Here in Cannes I’ve had a chance to look through the report, titled dryly “Supporting the development of effective tax systems”.
It contains recommendations for the G20 from some of the leading global organisations working on tax – the IMF, OECD, UN and World Bank, in strictly alphabetical order. It’s packed full of interesting recommendations and, with a few exceptions, it contains a lot of really welcome things. Unfortunately, we don’t expect the G20 communiqué to pick up on many of the best of them. Here are a few highlights, but only a few, and I encourage you to read the whole report.
Tax justice up front, but with a crucial omission
The report’s authors are engaged in a lot of capacity building work on tax policy and administration in developing countries. So it’s encouraging to see the following up front:
“Increased revenue—although extremely important in order to foster development, where spent correctly—is not the only consideration in assessing tax systems and their performance. Distributional concerns are particularly important, bearing in mind that the equity consequences of taxation can only be meaningfully assessed in conjunction with the spending that taxes finance.”
I couldn’t have written it better myself. But for some reason the report doesn’t include within its lengthy recommendations the importance of helping the governments of developing countries to assess the distributional impact of tax reforms. In most developing countries, there is no official data to show how a particular tax reform – coupled with the way tax revenues are spent – will affect particular income groups, or whether it will have a differential impact on women. A proper national debate on taxation can’t happen without this.
There’s an interesting quote quite early on. “The G20 countries’ lead role in the debate on international tax system creates an obligation on them to ensure its smooth functioning.” This is very interesting, because the corollary that follows is something that the UK government has consistently refused to accept.
“In that context,” the report continues, “it would be appropriate for G20 countries to undertake “spillover analyses” of any proposed changes to their tax systems that may have a significant impact on the fiscal circumstances of developing countries…in moving, for instance, from residence to territorial systems.” It’s good that the report gives this example, because it’s exactly the change that the UK is making at the moment. ActionAid, Christian Aid and the Labour opposition have all suggested that the planned reforms could hurt developing countries by intensifying tax dodging activities.
The UK refuses to do the kind of analysis recommended in the report, saying that it would be too big an exercise and that “The best way to prevent [tax avoidance by multinationals] is by helping these countries develop robust and stable tax systems which enable them to collect the tax they are owed.
Some words for the Netherlands and Switzerland
It’s also valuable that the report discusses G20 countries’ development responsibilities when negotiating tax treaties, a major issue for developing countries. It says:
“It is important that G-20 countries recognise in their negotiations that reductions in a developing country’s taxing jurisdiction may significantly erode its tax base. This is especially so if the benefits of the treaty are effectively available to third country residents through treaty shopping arrangements. G-20 countries should thus be prepared, for instance, to include anti-treaty shopping provisions in their treaties with developing countries.”
While the report makes recommendations for the G20, two other countries should especially take note of this advice – our colleagues in the Netherlands and Switzerland have written extensively about the impact of their tax treaties on developing countries. ActionAid’s report into tax avoidance by SABMiller showed the impact of these treaties in practice, alongside those of Mauritius.
Vodafone and SABMiller watch out!
The report notes “an emerging concern in several developing countries” which is way in which some companies structure corporate acquisition deals through tax havens in order to avoid capital gains tax. SABMiller and Vodafone are currently in court in India over such deals, which in Vodafone’s case is worth billions of pounds.
The international organisations argue that, while this is a “complex technical area” and “a subject of legitimate international debate,” the developing countries in which the “underlying real property” is based should be able to tax the sale, “regardless of the ‘location’ of the share transaction” in a tax haven. They note that this is particularly a problem in the extractive industry – much mining infrastructure in developing countries is owned and sold through tax havens.
The work they propose to help resolve this problem is potentially very valuable for developing countries.
More tax transparency
It’s great to see that the international organisations are advocating a range of tax transparency measures. For civil society organisations in developing countries, transparency is essential to properly scrutinise government policy, and to hold companies accountable for their actions. There are two great transparency recommendations for the G20:
- Making multinational companies more transparent: the report echoes Bill Gates’ support for more corporate transparency yesterday by suggesting the G20 “encourage the international organisations (including accounting and other bodies, as relevant) to accelerate exploratory work on how to promote [corporate] transparency, including through country-by-country reporting as a standard for MNEs”
- Assessing and publishing the amount of revenue that has been lost through tax exemptions granted to attract investment: “support the idea and practice of routine tax expenditure analysis as a key element of good fiscal governance.” The report contains a raft of recommendations on this topic, including to ensure that tax authorities are fully involved in the negotiation and design of tax exemptions, and to for the G20 to “encourage and support developing countries in their efforts to resist pressure to grant such mutually damaging tax breaks.”
More inclusive global tax standards
The report includes acknowledgements that “profit-shifting by multinationals is an increasing concern” and that “concerns about potential tax losses from transfer pricing are shared by developed and developing countries alike.”
It urges the G20 to support work to help developing countries do more to enforce international standards, but it also acknowledges that the standards themselves may need to change. The authors identify a “need to work more intensively with developing countries so as to enhance their input into and/or participation in the development of international standards and approaches to transfer pricing, to ensure that they reflect the needs and realities of such countries, and that these countries can implement these standards effectively.”
Interestingly, today saw the publication of David Cameron’s report on global ‘Governance for Growth’. which stresses greater collaboration between the UN and the G20, and includes “participation on an equal basis” as one of its four principles for setting international norms and standards – although it restricts this to “all major economies and other significant actors.”
The international organisations are right to identify that the G20 play a leading role in international taxation, as well as being the home states of most multinational companies and their major role as international aid donors. They commissioned a report asking expert organisations what the G20 could do to help developing countries raise more tax revenue, and do so fairly. Now the ball is in the G20’s court to follow those recommendations, which go way beyond a short term fix to address the global governance of taxation, which is an urgent need.