Is it true that the G20 wants to arrest tax evasion of multinationals?

General view of EU/Russia Summit, 03-04/06/2013 (EC Audiovisual Services).

General view of EU/Russia Summit, 03-04/06/2013 (EC Audiovisual Services).

Last Saturday the ministers of Finance of the G20 council agreed in Moscow to tackle global tax evasion by adopting a 15-point OECD Action Plan, which supposedly will give governments the domestic and international arms they need to combat tax Base Erosion and Profit Shifting (BEPS). The responsible European Commissioner for tax issues Algirdas Šemeta welcomed this G20 Finance Ministers’ commitment. He said “This confirms a paradigm shift in international taxation – one that will make it fairer, more effective and better equipped for the 21st century economy. The OECD’s Action Plan to tackle Base Erosion and Profit Shifting is the right approach to curbing corporate tax avoidance worldwide”.

This is not a simple thing however. Aggressive tax planning of giant multinationals has reached unbelievable levels, having engaged entire countries and territories in their ‘game’. Even within the European Union there are opportunities for the big players to hide their profits. On top of that globalisation and the borderless digital financial universe offer a multitude of complex ways and means to transfer profits and capital many times around the world in minutes. Actually it’s not only the multinationals that take advantage of those opportunities. Even medium enterprises and wealthy individuals can use those channels. But let’s take one thing at a time.

Governments knew

Every government in the developed world knows how the wealthy multinationals avoid paying taxes. The ‘secret’ is commonly known and it’s very simple. The multinational enterprises (MNEs) choose a low tax rate country or a tax haven territory to transfer the profits they have pocketed elsewhere. They can do that through their internal transfer pricing system of inter-group transactions. In reality such opportunities are not open only to multinational but also to wealthy individuals and smaller firms.

The advent of the digital economy and the total liberalisation of the financial/banking sector in the developed world has greatly facilitated legal tax avoidance and can even offer safe, albeit illegal, tax evasion to businesses and individuals. The key to arrest all that tax fraud is to tax profits and wealth in the country where they were created and the added value produced.

This is easier said than done. For example the American authorities, despite being very well organised and equipped, they cannot identify the way some Swiss banks help their citizens to avoid taxation. To succeed in this the US asked the Swiss to pass a law obliging their banks to give out information about their clients. So far Switzerland rejects it. If there was another way, the Americans would have discovered it. In this case the Americans probably want also to squeeze and why not throw out the Swiss banks, which make billions in the US market and compete successfully with the American banks.

Care more about avoiding double taxation

In any case the political will to arrest tax evasion is not always there. Most governments including the US are still more worried that their companies working abroad avoid double taxation than arrest their tax base. Tens of bilateral or multilateral Double Taxation Avoidance agreements have been signed during the past twenty years between developed and developing countries in every possible directions. No agreement though has been signed to arrest tax avoidance and fraud and in reality those double taxation avoidance agreements facilitate legal tax avoidance.

Cheaper tax avoidance

The problem is also that globalisation, the digital economy and the total liberties of the banks have ‘popularise’ the opportunities and the means to avoid paying taxes in the country where businesses or individuals produce their incomes and wealth. The ability to avoid taxes is even greater in the services sector and more so in those services which are offered internationally in a borderless level. The entire sea-going marine and the digital or material products and services sold through the internet are the perfect example of successful tax fraud. Even small enterprises and not so wealthy individuals have now access to cheap tax haven services and offshore bank accounts. Competition has worked well in this fraudulent and lawless universe greatly reducing the cost of tax aversion and avoidance.

Coming back to governments, it seems that the latest financial crisis and credit crunch cost them so much that they cannot anymore turn a blind eye to fast growing tax evasion. As OECD puts it, “Opportunities for MNEs to pay less tax harm everybody. Governments lose revenue and may have to cut public services and increase taxes on everybody else. But businesses suffer too. Small businesses, businesses working mainly in one national market and new firms can’t compete with MNEs who shift profits across borders to avoid or reduce tax through tax Base Erosion and Profit Shifting (BEPS). And an MNE that doesn’t shift profits is at a disadvantage compared to its BEPSing rivals”.

The agreement struck by the G20 ministers of Finance and the OECD to curb tax evasion and fraud is in principle a step towards the good direction. The problem is that its realisation presupposes the exchange of crucial economic and financial information between the G20 countries at the level of companies and individuals. It is questionable when and if at all, all those Parliaments will accept to vote the needed legislation establishing an effective system of information exchange between tax authorities and banks in all those countries. Or is this a new trick by politicians to attract votes?

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