1. Introduction
1. Two weeks after my appointment as rapporteur by the
Committee on Political Affairs and Democracy, I attended, from 11
to 13 February 2013, the OECD Parliamentary Days, and in particular
the OECD High-Level Parliamentary Seminar on “Following the money:
Trade, tax and banks”. On that occasion, I also had the opportunity
to meet several high-level members of the Secretariat of the Organisation
for Economic Co-operation and Development (OECD) and my compatriot,
Yves Leterme, Deputy Secretary-General of that organisation.
2. Following the exchange of views with Mr Leterme, I decided
to deal with the following subjects in my report: the OECD initiative
on New Approaches to Economic Challenges (NAEC); development and
taxation issues; and the OECD work on Base Erosion and Profit Shifting
(BEPS). I chose these topics for two major reasons. Firstly, it
is my view that governments’ inadequate responses to the economic
and employment crisis have damaged citizens’ trust in democracy.
This is demonstrated by the rise of populist propositions that characterise
public debate in many of our member States, and indeed it has been
the subject of a report recently presented to the Assembly.
Secondly, the ability of governments
to raise funds through taxation in order to pay for necessary public
services is a fundamental anchor for democracy. When the actions
of companies and individuals undermine governments’ legitimate financing
abilities, either through aggressive tax avoidance or through illegal
tax evasion, the very fundaments of democracy and equitable development
are threatened. This is a problem, not only for developed countries
but also for the developing world. The OECD is playing a leading
role in international efforts to bring greater fairness to tax policy
worldwide.
3. On 8 March 2013, I made a fact-finding visit to the OECD,
where I had very constructive meetings with: Sven Blondal, Head
of the Macroeconomic Policy Division, on Economic Outlook; Shardul
Agrawala, Head of the NAEC Unit in the Office of the Secretary-General,
on the NAEC; Grace Perez-Navarro, Deputy Director, Centre for Tax
Policy and Administration, on BEPS and the OECD work on Tax and
Development; and Willemien Bax, Head of Public Affairs, on OECD
activities relevant to the work of the Council of Europe. On 28 and
29 May 2013, I attended the OECD Forum in Paris, which focused on
three key themes in the debate on how to achieve a sustainable future:
promoting inclusive growth and addressing inequalities; rebuilding
trust in the system; and fostering sustainability.
4. In the meantime, I had proposed to the committee at its March
2013 meeting the following timetable, which is the same as we had
in 2012, and to which the committee agreed:
- Hearing with relevant OECD high-level officials and other
experts on 5 June in Paris, based on an outline report.
- The committee agrees on a draft report during the Assembly’s
June part-session.
- The draft report is sent to the overseas delegations and
to the OECD, for comments, at the beginning of July.
- Approval of the report by the Committee on Political Affairs
and Democracy, enlarged to include representatives of the overseas
delegations on 4-5 September in Paris.
- Debate in the enlarged Assembly on 1 October in Strasbourg.
5. On the basis of the above-mentioned agreed timetable and scope
of the report, I prepared an outline report for discussion at the
meeting of the Sub-Committee on relations with the OECD and the
EBRD in Paris on 5 June. On the occasion of this meeting, a hearing
was organised with the following participants: Raffaele Russo, Head
of the Non-Compliance Unit, International Co-operation and Tax Administration
Division, OECD Centre for Tax Policy and Administration; Shardul
Agrawala, Head of the NAEC Unit, OECD; John Christensen, co-founder
and Executive Director of the Tax Justice Network; and Gabriel Zucman,
PhD Candidate, Paris School of Economics.
6. In the light of this hearing and the outcome of discussions
with members of the sub-committee, I presented to the Committee
on Political Affairs and Democracy a draft report for consideration
during the June 2013 part-session, thus respecting the agreed timetable.
I took this opportunity to thank Mr Nicholas Bray for his valuable
assistance in the preparation of that version of the report.
7. The committee considered the draft report and agreed that
it be sent to overseas delegations and to the OECD for comments
or contributions. This was done on 5 July 2013. Some delegations
and the OECD sent contributions and I am grateful to them. Those
contributions which I could accept have been included in the present
report.
