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An overview of Lagoro IDP camp in Kitgum District, northern Uganda, 20 May 2007. Manoocher Deghati/IRIN
Thu, 07/25/2013 - 16:32 -- Anonymous (not verified)

G8 on tax: More a first step than a giant leap

19 June 2013
Kevin Watkins

Getting agreement on global action to prevent tax evasion was never going to be easy. In the event, the G8 summit communiqué has delivered more than a whimper, but far less than the big bang that many had hoped for.

Let’s start with the good news.

Thanks in no small measure to the British Government, which punched well above its weight class, tax and transparency are now firmly on the G8 radar. We now have a development agenda that goes beyond aid – one that links rich-country concerns over tax erosion to the loss of development finance in the world’s poorest countries. There are also encouraging signs that tax justice is mobilising public opinion.

Then there’s the communiqué itself. If you had offered veteran tax reform advocates the language in the Lough Erne document a year ago, many would have grabbed it with both hands. If implemented effectively, the pledge to move towards automatic exchanges of information between tax authorities could limit some forms of tax evasion.  There are also promises to develop G8 Action Plans.

Add to this the pledges to move towards disclosure of beneficial company ownership, commitments to engage developing countries in information-sharing, and to support tax authorities in developing countries, and you have a reasonable package.

The problems start with the underlying (lack of) detail.

Take the national action plans that the G8 countries have agreed to draw up to combat tax evasion and illicit transfers. The ten principles that guide the development of the plans are broadly the right ones. But they already underpin company reporting laws in most of the G8 (Russia being an exception). Similarly, the commitment to automatic exchange of information between tax authorities is a positive step. However, this is an extension of the Tax Information Exchange Agreements (TIEAs) that have been developed, to little real effect, over the past decade under OECD auspices.

The G8 summit will add some political momentum to efforts to establish more open reporting systems on companies and banking systems. But it also raises some questions:

  • Will the UK enforce compliance with reporting on beneficial ownership for overseas territories? The British Virgin Islands and the Cayman Islands have some of the world’s most opaque company registries – and both are at the heart of global webs for tax evasion and illicit transfers. 
  • Will the United States legislate to enforce transparency on Delaware – a world centre for shell companies? 
  • What is the time frame for implementation of the national action plans?
  • Who will monitor compliance with the commitments undertaken at Lough Erne?

That last question does have a partial answer. The G8 will ‘self-report’ to the public. But this is surely a poor substitute for independent auditing and review by some of the countries that have most to gain from effective action, including developing countries in Africa and other regions.

Parts of the communiqué bear the scars of protracted and difficult negotiations. Some G8 countries – including Britain and France – have actively promoted some far reaching measures. Both wanted the communiqué to include a provision that the proposed registries for reporting on beneficial company ownership would be open to public scrutiny. Thanks to some impressive rear-guard action by more recalcitrant G8 members – notably Russia and a less-than-enthusiastic Germany – the communiqué calls for the information to be made available to tax authorities and government agencies only. This will dilute the effectiveness of the proposed registries.

Other parts of the communiqué recite a range of existing initiatives. It calls on governments to join an established (and largely ineffective) voluntary international reporting system – the Global Forum – and for the OECD’s work (valuable but lacking political traction) on information-sharing, tax standards, and transfer pricing to be stepped-up. This is hardly breakthrough territory. In the absence of a big political push, the danger is that the OECD’s work will return to a low-level equilibrium. 

There are some positive declarations on developing countries. Here, too, the British Government deserves credit for highlighting the revenue losses sustained by Africa and other regions. There is a pledge to insure that information will be shared with tax authorities in the developing world, and the G8 also recognises that poor countries need capacity-building support. Unfortunately, most of this restates broad principles and approaches already set out in a 2011 report to the G20.

This is an area in which the communiqué would have been strengthened by some clear provisions. There is already an embryonic structure for tax cooperation with developing countries in place operating under OECD auspices. The Tax Inspection Without Borders initiative launched in 2012 was an innovative move aimed at deepening cooperation between rich and poor countries. Similarly, the Africa Partnership Forum has facilitated a useful dialogue on information-sharing with the OECD. But dialogue is no substitute for a concerted plan of action backed by clear commitments on finance and technical support to build the capacity of African tax authorities to combat tax evasion and illicit transfers.

Surely the G8 should, at the very least, have requested the IMF and the World Bank to draw up strategies for support commensurate with the level of ambition set out in the communiqué, and to prompt them to scale up their capacity-building efforts to combat tax evasion and illicit transfers.

Looking beyond taxation, some G8 countries appear to have offered more spin than substance. Just a few days ago, transparency campaigners (and, hands-up, yours truly) were celebrating what was presented as a commitment to sign-up for global reporting standards on transparency for extractive industries consistent with the landmark legislation adopted by the US and the EU. It turns out that the champagne should have been kept on ice.

To cite the actual wording of the communiqué: ‘Canada will launch consultations with stakeholders across Canada with a view to developing an equivalent mandatory reporting regime for extractive companies within the next two years.’

The words ‘just do it’ spring to mind.

If the G8 can’t agree to act decisively on a problem that is exposing some of the world’s poorest countries to plunder through dubious extractive industry dealings, what hope is there that its members will be listened to by China, Australia and Brazil in the G20?

Perhaps it’s unfair to set a high bar for judging the G8 commitment on tax. But when all’s said and done, the G8 governments have to be judged against their own claims – and the collective claims made in the communiqué are not modest.

‘We will act,’ the leaders declared, ‘to restore confidence in the fairness and effectiveness of our international tax rules and practices, and to ensure that each country is able to collect taxes owing and that developing countries are also able to secure the benefits of progress made on this agenda.’

I’m left with just one question – ‘when’?

The answer will depend on what comes next. With the G20 summit scheduled for September, there is an opportunity to engage a wider group of governments, and to start putting flesh on the bare bones of the Lough Erne communiqué. But combating the global pandemic of tax evasion and illicit finance will take more than encouraging words.

This post features the author's personal view and does not represent the view of ODI.