Will the G20 ever end the global problem of tax avoidance and tax evasion?

Ahead of the G20 Summit in Hamburg this week our own George Turner has published this op-ed in the German newspaper Die Tageszeitung today. The article discusses why, despite sustained political engagement from world leaders, we are still some way from solving the problem of tax avoidance and tax evasion. Here’s an English translation of the article:

Tax justice has become a long established item on the G20 agenda, and rightly so. The leaders met as a group for first time in 2008 in Washington DC. At that first meeting efforts to improve co-operation between tax authorities were discussed. In 2009 leaders committed to ending banking secrecy and protecting public finances. In 2013 the G8 put tax at the top of the agenda for that year’s summit, which called for a comprehensive set of measures to tackle tax evasion by individuals, and tax avoidance by multinational companies. That call was followed up at the G20 meeting later that year.

But despite this sustained pressure from the very highest level progress has been slow, and tax evasion and avoidance continue to bleed public services to the tune of billions of dollars a year.

Research by my colleague at the Tax Justice Network, Alex Cobham with Petr Jansky of Charles University in Prague, estimates that tax avoidance by multinational companies costs governments $500bn a year. Research by the IMF puts that figure higher, at $600bn.

A report released by the British Virgin Islands in June to promote that jurisdiction as a financial centre revealed that this small Caribbean island was home to twice as many financial assets ($1.5 trillion) than previously thought.

So why, despite high level political engagement has the issue not gone away?

Some progress is being made. Ten years ago when the Tax Justice Network was proposing measures such as country level financial reporting for multinational companies, and the automatic exchange of banking and asset ownership information between tax authorities, we were accused of being utopian dreamers. Now those measures are (slowly) on their way to being implemented, having received the backing of world leaders.

However, there is still much to do before we end the scourge of tax avoidance and evasion.

Our current tax systems are still stuck in a bygone era when the vast majority of economic activity was conducted by domestic companies. Tax authorities don’t treat companies as global players with global supply chains but instead as a series of national companies joined together by a head office. This system is what creates opportunities for companies to engage in transfer pricing and tax avoidance.

Today, in a world of global, multinational companies, many of which have revenues larger than the GDP of some of the countries where they operate, that system is broken beyond repair. What is required is not to fix it, but to change it altogether.

What we need is a system where multinationals are treated as single integrated companies, and their profits divided between countries where the real economic activity is taking place. After all, multinationals think and behave as single companies, and so tax authorities should treat them as single companies too.

As demonstrated by the ongoing disputes between the United States and the European Union on the activities of US tech companies, moving to such a system is, in the end, a political issue. It requires some discussion on how the profits of international companies should be divided between countries.

But currently there is no comprehensive, global political forum where these issues can be hammered out in detail. Although the G8 and G20 have shown considerable leadership, they meet infrequently and have a crowded agenda. They have delegated most of the work on coming up with solutions to the OECD, a policy development institution which does not have global legitimacy, and is perceived to be dominated by the interests of a small, wealthy group of nations.

It is also an organisation which is inherently lacking in ambition. In recent years it has twice declared that the age of tax havens is over, the latest absurd pronouncement coming to this G20 meeting in the form of a report on the progress countries are making in implementing global transparency standards. That report names only one nation, Trinidad and Tobago, as not meeting international standards on information exchange. The reality is that the bar which the OECD sets for transparency is so low that passing their test is meaningless.

The United Nations has agencies and institutions that deal with a broad range of international issues, from the environment, security, world trade and international development. But it currently has no dedicated agency looking at tax.

To build a new tax system that is fit for the 21st century, what is required is a new global consensus. To do that may require more than the occasional statement from the G20 and the well intentioned work of the OECD, but sustained political engagement in a global political institution. Then, rather than make slow progress in combatting this great issue of our time, the international community can make a real impact by ending tax avoidance and tax evasion and helping to provide nations with the funds necessary to address other globally important issues: healthcare, international development and the environment, to name but few.

Photo credit: Hamburg by Markus Jaschke on Flickr using the creative commons licence.