2. New thinking
needed to pull the world economy back on a growth path
8. The financial and economic crisis that exploded in
2008 is still continuing in 2013. Unprecedented action by central
banks to inject liquidity into economies has staved off disaster.
The tentative recovery that began in 2010 was not, however, strong
enough to put the world economy back on a solid growth path and
the outlook, particularly in Europe, remains uncertain. Unemployment
is high and businesses hesitate to invest. Consumers lack the confidence
to increase their spending and OECD governments are under pressure
to reduce high public debt levels.
9. According to the OECD’s latest economic forecasts, published
on 29 May 2013 ahead of the Organisation’s annual ministerial meeting,
the global economy is gradually regaining strength. The OECD predicted
that gross domestic product (GDP) in its 34 member countries would
grow by 1.2% this year, with the United States economy expanding
by 1.9% and the Japanese economy by 1.6%. Growth in China is forecast
to continue at a steady rate of 7.8% this year. However, European
economies mostly remain weak, dragged down by record-high unemployment.
The OECD forecast that the euro-area economy will shrink 0.6% this
year, before returning to a forecast growth rate of 1.1% in 2014.
10. Income inequality is rising, not only between countries but
within countries. According to recently published OECD figures,
the richest 10% of the population in OECD countries earned on average
9.5 times the income of the poorest 10% in 2010, up from 9 times
in 2007. The gap was largest in Mexico, where the richest 10% had
27 times more income than the poorest 10%. But it was also particularly
high in Chile, Turkey, the United States and Israel. Further cuts
in welfare spending are likely to add to income inequality and cause greater
poverty in OECD countries in the years ahead.
11. Against this background, it is not surprising that policymakers
are increasingly turning against the neo-liberal free-trade and
free-market policies that gained currency during the 1980s and 1990s.
In preparing this report, I was struck by the conclusions of the
latest Human Development Report from the United Nations Development
Program (UNDP). Entitled “The Rise of the South”, this report is
an invitation to shift from dogmatic thinking to fact-based thinking
on socio-economic policies for human development. It shows that developing
States that performed well were often those that actively supported
private industries and collaborated with the private sector to improve
human development; that opened gradually, rather than suddenly,
to world markets; and that invested in health, education and human
development.
12. This is in stark contrast to the dogmatic Washington thinking
of only a few years ago, which imposed on countries in difficulty
a recipe of minimal State intervention, immediate opening to trade
and structural adjustment with far-reaching cuts in public spending
on education and health.
13. This shift in policy approach coincides with a shift in the
nexus of growth from West to East and from North to South, and a
growing realisation that some economic recipes of yesterday are
no longer relevant for tomorrow. In an article in the OECD Observer last year, OECD Secretary-General
Angel Gurría acknowledged that “the world economy is going through
a paradigm shift”. Under such conditions, he concluded, “we need
to identify which of our previous ideas, frameworks and tools still
hold and which need to change”. Reality has forced the OECD to engage
in some serious soul-searching.
14. A look at some of the economic prescriptions that the OECD
was issuing only three years ago shows how far policy advice has
been overtaken by events. After the immediate financial crisis of
2008-2009 had passed, many developed countries responded with shock
treatment of spending cuts and tax increases in an effort to rein
in high public deficits. In its
Economic
Outlook 87, published in the spring of 2010, the OECD recommended
that the central banks begin exiting from extraordinary policy measures
and in some cases start to “normalise” their policy interest rates
in order to guard against a risk that inflation expectations might
become “de-anchored” in the context of a forecast recovery in activity.
At the same time, it suggested that the European Central Bank (ECB)
should prevent overnight rates from converging too soon to the higher
key policy interest rate and raise interest rates in the euro zone
by the end of 2010, this despite the fact that OECD’s models projected
low inflation for years to come.
15. In this context, one may note that the OECD has consistently
highlighted the role of structural reforms, not only in paving the
way for strong potential growth over the longer term but also in
strengthening activity in support of the recovery. Structural policies
are indeed at the heart of its analysis and policy advice and of
its response to the crisis.
16. Structural reforms were frequently cited as tools to combat
macro-economic imbalances and improve competitiveness for deficit
euro countries, both in the Economic
Outlook 87 and in subsequent publications, such as Going for Growth. Emphasis was put
on structural reforms in labour and product markets with the aim of
increasing competition, fostering innovation and combating long-term
unemployment. European periphery countries were cited in particular
as potential beneficiaries of such measures as part of a package
to restore competitiveness, but emphasis was also put on the need
for reforms in surplus countries that would contribute to a more
symmetric rebalancing.
