The OECD & G20 attack on tax havens: the adventure continues
Oxford Analytica, an independent, privately held firm specializing in providing scholarly analysis of world developments for business and government leaders, published an excellent article this past Friday on the coordinated attack on tax havens by the OECD and G20 countries.
An excerpt:
Singapore today signed a protocol with France that brings the two countries’ bilateral tax treaty into line with the OECD standard on transparency and exchange of information for tax purposes. This is the twelfth agreement it has signed in accordance with the OECD standard, thereby moving Singapore into the category of jurisdictions deemed to have substantially implemented the standard. This required that Singapore pass legislation to enable its authorities to exchange information, including bank and fiduciary information, with tax authorities in other countries.
Tax havens. Tax havens are not merely jurisdictions with nil or low tax rates; many countries attract business in this way. Explicit appellation is also misleading: for example, the OECD has never defined Singapore, nor Switzerland, as a ‘tax haven.’ The critical aspect of a tax haven is non-cooperation with other jurisdictions in the realm of tax information, and implicitly offering a refuge for tax evaders and money-laundering.
G20. The big economies are now pressing for compliance in transparency as a tool to put pressure on tax and asset-management aspects of tax havens. In practice, the main issue is use of tax havens for aggressive tax competition and homes for asset management in offshore funds:
- In 2009, the US Government Accountability Office (GAO) estimated that 83 of the largest 100 US corporations were doing business in tax havens.
- The US Treasury estimated it was losing 100 billion dollars in revenue per annum.
Market fundamentalism. Growth of tax havens was possible mainly because, in the absence of global cooperation, piecemeal regulatory efforts would merely push business from one tax haven to another. In the prevailing climate of market fundamentalism, banks successfully argued that they needed freedom to organise their affairs. That time is over. The list of those who had not made “substantial progress” (ie had not signed twelve individual tax information exchange agreements with other jurisdictions) shrank by 15 in the April-November period:
- All jurisdictions of relevance have committed to tax transparency standards.
- About 20 small states remain to implement their commitments and seven larger economies have yet to do so.
There’s no question that OECD and G20 countries see tax havens as the enemy of their tax revenue. However, dismantling those regimes may have an unexpected, adverse effect on the capital markets. In the short-run, the cost of capital will likely rise in real terms impeding economic expansion as business and consumers find they are unable to afford the capital markets’ prevailing rates. Under this scenario an increase in inflation would also be likely as businesses would have to raise prices to obtain needed capital. Perversely, the very governments in the vanguard of the movement to dismantle tax havens would likely find themselves the most adversely impacted. Governments who have been running deficits will find the cost of funding those deficits as a percentage of their GDP will increase sharply, due to constraints being placed on the capital markets.
Ultimately, tax havens are a symptom of a much larger problem. Developed countries’ governments have grown to such gargantuan proportions that they must continually squeeze taxpayers to fund themselves. Corporations and individuals are essentially paying for the privilege of being taxed. Tax havens exist because there is a market for them. Contracting government, creating and implementing tax policies which align corporate and governmental interests, and efficient enforcement of existing rules is the better, albeit less sexy, answer.
Tags: Budget Deficit, enterprise risk management, OECD, tax, Tax legislation, Tax Reform, Tax Treaties, transfer pricing