By David Jessop
A new front is about to open in the drive by wealthy advanced economies to enhance their tax income. It is an approach that has implications for the Caribbean and particularly those nations that operate as offshore financial centres.
Politicians in the UK, France, Germany, the US and elsewhere have begun to use language that indicates they intend addressing the low levels of tax paid by multinational corporations through their use of ever more complex schemes that aggressively avoid tax.
Since the mid 1990s major changes in global economic policy on taxation have been signalled at summit meetings of the G20, the grouping which bring together the world’s wealthiest nations. Despite this, influential US based pressure groups like Global Financial Integrity (GFI) believe that these initiatives have so far had little practical effect.
GFI argue that although officials suggest that policies pursued from the mid 1990s onwards are said to be having an effect, deposit data from the Bank of International Settlements accessed by academics suggests otherwise. So much so, they say, that the US$2.7 trillion held in offshore financial centres has changed little in recent years. Instead all that is happening, they claim, is that the sums have moved between offshore locations or are being re-deposited by holding companies registered in other offshore jurisdictions.
However, all this may now be about to change as cash strapped governments, faced with having to tax their citizens more while cutting public expenditure, have recognised that for economic and political reasons, they can no longer allow companies to avoid paying a fair share of their profits to the countries in which they operate.
The issue has been made more acute by media coverage alleging that household brands including Exxon, Starbucks and Carnival Cruise Lines are using aggressive but legal tax avoidance measures; that the same mechanisms are being used by organised crime, terrorist networks and cyber criminals; and that big onshore banks like HSBC are facilitating their clients offshore tax avoidance.
Speaking on November 5 about the need to tackle aggressive approaches to reducing corporate tax liability, George Osborne the UK Chancellor of the Exchequer (Finance Minister), indicated in a rare joint statement with his German counterpart, Wolfgang Schäuble, that multinational corporations will come under increased scrutiny as will the offshore mechanisms that they use.
In a joint statement following a recent G20 meeting in Mexico, the two Ministers made clear that they want their colleagues to back the Organisation for Economic Cooperation and Development’s (OECD) initiative on tax base erosion and profit shifting and expect a first analysis report to be available at the next G20 meeting in Russia in February 2013.
According to officials, the approach is meant to be a step towards promoting a better way of dealing with companies moving their profits through lower or no tax jurisdictions and the consequent erosion of the global corporate tax base.
It is also meant to find ways to tackle legal mechanisms that allow offshore centres such as say Luxembourg or the Cayman Islands to provide vehicles that enable large companies, those engaged in e-commerce, and wealthy individuals, to pay hardly any tax in the countries in which they operate or reside.
It is in effect an attempt to have national tax systems catch up with the reality of economic globalisation and the ability of increasing numbers of very large companies to avoid tax by making use of, for example, largely unregulated transfer pricing: the mechanism whereby related parties adjust the charges for goods, services, or the use of property between jurisdictions.
The approach being urged on the G20 is of course not without its contractions as much of what is presently being undertaken by companies is legal, albeit at the boundaries of tax avoidance. Furthermore, the problem is not easy to resolve, not least because Governments want competitive corporate tax systems that attract global companies but also want global companies that pay a reasonable rate of tax onshore. The approach is also globally contentious with emerging economies such as China which sees such moves as an attempt to restrain their trade and growth.
Germany and the UK’s response to this paradox is that fair competition is best achieved through international action to ensure that strong standards are agreed on by the G20 and other relevant international fora. Their words reflect the growing pressure on politicians to tackle corporate tax avoidance as recessionary forces bring about significant cuts in public expenditure and social services, and governments have to generate new revenues to assuage public anger.
These new developments come not long after a little noticed statement on the subject by the European Commissioner for Taxation, Customs, Anti-Fraud and Audit, Algirdas Šemeta.
In an in interview on September 12, he made clear that Europe will publish details before the end of 2012 of a new initiative aimed at offshore financial centres and at aggressive tax planning. This will form a part of a broader European action plan to deal with tax evasion. An outline of his approach can be found in the late June EC policy paper unappetisingly entitled ‘Communication on concrete ways to reinforce the fight against tax fraud and tax evasion including in relation to third countries’.
The EC is suggesting in the Communication, that equivalent measures to the EU Savings Directive should be developed with EU dependent territories so that as amendments are made to the existing EU savings agreements with Switzerland, Andorra, Monaco, Liechtenstein and San Marino such new standards should be applied to dependent or associated territories.
This new tougher approach appears also to have found its way into strengthened language on financial services in a new Overseas Association Decision that will affect all Caribbean Overseas Territories once agreed by the year’s end.
The policy, which had its origins in the mid 1990s in concern about money laundering, financing for terrorism, tax evasion and the financial instability, is moving on. It may well come to affect offshore financial centres in the region. It may also remind Governments across the region that they too need to demonstrate to hard pressed voters that they are operating tax systems that capture onshore a fair part of the income of successful local Caribbean companies and individuals.
David Jessop is the Director of the Caribbean Council and can be contacted at email@example.com
Previous columns can be found at www.caribbean-council.org