the BEPS process did not reflect a sense that they were losing revenues to tax avoidance, but a desire to be rid of pressure from their own multinationals for a similar provision in Germany.
What can the G-20 do?
Above all, it can send a signal to the OECD that the political dynamic of ‘tax wars’ is understood, and that the technical discussions on BEPS should be informed by an understanding of the related pressures. An emphasis on BEPS Action Point 11, which seeks data to track the extent of misalignment between profits and the location of underlying economic activity, would be valuable; including, ideally, an explicit commitment by member countries to provide the necessary data on their own economies and multinationals.