G-20: concerns raised about aggressive tax avoidance strategies of banks

Guest blogger Professor Dries Lesage, University of Ghent - originally published on Mondiaal Nieuws

OECD: Governments very concerned about massive deductible bank losses

TORONTO, 28 juni 2010 (MO) - Saturday (26 June), Jeffrey Owens, head of tax at the OECD, said that his organization is involved in talks between governments and the banking sector on the rising issue of deductible bank losses. He did so in Toronto at a press briefing for journalists covering the G20 summit.

During the ongoing global financial crisis, banks have already lost 800bn dollars, and this amount is rapidly growing on a weekly basis. These losses “have to be deducted somewhere”, and governments are concerned that this will heavily affect their corporate tax revenues over the coming years. Moreover, there are indications of “aggressive tax planning strategies” applied by banks. These include methods to make losses come to the surface in higher-tax jurisdictions. It could be that some important banks will not have to pay any corporate taxes at all in the coming years, and will even get refunded. Yet, Mr Owens is pleased with the progress made thus far and the constructive attitude of the actors involved. A report is to be released in September. Officials also think of a voluntary code of conduct for banks. Anyway, this issue adds a new dimension to the discussion on bank taxes.

Tax and development

Mr Owens also made a strong case to consider the relation between tax and development. Although domestic resource mobilisation is on the rise in a number of developing countries, “aid agencies should pay much more attention to this aspect.” Support to national tax administration still amounts to only about 0.7 percent of total development assistance. This effort should be increased, as the investment is likely to yield a multiple return. The OECD is becoming actively engaged in the tax and development debate in the framework of the UN Financing for Development process.

G20 and tax havens

With regard to tax havens, Mr. Owens called this topic a “G20 success story.” He emphasised the peer-review process that is now underway in the OECD’s Global Forum on transparency and information exchange. The review involves all G20, OECD and offshore jurisdictions. It will first examine legal and regulatory frameworks, and subsequently the actual implementation. The review is to take three years. In answer to a question, he stated that, at this moment, a revision of the criteria to assess compliance with the OECD standard is not on the table. That standard allows for information exchange on request between countries in a way that overrules banking secrecy. In particular the threshold of 12 bilateral tax agreements as an indication of compliance is facing growing criticism. It has made it too easy for certain jurisdictions to move from the G20 black and grey lists to the white list.

The French President Nicolas Sarkozy, at a press briefing in Toronto on Saturday just before the G20, suggested that some jurisdictions have met the number of 12 in a way that is not very serious. Possibly, he meant the fact that some tax havens had been concluding agreements with other tax havens or thinly populated jurisdictions such as Greenland. The logical implication of Sarkozy’s remark seems to be that there are jurisdictions now on the white list that should not be there. Sarkozy again talked about “putting non-complying jurisdictions on a black list”, even though the G20 black list got empty shortly after the 2009 London summit.

In a reaction, Mr Owens specified that the OECD has never said that reaching 12 agreements is sufficient. Also the implementation has to be looked at, as well as the overall compliance with the spirit of the OECD’s standard. The aim of the peer review is exactly to identify any remaining practices that may undermine the effectiveness of the standard. Moreover, “87 percent of the agreements are between countries which have real economic links, so massive signing of agreements is a sign of real progress.” Responding to specific questions, he added that places such as Hong Kong, Macau and the State of Delaware, located in powerful G20 countries, will equally be examined. There is a possibility that as a result of the peer review new proposals will be made.

Dries Lesage (University of Ghent) followed for MO* the G8 and G20 summit in Canada.