However necessary it may be, amid an anti-elitist zeitgeist, the optics of a lavish forum that brings together leaders from twenty of the world’s largest economies cannot help but come across as a little tone-deaf. In this blog, Hugh Jorgensen explores whether taxation might be one area where the G20 could demonstrate an appreciation of, and need to respond to, the public’s apparent and growing frustration with status quo economic policy.
Combined with the world’s slow growth performance after the global financial crisis, the G20 desperately needs to show that it is attuned to the concerns of the citizenry it purports to represent. In this respect, the G20’s work on international taxation cooperation may not seem like the most obvious ‘go-to weapon’, but political events in the last twelve months suggest 2017 should be the year when the G20’s tax agenda earns its stripes as a centerpiece of the G20’s rhetorical and practical case for closer international cooperation.
For among its large number of previous commitments, taxation is one area where the G20 can credibly argue that it has been laying fundamental track-work for growth patterns that are more inclusive, less unequal, and more concerned with ensuring that even the wealthiest multi-national corporations are paying their fair share of tax. With so many large financial firms and industries having received publicly-funded bailouts in the last decade, the G20 is well-poised to demonstrate to globalization-skeptics that it has a workable vision, in line with the 2030 Agenda and the Sustainable Development Goals, where governments and businesses are net contributors to the advancement and not the detriment of society. If done wisely, the G20 therefore has a chance to tap in to the popular sentiment embodied in the recent electoral victories of Trump, Brexit, and the rise of similarly minded political movements in Europe, but in a practical and pragmatic way.
Admittedly, the G20’s work on taxation cooperation has thus far been fairly slow, methodical and a little tame. Yet the achievements of the G20 members in their campaign against the erosion of their tax bases, courtesy of large firms shifting their profits to low or no-tax jurisdictions where they have no economic activity (commonly called Base Erosion and Profit Shifting – BEPS), is nevertheless one of the best platforms that the G20 has for demonstrating that it is serious about its now often-repeated, but not always readily apparent, commitment to supporting inclusive growth.
The G20’s comparative advantage is not as a forum for technocrats
The employment of inclusive rhetoric is all well and fine, but as many of the individual growth plans presented by G20 members at G20 meetings entail domestic reforms that ultimately hinge on domestic legislative battles, it is not always clear whether high-level G20 policy discussions are part of a policy process that is filtering all the way down to the lives of everyday citizens.
In Dani Rodrik’s perceptive critique of global governance evangelism, the goal of meetings like the G20 should be to collectively enhance domestic decision-making capacity, rather than constrain it. In contrast, and following Rodrik’s lead, any objective reading of a G20 communique (and if we are being honest, often the analysis and output of track II entities like the T20 or the B20), suggests the G20-universe is morphing into one more highly technocratic arena with a predilection for conceptual reports and impenetrable studies that too easily circumvent the difficult question of how to actually push reforms through processes of public deliberation.
As Mike Callaghan implied recently in these pages, this needs to change. There are already more than enough meetings and international forums to work out the logical details. The G20 is a supposed to be special because it is run by political leaders, that come with the unique political remit of being the primary political actors from their respective states. Rather than technocratic tinkering, their comparative advantage is in being able to theoretically break through the international and domestic political deadlocks that bureaucrats and lower-level officials cannot.
Where G20 leaders can help on taxation cooperation
This is where clamping down on legal tax avoidance, or tax minimization, comes back in. In addition to the obvious fact that G20 members cannot fulfil their policy commitments without a reliable source of taxation revenue, G20 members, and the international community in general, cannot expect to combat the competitive tax arrangements of large multinational entities (MNEs) so long as there are holdout states willing to implement low or laxly enforced ‘beggar-thy-neighbour’ tax regimes – including in some cases, G20 states themselves.
The adoption last month by over 100 tax jurisdictions, including the G20 members, of the ‘Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS’ was thus a positive affirmation of the momentum boost the G20 has given to the OECD’s work on tax avoidance. The convention updates over 2000 tax bilateral treaties around the world and expands the number of legal tools that governments can draw upon in their effort to see that profits are taxed in the countries where they are actually made. Although more needs to be done to bring in non-OECD and non-G20 member countries into the actual creation of BEPS-related policies, the wide-spread adoption of the convention is a clear indication of the G20’s capacity to galvanize global changes beyond its own membership-base in the area of taxation cooperation, an outcome that is not often seen in other aspects of its agenda.
Yet although commendable, the BEPS agenda still falls a long way short of the G20’s original intention for MNEs to be taxed “where economic activities take place and economic value is created”. In part this is due to the mismatch between the small number of skilled officials working for tax authorities versus the legions of employees hired by large MNEs – for example, even the US IRS had to hire outside consultants in its recent audit of Microsoft – again making for an especially difficult challenge for low to middle income (LMIC) countries that lack anything like the sufficient resources and expertise to take full advantage of the BEPS reforms.
Yet even in relatively wealthier countries, the determination of governments to follow through on the spirit of the BEPS agenda, as opposed to throwing in the towel and implementing their own ‘beggar-thy-neighbour’ tax rates, is at a crucial inflection point. The UK, for example, is evidently flirting with lowering its corporate taxes even in the wake of Brexit, so as to avoid an exodus of firms currently located in London, and President-elect Trump has vowed to pursue a similar agenda in the US in an effort to boost growth.
While such low-tax regimes may have an immediate political appeal for business, if done in an unintegrated way, they are all potentially small steps to what could amount to a highly destructive race to the bottom, pushing governments into even further debt and deficit territory than they are today. Instead, the G20, under the German presidency, should look to tackle head-on the kinds of complicated issues that stand between the existing BEPS agenda and the kind of international tax regime that could bring about more predictable streams of international and domestic revenue mobilization, or, in simpler terms, to have enough money to do the things their citizens expect of them.
For the OECD countries, the IMF has estimated some $500 billion is lost every year by OECD countries to MNE profit-shifting arrangements, and up to $200 billion by developing countries. Given these large estimates are probably at the conservative end of the possible range, the G20 could make important political headway in the coming year by discussing how to allocate taxing rights among potential claimant countries, discussing some form of minimum tax on MNEs in their entirety (thereby challenging the arms-length excuse favoured by MNEs that allows for subsidiaries to be taxed as separate entities), and by pushing for more stringent and lower-capitalisation benchmarks in determining which MNEs must maintain registers of their revenue, profits and employee bases in every country where they maintain a presence.
In general though, the important thing is that the G20 be seen this year to take on the avoidance of tax by wealthy MNEs in a meaningful way. The good thing is that the G20 has done the necessary groundwork and has the experience to do it. The world may be a long way from creating the kind of international tax organization called for at the 2016 G20 summit by China’s finance minister Lou Jiwei , yet in a globalized economy, where so many MNE’s are seemingly everywhere but also jurisdictionally nowhere that charges tax, it may be up to the G20 to make the returns from international cooperation ‘great again’.