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2013-06-26 08:38:21
The G8 pledges to tackle the three Ts
Jun 22nd 2013 |From the print edition
A NEW seven-point strategy to end the bloodshed in Syria was the
headline-grabber from the G8 summit in Northern Ireland on June 17th-18th. But
the leaders of some of the world s richest economies also made progress on the
three Ts : trade, transparency and tax.
The summit kicked off with America and the European Union announcing that talks
will begin next month on creating a transatlantic free-trade area. The French
gave their approval to the talks after being promised that Hollywood will not
be allowed to destroy the French film industry. The two sides say they hope a
deal will be done in 2014, although it would be unusual for trade talks to
proceed so smoothly, even with estimated benefits of over $200 billion from
freer transatlantic trade at stake.
The summit also produced promises to promote transparency regarding the
ownership of hitherto anonymous shell companies. Shell companies, whose
ownership is often unclear, can have legitimate uses such as protecting
commercially sensitive information, but they are often deployed to reduce
taxes. The G8 leaders concluded that every firm should have to obtain and hold
information about its beneficial owners (the human kind, as opposed to nominees
or legal persons ) and update it as needed. This should be readily available
to police, tax administrations and other relevant authorities although the
summiteers disappointed campaigners by failing to recommend that this
information also be made public.
The third T was tax. Publicity over the low taxes paid on foreign profits by
American multinationals such as Apple, Google and Starbucks has propelled
tackling tax avoidance up the political agenda in the G8, including in Britain,
the summit s host. So it came as no surprise that there were several
potentially significant pledges on tax in the final communiqu , including that:
tax authorities across the world should automatically share information to
fight the scourge of tax evasion.
Should is not the same as will . On June 19th Swiss lawmakers voted down a
bill that would have enabled Swiss banks to co-operate with US authorities in
their pursuit of American tax dodgers. But automatic exchange of tax
information now seems increasingly likely to become the global standard. As the
summit opened, ten British dependencies with large financial sectors, including
Jersey and the Cayman Islands, agreed to sign a multilateral convention on
information-swapping. That was important for David Cameron, the British prime
minister, who had been under pressure to show he was bringing Britain s
offshore satellites to heel.
On tax avoidance by multinationals, the leaders endorsed an initiative by the
OECD, which will be put to a G20 finance ministers meeting next month in which
countries such as Brazil, China and India will also take part. The OECD reforms
are intended to make it harder for firms to shift profits to low-tax countries.
The G8 leaders also called on multinationals to make a full disclosure to the
taxman over how much tax they pay in different countries.
It again remains to be seen whether any of this will make a meaningful
difference to the amount of tax companies pay. Cross-border corporate taxation
is fiendishly complex, the lobbying around it furious. Several recent academic
studies show just how pervasive tax avoidance is.
The ability to shift profits to low-tax countries by locating intellectual
property in them, which is then licensed to related businesses in high-tax
countries, is often assumed to be the preserve of high-tech companies. Yet in
Through a Latte, Darkly , a new study of how Starbucks has largely avoided
paying tax in Britain, Edward Kleinbard of the University of Southern
California shows that current tax rules make it easy for all sorts of firms to
generate what he calls stateless income : profit subject to tax in a
jurisdiction that is neither the location of the factors of production that
generate the income nor where the parent firm is domiciled. In Starbucks s
case, the firm has in effect turned the process of making an expensive cup of
coffee into intellectual property.
In another new paper Harry Grubert of America s Treasury and Rosanne Altshuler
of Rutgers University delve into tax returns by American multinationals in
2006. They examine all the foreign profits held abroad by these firms (because
bringing the money home would incur tax). A remarkable 36.8% of these profits
were recorded in countries taxing them at a rate of 0-5%, and a further 9.1%
were in countries taxing at 5-10%. Given how much more aggressive their
tax-avoidance strategies are believed to have become since, it seems likely
that the proportion of foreign profits held by American firms in low-tax
countries is now well over half. It will take more than fine words in a
communiqu to change behaviour when so much is at stake.