Hic Lough Erne, Hic Salta!

The 3T agenda for next Monday’s G-8 Summit in Lough Erne, a golf resort in Northern Ireland, is intended by its host, David Cameron, to make progress in Tax, Trade and Transparency.

In the forefield, a number of new initiatives on tax and transparency have been started: in the UK itself, where the debate on profit shifting and tax havens has led to public outcries and initiatives by Cameron and his ministers to retrieve some of their lacking taxes (and information on companies and beneficial ownership) from their own crown dependencies in the Carribean and the Channel Islands. First successes are reported, but it is yet unclear, how much of that is just for the shopwindow, and how much is real progress. The US, with their FATCA activities, is forcing (small countries like e.g. Switzerland and Austria) to transfer data on US citizens to US tax authorities, and has e.g. forced Swiss Banks to furnish data and refrain from advising US citizens (and companies?) on “tax optimization”. A Swiss draft law empowering Swiss banks to make such “deals” with US authorities has met fierce opposition, both from the banks and from parlamentarians.

The European Union is engaged in a number of areas to require more transparency: Luxembourg and Austria, the last two holdouts, are cajoled into agreeing to automatic information exchange on interest rate incomes of EU citizens; negotiations are under way with Switzerland, Liechtenstein, Monaco, Andorra and San Marino to reach similar agreements; to extend the reach of the Savings Tax Directive with respect to automatic information to other types of capital income; to reach an agreement on revealing the beneficial owner of companies, so they can be taxed, and so on, and so forth.

These are all very welcome developments. They are designed to dry out the hiding of illegally acquired or non-taxed funds in offshore jurisdictions (aka “Tax havens”), to fight illegal capital flows, to wipe out tax evasion – all with the consensual aim that taxes should be paid where the relevant economic activity occurs. (For a number of business ventures, e.g. electronic sales, this is not easily solved).

The NGO Tax Justice Network estimates that 21-35 tn $ of private funds (owned by individuals) are hidden in tax havens. The estimates of how much in taxes developing and emerging countries, but also industrialized countries, are losing through legal and illegal tax evasion, are much higher. But it is especially less developed countries, which have difficulties in raising taxes anyway, which suffer most. But for all countries, this legal and illegal tax competition for business taxes means that the tax burden on labor income and all types of sales taxes is higher, because they are paid on the spot and cannot (easily) be shifted.

A case in point is the location of the forthcoming G-8 summit. Since in Northern Ireland companies pay the UK rate of 26%, they are at a severe disadvantage vis-à-vis their Ireland counterparts, where the rate is a paltry 12.5%. Northern Ireland politicians hope that this summit will induce the UK authorities to lower their tax rate.

The G-8 agenda specifically wants to target mining industries and reach agreements that countries with mining operations “publish-what-they-pay” to foreign and domestic concession holders, that is publish the production sharing agreements and all other information on money flows. An initiative by Tony Blair, the Extractive Industries Transparency Initiative has shown some results in this respect, but only very few countries are complying yet – and there are severe doubts whether all information is correct. The purpose was to make governments in resource rich countries accountable to their populations by showing how much they made from concession agreements, which were and still are a major source of large-scale corruption by governments.

Cameron’s agenda is welcome. The US is, in spite of its intense pressure on other countries to reveal US citizens tax-relevant information, reluctant to agree to more information on beneficial ownership (Delaware, Nevada and other states are known all over the world for easy and non-transparent registration rules). Canada is also reluctant, maybe because its mining companies operate mines all over the world. The UK so far has blocked many tax initiatives in the EU and will have to prove that Saul has become Paul. The EU Commission should use all its influence to bring the agenda forward. Very little can be expected from Russia and Japan in this area. David Cameron still has a lot of convincing to do if he wants “his” summit to be a success. The world will be watching, especially the small countries which suspect anyway that different rules apply to the powerful.


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Filed under European Union, Fiscal Policy, Global Governance

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