This year’s Group of 20 summit on Sept. 5-6 in Russia is not likely to find much consensus on Syria and its chemical weapons. But this “club” of wealthy nations has not been idle on another troubling issue.
Behind the scenes, the summit’s leaders have prepared to endorse a campaign against tax avoidance by globe-straddling corporations and individuals.
Most international tax avoidance, such as a company parking its profits in a low-tax country, is not illegal. It simply exploits differences between each nation’s tax practices. But the practice feeds into a perception of unfairness among those individuals and corporations that do pay taxes in full.
And the secrecy of this shadowy practice only courts suspicions of corruption. Indeed, many corrupt people do hide their wealth in tax havens, which particularly annoys those leaders in Russia and China battling corruption.
Most of all, the G20 campaign is an attempt to update a century-old international tax system to fit today’s digital and very globalized economy with its complex supply chains. Software, for example, can be written in a dozen countries, so where should its “value creation” be taxed? If Google collects data on French citizens and sells it to American advertisers, should it pay a tax?
There are no easy answers and yet there is amazing consensus to find them. The G20 is basing its campaign on a 15-point “action plan” released in July by the Organization for Economic Cooperation and Development, which includes 34 mostly developed countries. The plan’s major goal is to harmonize tax laws between countries by 2016 with some guiding principles. One of those principles: “Profits should be taxed where functions driving the profits are performed and where value is created.”
While the G20 agrees on goals, each nation’s reasons may differ. China and Russia want to stem capital flight, or the outflow of cash by wealthy citizens, in a major effort against domestic corruption. Ireland and the Netherlands, which have been low-tax havens, now realize they are outliers in a European Union that must pull together on tax policy. And since the 2007-09 financial crisis, most governments have gone on a hunt for new sources of revenue, with tax avoidance by big multinational companies being an easy target.
Helping to focus the issue was the exposure of rampant tax evasion in Greece that helped trigger the eurozone crisis. So, too, did last March’s financial collapse in Cyprus, which uncovered the country’s role as a haven for Russian money laundering.
With so much of today’s wealth created in nontangibles, such as patents and financial services, the G20 is putting its stamp on the need for transparency. Businesses today operate in a near-borderless economy involving multiple and complex transactions. Governments are being forced to work together to even define a commercial activity to tax, not to mention trying to define whether a tax burden is “fair.”
Maintaining a G20 consensus on tax avoidance will be essential as each country tries to revise its tax laws. Britain will need to change the practices of offshore havens of commonwealth territories like the Cayman Islands. Washington will need to convince states like Delaware that its tax policies encourage tax evasion. The effort is as difficult as a global trade deal.
Achieving any sort of global consensus is rare these days. But as national economies steadily merge, so must their operating principles. This summit will be a historic moment in establishing a global norm in transparency and accountability.