International action on tax evasion: from progress to counter movements

An OECD summary(opens in new window) on international actions against tax evasion (fraud and avoidance), released before the G20 summit in Hamburg (July 2017), outlined some successes. The figures on participation in the automatic exchange of tax information (starting in 101 countries in 2017 or 2018) in the Global Forum(opens in new window) on Transparency and Exchange of Information (which is designed to facilitate cooperation on tax matters) and in the Multilateral Convention(opens in new window) on Mutual Administrative Assistance, are impressive and include many (if not all) notorious tax havens. However, participation does not mean that there are no problems (e.g. Panama was already participating in some of such initiatives when the scandal concerning the Panama Papers broke out). Also the summary shows the weaknesses of the G20’s work: The blacklist that had long been announced ultimately consisted of one (!) country: Trinidad and Tobago. One reason for this is that countries were able to escape the blacklisting by simply committing to certain measures. In this way, progress in tackling tax fraud is being undermined by a misleading blacklist.

International actions against tax avoidance by multinational corporations are also moving forward, but the results are less convincing: Already last year, the G20 and OECD set up an “Inclusive Framework(opens in new window) ”, whereby non-G20 countries can (or are forced to, in the case of tax havens) implement the four minimum standards of the G20’s project against “Base Erosion and Profit Shifting(opens in new window) ” (BEPS). These include country-by-country reporting of tax and other data, prohibition of particularly harmful special tax rates, e.g. for license payments, measures against tax treaty abuse through letterbox companies, and more detailed rules for tax disputes between authorities. Additionally, all participating countries will further discuss the remaining BEPS agenda. So far, 100 countries are committed to the Framework (covering 93 percent of the global GDP). On 7 June 2017, a “Multilateral Convention(opens in new window) to Implement Tax Treaty Related Measures to Prevent BEPS” was set up as the first global attempt ever to replace bilateral tax treaties (for an evaluation see here(opens in new window) ). However, despite its name, it is not truly multilateral, because participating countries have a good deal of freedom in choosing the countries they want to partner with and the (bilateral or national) provisions they are willing to override through the new convention. This has now ended up in a patchy and non-transparent net of new bilateral commitments. More importantly, it allows tax havens to defend their business model. For example, Mauritius opted not to include its tax treaties with many African countries, but to keep them bilaterally, and also not to apply the tougher method of checking whether any letterbox company is involved using the advantages of a tax treaty (countries are able to choose two methods, a weaker or a tougher one).

Meanwhile, important open conflicts within the BEPS work have not yet been solved. In particular, there are fierce debates about how to divide profits among the countries related to the newly defined “permanent establishment”, a corporate structure that is the pre-condition for tax profits in a country. The developed countries are defending their taxing rights from the past, while countries with emerging economies are striving to gain more taxing rights. Initially, a consensus was announced for the end of 2016, but the debates are still going on.

The biggest new tax work of the G20 is on “tax certainty”. The exact meaning was outlined in reports by the OECD/IMF(opens in new window) and European Commission(opens in new window) . The principle covers a wide range of issues, including the accuracy of tax laws and the reliability of tax authorities. While this agenda has some merits in designing a fair tax system, the point of time for this discussion and those who support it are raising doubts. Business is applauding it in all international fora, using “tax certainty” to complain, amongst others, about fast-changing tax laws, which also include the reforms of the BEPS project. “Tax certainty” can be a counter-agenda to international action against tax avoidance. Furthermore, there is a strong focus on introducing binding arbitration if disputes between tax authorities occur, which is also welcomed by business. However, when the BEPS results were published in 2015, there was a clear split between developed and emerging G20 countries on the commitment to binding arbitration, the latter rejecting it because they fear not having sufficient resources. “Tax certainty” thus seems to be an attempt by the developed countries and their businesses to re-introduce the issue.

Markus Henn, WEED