How far will governments go with committing to tackling tax avoidance?

UK Prime Minister David Cameron and his Chancellor George Osborne have gone to extraordinary lengths in recent weeks to condemn tax avoidance and committing themselves, through G8 and G20 respectively, to tackling this systemic cancer.  These commitments are to be welcomed and are the strongest signal to date that TJN's core message is getting through to decision-makers at the highest level.  Now the real work of translating these commitments into solid measures must get underway, and as Salman Shaheen argues in the New Statesman, the challenge facing both G8 and G20 leaders lies with avoiding half-measures and going for comprehensive reforms fit for the 21st century.

Shaheen identifies several areas of reform that will be familiar to readers of this blog.  Since 2002 we have been promoting a country-by-country reporting standard as a crucial tool for ensuring an effective level of accounting transparency.  CBCR has already gained support within the political and business communities, and now needs to be extended beyond the extractive industries to other sectors.  As Shaheen explains:

"This is a vital first step. But if Osborne is serious about tax transparency, he must now make the case for a much more robust form of country-by-country reporting whereby every large multinational corporation in every sector would be required to publish in their annual audited financial statements a country consolidated profit and loss account, limited balance sheet and cash flow data on tax paid for every jurisdiction where they have a permanent establishment for tax."

Problems with transfer pricing have become endemic.  Some will be tempted to tweak the OECD's arm's length method and leave it at that.  TJN sees the need for a more comprehensive reform and has called for an opening up of research into how a unitary approach with combined reporting would allow taxable profits to be apportioned to the countries where genuine economic activity occurs.  Last December TJN's Sol Picciotto laid out a route map towards attaining this goal, available here, and Shaheen picks up on this theme in his article:

"Osborne should be pushing for serious examination of a system of unitary taxation, under which companies would submit a global consolidated account in each country in which they are present, then apportion the global profits among these countries by a formula reflecting the genuine economic activity of the company in each jurisdiction."

And then there is the vexing issue of how to turn round the culture of the global tax avoidance industry.  We recognise that systemic flaws have corrupted the integrity of tax professionals in most countries.  We feel the solution lies with a General Anti-Avoidance Principle which would reverse a widespread tendency to over indulge tax avoiders.  George Osborne has gone partially down this route with his proposed General Anti-Avoidance Rule, but we feel this measure is a half-way house.  As Michael Meacher MP has previously commented:

"The real purpose of the GAAR is not to counter tax avoidance, but to narrow its definition, making everything else ethically and technically acceptable because it is outside that narrow remit."

In their recent letter to the Financial Times (16 February 2013) George Osborne and his counterparts in France and Germany - Pierre Moscovici and Wolfgang Schauble respectively - spelt out the gravity of the problem facing the world:

 "...the practices some multinational enterprises use to reduce their tax liability have become more aggressive over the past decade.  Some multinationals are exploiting the transfer pricing or treaty rules to shift profits to places with no or low taxation, allowing them to pay as little as 5 per cent in corporate taxes while smaller businesses are paying up to 30 per cent.  This distorts competition, giving larger companies an advantage over smaller, more domestic companies."

This gets to the heart of the problem, and underlines the urgency of the need for new rules.  Tax justice is gaining momentum with a strong following wind, but we must be alert to the risk that political leaders will settle for half-way measures rather than the systemic reforms the situation requires.  As Shaheen comments in his concluding remark, we sincerely hope that world leaders will neither falter nor miss this historic opportunity.