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The G8 summit - T time

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.