The G20 Communique is good news on the international tax reform front. As part of the G20 commitment to boost economic resilience the Communique commits G20 nations to taking action to ensure fairness in the international tax system. This means they are looking at ways to ensure profits are taxed where economic activities deriving the profits are performed and where value is created.
The most positive statement is the endorsement of the global Common Reporting Standard for the automatic exchange of information between revenue authorities. The G20 also provides strong support for the recommendations coming out of the OECD project on Base Erosion and Profit Shifting (BEPS). And so it should.
The reform program is ambitious and not yet finished but the G20 has committed to continuing the reform program in 2015. As such, the tax scandals we have seen recently coming out of “Lux leaks” as well as multinationals such as Apple, Google and Starbucks being named as engaging in highly aggressive tax planning strategies will hopefully become a thing of the past.
Despite the ongoing nature of the OECD BEPS project we have broad agreement from the world’s largest economies on what are complex and multifaceted problems. Developing nations will also be pleased to see a commitment to deeper engagement with them to address their concerns.
There is a great deal of work still to be done and it would be easy to argue that the OECD has not gone far enough in its proposal for reform, but now is not the time to do so. Now is the time to take a breath and reflect on achievements to date. These achievements, reflecting a half-way point in the reform program for the OECD are significant. It is also time to consider the next step for nations which have endorsed the OECD recommendations.
The high level support requires action at a domestic level. Top down political support is apparent but that needs to translate into action. The political will must exist if outputs are to be realised in a practical sense. Governments are going to continue to be lobbied by those with vested interests. Some groups and authors suggest multinationals are doing nothing wrong, while others suggest there are no solutions to a broken tax system. Clearly, the G20 leaders do not agree and these voices are likely to become less vocal.
Government action must be coordinated
Governments must act but need to do so in concert with other governments. A coordinated effort is needed and this is not lost on the OECD. Here we are already seeing cracks appear with some too slow, others too fast and some just not wanting to play.
Australia was slow to agree to endorse the Common Reporting Standard for the automatic exchange of information. Fortunately it has now done so. Other nations are potentially too keen. On Friday Pascal Saint-Amans, Head of the Centre for Tax Policy at the OECD, raised concerns about too much momentum. As he said, unilateral action may lead to chaos.
Mexico is one such example of a nation keen to enact new laws to curb BEPS. In fact, it did so earlier this year.
India is also a good example of a nation not liking some of the recommendations. It has made it clear it is opposed to the proposal to make arbitration binding and mandatory under the mutual agreement procedure (MAP) to resolve disputes in tax treaties. India argues such a requirement will impinge on its sovereign rights.
Despite the need for domestic legislation to introduce new rules, the OECD reform program is about nations agreeing to common rules. However, nations have options: agree to the common rules or act unilaterally. The latter would be less than satisfactory as tax evasion is a global problem that must be addressed with global solutions. In fact, as we have seen recently with the Lux leaks scandal, often it’s because nations act unilaterally that base erosion is occurring.
We are yet to see whether Jean-Claude Juncker, current European Commission President, and previous Prime Minister of Luxembourg views tax avoidance in the same way as other nations or sees it as an important issue. On Saturday he said that he is in favour of tax competition as long as it is “fair” tax competition in Europe.
It is easy to blame multinationals, and no doubt, they deserve some of the blame. But once the behaviour of the multinationals is addressed, it is necessary to look at what nations themselves are doing. Nations offer tax incentives to attract investment. The question becomes one of when do such incentives constitute legitimate tax competition and when do they constitute harmful tax practices. Patent boxes, or the preferential tax treatment of intellectual property is one such area of dispute amongst countries.
As I said, the G20 is supporting an ambitious tax reform program by the OECD so this is a “good news” story for the international community. Now we need to keep up the momentum.