• Gaining ground - but still a long way to go

    Posted by Mark

    11 March, 2014

    There has been some exciting progress being made on addressing global tax evasion. However, there is a lot more that still needs to happen and there is still a risk new global rules will be set that disadvantage developing countries and will restrict their ability to seriously tackle tax dodging by multinational corporations and wealthy individuals.

    At the meeting of the G20 Finance Ministers in Sydney on 22 and 23 February, the Finance Ministers and Treasurers again agreed “Profits should be taxed where economic activities deriving the profits are performed and where value is created.”

    They gave their full support for the G20/OECD Action Plan to address tax dodging. They committed to ensure that by the Brisbane G20 summit in November, they will start to deliver effective, practical and sustainable measures to counter tax dodging across all industries.

    They endorsed the OECD new global standard for countries and tax havens to exchange information with each other, a new tool for fighting the scourge of tax evasion.

    The Ministers and Treasurers stated that they expected to begin to exchange information automatically on tax matters among the tax authorities of G20 members by the end of 2015. They also promised to support low-income and developing countries so that they benefit from the G20 work on tax.

    The Ministers and Treasurers of the G20 asked the government officials of the G20 Anti-Corruption Working Group for advice on concrete actions that the G20 can take to meet the new global standards for identifying the beneficial (real) owners of companies and other legal structures such as trusts so that G20 countries can lead by example.

    In other positive news, Australia as the President of the G20, is organising a forum in early May in Japan on the issue of combating tax dodging and how developing countries can be helped to benefit from actions to tackle tax dodging. Government officials, businesses and civil society groups from developing countries will be invited to the forum.

    However, all these fine words and commitments don’t mean much until countries actually implement them in their laws and practices and until developing countries get more of the revenue they should from their tax laws. The real test is when developing countries have more of the revenue they need to provide essential services, like health and education, to their people and they spend it for the benefit of their people.

    Source: OECD websiteSource: OECD website

    The new OECD standard
     

    The new OECD standard for automatic information exchange between tax authorities contains many positive elements but falls far short of what the world’s citizens desperately need – especially citizens in poorer countries. Of particular concern:

    • The OECD plan is likely to result in developing countries being excluded because they are expected to provide ‘reciprocal’ information exchange, even though pretty much all active tax havens are in rich countries, and many developing countries would need to sacrifice scarce resources to set up the arrangements to collect the information to be exchanged.
    • The OECD standard, while technically useful, contains loopholes that can easily be, and must be, closed.

    The OECD is the dominant global body setting standards for information exchange. Its current dominant standard of ‘upon request’ standard for information exchange is woefully inadequate. In April 2013, however, G20 Finance Ministers and Central Bank Governors endorsed a complementary, and far stronger standard: automatic information exchange (AIE). The G8 Presidency requested that the OECD write this report about just how the AIE project should work.

    The climate of world opinion has turned strongly against tax avoidance & evasion in the past couple of years, but we have seen few serious concrete steps so far. The OECD’s new report could be the first big step in putting together the nuts and bolts of real change.

    The OECD’s new ‘automatic’ standard will not replace the “upon request” standard but will complement it, while trying to address its many limitations. The new report recommends two main components:

    • a Competent Authority Agreement (a model agreement to be signed by governments willing to implement the new global AIE standard among each other); and
    • Common Reporting Standards (CRS) providing minimal common rules to be followed regarding “reporting” (the specific financial account information) and the “due diligence” that certain financial institutions must conduct. This means the financial institution will need to identify the residency of individuals and businesses whose information will be reported by financial institutions to the local competent tax authority, which then “automatically” exchanges it with the foreign competent tax authority where the reportable persons need to pay tax.

    The positives
     

    In contrast to the previous “upon request” standard, the new global standard of AIE will not hinge on costly investigations by local authorities or on a deliberate lack of requests from authorities protecting corrupt officials or tax-evading elites. This new platform also has a wider scope: it covers individuals and entities (including foundations and trusts). However, the effectiveness of this broader scope still relies on comprehensive beneficial ownership information in registries of trusts and shell companies, so that the real owners of the trusts and companies can be identified.

    Some problems and solutions
     

    The rules require ‘reciprocity’ in information exchange – but this disadvantages poorer countries. To understand why reciprocity is a problem, consider first how many wealthy Papua New Guineans are likely to stash assets secretly in Singapore – then consider how many wealthy Singaporeans are likely to have located their secret stashes in Papua New Guinea. Nearly all the active tax havens are located in rich countries, and the flow of illicit money is generally in one direction: from poor countries to rich. So it is less relevant for developing countries to hand over all relevant information. If Singapore really wants reciprocity from PNG, it can request this bilaterally through a tax information exchange agreement.

    Not only that: if these countries don’t have the capacity or resources to set up the structures for collecting the relevant information, then under the ‘reciprocity’ principle they will be left in the dark.

    Even if developing countries don’t have the capacity to make full use of the data they are provided with, it will still have a powerful deterrent effect. The more global co-operation there is on AIE, the stronger the system will be. So provisions should be added to allow countries to engage without being required to adopt full reciprocity, expanding the pool of participants. There is also a need for collective penalties against those governments that deliberately decide not to become involved in AIE, as a way to attract illicit funds.

    So, we can celebrate the progress that is being made to tackle tax dodging, but we have to acknowledge there is a risk the poor will miss out on the benefits. This is why this year's Shine the Light campaign is so important – Australia, as the chair of the G20, is at the heart of these global decisions in 2014, so we have the opportunity to be a voice for the poor and seek to ensure these tax reforms benefit poorer countries just as much as rich ones.

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    Mark Zirnsak is the Director of the Justice and International Mission of the Uniting Church in Australia (Synod of Victoria and Tasmania). Mark also sits on Micah Challenge's Campaign Strategy Group.