The false economy

The false economy

G8 summit: High on vague promises, low on delivery

Despite the G8’s attention, tax haven fat cats are still free to sip their tax-free cocktails. David Parry/PA

The G8 summit in Lough Erne was preceded by much hype and promises about action on tax avoidance and corporate secrecy, but it has delivered little. The leaders’ communiqué commits governments to nothing more than vague promises.

The most welcome development is that the ten-point communiqué endorses automatic exchange of information in matters relating to tax evasion, assuming that something is always classified as “tax evasion” rather than its greyer cousin “tax avoidance”. Thus if a resident of the UK has stashed cash in a tax haven, then that jurisdiction would be obliged to inform the UK tax authorities.

The Organisation for Economic Co-operation and Development (OECD) has published its proposals, but the G8 has made no mention of any time scale for implementation. Neither does the communiqué say anything about how this information exchange is to be co-ordinated or enforced.

More importantly, how the UK is going to persuade its secretive Crown Dependencies to sign the exchange? How will places such as the Cayman Islands comply with this protocol when they do not levy income or corporate taxes, and thus do not have the infrastructure for collecting data about taxes or tax avoidance vehicles?

The promise to reveal beneficial ownership of companies looks attractive, as anonymous companies facilitate tax avoidance/evasion, money laundering and flight of capital. The communiqué states that this

could be achieved through central registries of company beneficial ownership and basic information at national or state level. Countries should consider measures to facilitate access to company beneficial ownership information by financial institutions and other regulated businesses. Some basic company information should be publicly accessible.

A number of things are noticeable. There is no intention to let the public know the details about ownership of companies. There is no mention of any timescale within which any reforms are to be implemented. Maybe this absence of detail is indicative of oppositions that some governments are likely to encounter from their local economic elites.

The US has a particular problem in that its own tax havens Delaware, Nevada and New Jersey need to be persuaded to embrace openness, something they have so far resisted. The UK will also have to do much to get anywhere near the promise. At present foreign companies, including those registered in secretive tax havens, can be directors of the companies registered in the UK. Shares in UK companies can be held by nominees, who may not be resident in the UK. Yet there is no commitment to introduce any legislation. The failure of the UK to lead by example may also embolden the UK Crown Dependencies and Overseas Territories to resist some of the changes.

Trusts are a key vehicle for providing secrecy and avoiding taxes. The communiqué advocates more information about them too, but not for the general public. It says that the information about them should be accessible by law enforcement, tax administrations and other relevant authorities including, as appropriate, financial intelligence units. So the public bears the cost of tax avoidance perpetrated through trusts but will not be permitted to know the beneficiaries. Again, there is no mention of any time scale. Once again, the UK will have much to do because there is no public record of the number of trusts, or their beneficiaries.

With tax revenues, developing countries can lift their population out of poverty. So it is welcome to note that the communiqué states that “Developing countries should have the information and capacity to collect the taxes owed them … Other countries have a duty to help them”. But, once again, there is no firm commitment to deliver any policy changes in the G8 countries.

With a daily diet of revelations about tax avoidance by giant corporations, such as Google, Microsoft, Apple, Amazon, Starbucks and eBay, there was a feeling that the G8 would start a dialogue about changing the system for taxing corporate profits. The communiqué states that “Countries should change rules that let companies shift their profits across borders to avoid taxes”, but change to what? There is no commitment and no foundations have been laid for taking the matters forwards at the next G20 or the G8 meeting even though alternative models exist.

The kindest thing that one could say about the G8 communiqué is that as a result of public anger, issues such as tax avoidance and corporate secrecy are on the political agenda. However, the summit has not delivered.

Perhaps, the expectations were too high. After all, most G8 leaders are facing declining popularity at home. The UK Prime Minister is facing dissent within the Conservative Party, the policy disagreements with coalition partners Liberal Democrats are becoming more vocal (e.g. over benefit and tax cuts), and his popularity ratings are down. Similarly, with intransigence by the Republican Party US President Obama can’t push through his preferred policies through the legislature. So they all need some trophies to take home, which look and sound good but will not commit them to any firm legislative action.

Another thought is that with no representations from Africa, India, China and Brazil, the G8’s terms for ending tax avoidance or corporate secrecy may not be acceptable to the emerging economic powerhouses. So the action will move to next year’s G20 summit. As always, corporate elites will be operating behind the scenes and colonising the political agenda. Any progress on eroding secrecy and tax avoidance is going to be slow, and that is a good reason for civil society to continue to campaign for change.