Transparency, trade and tax: a G8 action plan
Jeffrey Owens, the OECD’s former head of tax, and Mick Moore, of the University of Sussex, believe their 10 point action plan for the G8 summit next month could achieve fairer taxation of multinationals, improve tax transparency and help developing countries build up their tax capacity.
The UK has set itself an ambitious agenda for its G8 presidency, centred around three themes: transparency, trade and tax.
These themes are closely interlinked. With the removal of many tariff and non-tariff barriers to cross-border trade, tax now has the potential to be the last trade barrier. Trade flourishes in a transparent and open environment where under the table deals are difficult to hide. Tax transparency is at the centre of the G20 agenda and already this has led to the removal of bank secrecy as barrier behind which tax evaders can hide. The G20 has also recognised that there are increasingly links between tax transparency and effective action against corruption and money laundering. Transparency is central to developing countries achieving self-sustaining growth, since it enables them to counter tax evasion, capital flight and corruption, all of which flourish in an opaque environment.
Only two years ago, many commentators had written off the G8 as an anachronism. They believed political power had shifted to the G20. This proved premature. The G8 has the cohesion that the G20 lacks, and can still influence the global agenda. The G8 summit will be held at Lough Erne in June, before the G20 summit at St Petersburg in September. By taking action on a range of tax issues the G8 leaders can seize this opportunity to send a clear signal to the G20 .
Here is a 10 point action plan for the G8. Implementing it would go a long way to:
improving tax transparency;
achieving fairer taxation of multinationals; and
helping developing countries to build up their tax capacity.
These actions would also improve transparency and facilitate trade. This is not a plan for the comprehensive reform of the international tax system. It focuses on specific actions that the G8 could realistically take now.
All G8 countries should:
1. Formally commit to join and implement the Extractive Industry Transparency Initiative (EITI) before the end of 2013 and agree to expand it to all other sectors by 2015.
2. Encourage their multinationals to voluntarily adopt country by country reporting of the revenues earned and taxes paid in the countries in which they operate and to work towards developing a standard format for such reporting.
3. Without pre-empting the G20 base erosion and profit shifting initiative, G8 countries can implement some of the proposals likely to be presented to G20 leaders in September. They should:
a. strengthen their anti-abuse measures by putting in place general anti-avoidance rules (GAARs) (or equivalent measures) using the UK recently introduced GAARs as a model;
b. strengthen their controlled foreign corporation legislation;
c. insert in their tax treaties a ‘subject to tax’ clause so that incomes are not unintentionally exempt from tax in both the source and resident country;
d. announce that they are prepared to share information on aggressive tax schemes with their other G20 counterparts and with treaty partners from developing countries;
e. insert into their tax treaties with these countries an anti-tax treaty shopping provision;
f. ask the OECD to develop a multilateral mechanism to update the existing network of bilateral tax treaties so that these changes can be implemented rapidly; and
g. announce that they will work towards a multilateralisation of the US’ Foreign Account Compliance Act (FATCA), aiming for a global reporting standard backed up by automatic exchange of information.
4. Commit to adapting the arm’s-length principle, which underlies the OECD and UN’s transfer pricing instruments, to the realities of a global economy increasingly dominated by “know-how”, services and digitalised transactions. G8 leaders could also commit to creating a pan-Africa database on comparative information needed by tax administrations in developing countries to implement effectively their transfer pricing provisions and to express a willingness to undertake advance pricing agreements and joint audits with these countries.
5. Re-launch the debate on harmful tax competition pushing for a more effective implementation of the OECD’s 1998 guidelines, extending the scope of the guidelines and encouraging all of the G20 countries to endorse them.
6. Recognise explicitly the links between tax evasion, money laundering, bribery and capital flight and accept that to address these illicit activities will require improving transparency in financial markets (for example, by addressing the issue of beneficial ownership); removing legal impediments to the flow of information between tax administrations and law enforcement agencies – actions which should be easier now that the Financial Action Task Force has made tax crimes a predicate offence.
7. Commit to undertake a spill-over analysis of the impact on developing countries of changes in G8 tax systems and to publish this as part of their annual budgets.
8. Ask the IMF, the OECD, the World Bank, and other interested organisations, to undertake a joint analysis of how to improve the transparency of tax incentives for foreign direct investment and the use of free trade zones, including developing an agreed methodology to measure their costs and effectiveness in terms of generating new investment.
9. To enable developing countries to have a voice in the international tax debate, G8 countries should commit to doubling the resources of the UN Tax Committee by 2015 and to broaden its agenda beyond international tax issues. They should also encourage the committee, whose membership will be decided in July, to strengthen the presence of developing countries in the Committee. This newly composed UN Tax Committee should have an opportunity to discuss the outcomes from the G20 when it meets in October.
10. Commit to doubling the proportion of their aid budgets devoted to building up tax capacity in developing countries by 2015 (less than 1% of aid budgets go to tax projects). Tax and aid should be seen as complementary, with the reinforcing of the tax capacity of developing countries being seen as providing a long-run exit strategy from aid dependency. This is important not only in the light of the current pressures on aid budgets, but also in terms of improving transparency, accountability and good governance in developing world.
Endorsing this 10 point action plan will:
send a strong signal to other G20 countries and to the international community that the G8 is prepared to lead by example:
is fully committed to mobilising domestic resources in developing countries as an effective way of lifting millions of people out of poverty:
and will assist in taking forward the broader G20 tax agenda to combat base erosion, profit shifting and more generally offshore non-compliance.
Jeffrey Owens (Director of the WU Global Tax Policy Center at the Institute for Austrian and International Tax Law, Vienna University of Economics and Business) and Mick Moore, CEO of the International Centre for Tax and Development’(ICTD), which is based at the ‘Institute of Development Studies’ (IDS).