The Great Tax Awakening? Three Reservations
Never has there been such extensive popular and political interest in tax reform. Never have so many governments declared that they intend to change the global tax system and ensure that transnational corporations pay their fair share. Never have arcane issues like ‘transfer mispricing’ received so much media coverage. And never have there been so many promising indicators of real policy change.
Pressures from American and European legislators and tax authorities have cracked open banking secrecy in Switzerland and Luxembourg, and may end it entirely. Other tax havens are facing the same prospect. The European Union is contemplating a major shift toward a form of ‘unitary taxation’ of transnational corporations.
Large British companies have lost much of their appetite for battling with Her Majesty’s Revenue and Customs, and are complying in cases that they would have contested only a couple of years ago. The forthcoming G8 and G20 meetings have crystallised concerns that have been building since the 2008 financial crises, and raised hopes of reforms that will benefit rich and poor governments alike, and ordinary people and businesses worldwide.
There is still a good chance that these reforms will happen. But we need to watch out on three fronts in particular.
First, the reforms that are needed now in the global systems for taxing transnational corporations and high net worth individuals are not the dramatic ‘stroke of the pen’ changes that we can easily monitor. It may make sense in the long term to move to a completely new system of ‘unitary taxation’ for transnational corporations. But that will be in the long term. Most of the reforms that are feasible and needed at this moment take the form of legal and procedural changes in complex domains accessible mainly to specialist professionals. We should, for example:
Greatly extend mechanisms for the automatic exchange of information among national tax authorities;
Find ways of putting an end to ‘beneficial ownership’ – secrecy about the real ownership of companies, foundations and trusts;
Motivate transnational corporations to account for their activities and profits in detail, and in a common format, for each country in which they operate;
Create a mechanism to make it possible to revise the thousands of bilateral tax treaties in existence without re-negotiating each one separately;
Agree on a common global anti-abuse rule and a way of sharing information among tax authorities about aggressive tax avoidance schemes; and
Make it easier for tax and police authorities to share the information they need to tackle the inter-related problems of corruption, money laundering and tax evasion.
It would be easy for governments to make grand declarations, but not do all the follow up work that is needed for effective delivery. How will we know whether they really are are putting their money where their mouths are?
Second, all the changes mentioned above are driven, directly or indirectly, by the urgent needs of most rich country governments to raise more revenue to meet their huge fiscal deficits. Those governments, along with the EU and the OECD, dominate the global tax system. There are reasons to be optimistic that the kinds of reforms they are contemplating will also be of benefit to developing countries. We can be fairly sure that the national tax administrations of the BRICs and other large, middle income countries like Turkey will welcome and be able to cope with these changes. They have the skilled personnel and the IT systems needed effectively to process the large increases in inflows and outflows of information that the reforms require.
But it is far from certain that the same is true of most poorer, smaller developing countries. They are anyway almost unrepresented in the current global debate. Their national tax administrations could be overwhelmed by the outcomes, and find themselves net losers, devoting so many resources to supplying data to the rest of the world that they are unable to take advantage of the wider access to information that they will nominally enjoy.
The extension of the principle of automatic information exchange among tax authorities will anyway have to be carefully calibrated. It cannot be automatic, for all countries, instantaneously. The information that is used to collect taxes can also be employed for purposes of blackmail and extortion. We already see a few governments using Interpol international arrest warrants to harass political opponents rather than to apprehend criminals. Concerns about the possibility of tax information being misused are legitimate – but could also become a pretext for excluding many poor developing countries from international arrangements to exchange tax information. Those that are excluded will be at a real disadvantage.
Third, the coalition of forces that has helped make tax so prominent on the contemporary political agenda may not endure over the period needed to ensure that reforms are real and sustained. National governments have not generally played leading roles in creating the reform agenda. We owe much more to the combination of (a) a very impressive set of advocacy and campaigning organisations like Action Aid, Christian Aid, Oxfam, Global Witness, Tax Justice Network and UK Uncut and (b) authoritative international organisations like the European Union, the IMF and the OECD. But the two do not always work well together. In particular, some of the advocacy organisations also campaign actively against the international organisations, sometimes on grounds that I would characterise as populist and diversionary – most notably in criticising the extent to which the IMF has been an active proponent of Value-added taxes.
It is a good time to celebrate the progress that is being made in setting the stage for serious global tax reform. But it is not the time to relax, to assume that the interests of the poorer countries will really be taken into account, or to indulge in fractious politics over minor issues.