If you find filling out a tax return difficult, try being the leader of a rich nation these days who needs to set new tax policy.
On the one hand, you want to lower corporate tax rates in a global competition to attract foreign investment. Yet in an age of austerity, you also seek more revenue by chasing down your own companies that shift profits to low-tax “havens” in other countries.
The attempt to resolve this dilemma helps explain a flurry of recent actions in Europe and the United States aimed at curbing legal tax evasion across borders while preventing a race to the bottom among nations in lowering their corporate tax rates.
On June 17, for example, President Obama and other leaders will meet at a Group of Eight (G8) summit in Northern Ireland with the topic of tax avoidance high on the agenda. Britain, as summit president, hopes to strike a deal on the beggar-thy-neighbor tax competition and also make it easier for nations to share information on tax-avoiding multinationals.
The principle at stake is transparency. “Without a level playing field we will see a transfer of financial activity to ones that lack transparency,” says British treasurer George Osborne, whose own country includes such tax havens as the Channel Islands.
In recent weeks, several big multinational companies have suffered reputational shock for their legal tax evasion. Apple faced a hostile Senate hearing in May, while the tax tactics of Google, Starbucks, and Amazon recently created a public outcry in Britain.
“Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues,” said British Prime Minister David Cameron in January.
Yet it is governments that must change their ways to reduce the number of companies that globe-trot for lower rates. Eric Schmidt, chairman of Google, describes international tax rules as “irrational.” Sir Roger Carr, president of the CBI employers’ group, said in a recent speech: “As governments seek to win the affections of companies by ever lowering tax in a competitive global race, it is hard to argue that paying less tax is somehow socially irresponsible.”
That is one reason why another “club” of wealthy nations, the 34-nation Organization for Economic Cooperation and Development (OECD), has been able to convince more countries to sign an agreement that allows easier exchange of information on tax matters between governments, especially about tax cheaters.
The agreement is “an important milestone on the road to closer cooperation and more transparency – to making the international system fair to all taxpayers,” the OECD’s Secretary-General Angel Gurría said. The OECD also wants to curb “hybrids,” or the practice by some companies of exploiting different tax policies between countries for their best tax advantage.
Even Switzerland, once the icon of bank secrecy for tax evaders, has been swept up in all this global reform on taxes. It relented this week to US pressure and agreed to allow Swiss banks to cooperate with foreign tax authorities.
With open, honest, and consistent rules, more nations might be able to ease the competition on corporate tax rates and retrieve more tax revenue from their domestic companies.