17. In some instances, such as in the economic survey of Portugal
in 2010, a combination of lower labour taxes and higher value added
tax (VAT) was suggested as a way of giving short-term stimulus,
also called fiscal devaluation.
18. The OECD’s Economic Outlook 87 did
acknowledge that redressing imbalances through low inflation or deflation
in the periphery would be difficult and that not all countries should
pursue price competitiveness at the same time. The OECD’s advice
on monetary, fiscal and structural policy has reflected this, including
arguing for strong monetary stimulus to ensure that the inflation
target is met and allowing above-target inflation in surplus countries.
The advice differentiated on the pace of fiscal consolidation and
the urgent need for reforms in surplus countries, but it did not
follow up on that observation by recommending higher aggregate inflation
in the eurozone or fiscal stimulus in surplus countries as a means
of addressing imbalances.
19. Now, after three years of lacklustre growth and ongoing recessions
in many member countries, it is time to evaluate the forecasting
record and the impact of policy actions taken, including those recommended
by the OECD. Actual growth rates have turned out much weaker than
those forecast by the OECD and other such bodies in 2010. Figure
1 draws on OECD data to show the forecasting error, namely the difference
between forecast and actual GDP growth, as a function of the fiscal
consolidation effort that was predicted at that time. It turns out
that, on average, countries with large planned consolidation packages
have seen larger-than-expected adverse effects on growth. However,
the OECD argues that this result is very sensitive to the inclusion
of a specific country in the sample and does not necessarily imply
a causal link. In addition, other factors such as openness, financial
structure and the impact of the euro area sovereign debt crisis
appear to have stronger relationships to the forecast errors that
were made.
Figure 1: Fiscal consolidation
plans and growth forecast errors
Note: The sample used here includes
those OECD countries that are considered in the International Monetary Fund’s
(FMI) World Economic Outlook, October 2012, Figure 1.1.1.
20. Bond spreads in distressed euro countries have widened.
Figure 2 shows the rise in the spread of Spain, Italy and Belgium
from 2010 to 2012. It suggests a role of the rate increase by the
ECB in April 2011 in fuelling panic on European bond markets. By
reacting too aggressively to a perceived rise in inflation at that
time, the ECB may have implicitly given the signal that periphery
countries with overvalued real exchange rates could not count on
the ECB to help ease the deflationary spiral in these countries
by allowing for more inflation in the core. This led bond markets
to conclude that countries would not be able to maintain the deflationary
process for long, raising expectations of default and setting off
a self-fulfilling crisis. The ECB seems to have underestimated the
crucial importance in a monetary union of a lender of last resort,
in the form of a central bank that protects the government from
a sudden stop in access to funding.
Figure 2: 10-year bond spreads
over German Bunds, for Italy, Belgium and Spain
Note: The first line indicates
the date of the ECB’s rate hike, the second the inauguration of
the government Di Rupo-1 in Belgium.
3. The need for “new
approaches”
21. Why did this debacle occur? In part, because the
adverse effects of fiscal policy on growth were underestimated.
It turns out that the impact of fiscal multipliers – materialised
in the percentage decrease in GDP resulting from a given amount
of fiscal consolidation – has been higher than had previously been expected.
Now, at last, there are signs that Europe’s policymakers may be
coming to their senses and relenting on the pace of co-ordinated
fiscal policy tightening. Continued recession, rising unemployment,
sub-target inflation, and weak money and credit data have belatedly
forced the ECB to play a more active role in favour of expansion.
At the same time, the OECD has embarked on a far-reaching review
of economic thinking, under an initiative called “New Approaches
to Economic Challenges”.
22. If the crisis of 2008-2009 was the result of failing financial
markets, there are good reasons to conclude that the ongoing recession
after 2010 has been partly the result of bad judgment and policy
errors in dealing with the aftermath of the crisis and the legacy
of high private debt build-up. This initiative provides a welcome opportunity
to review new academic contributions that may help to formulate
policies better adapted to the current crisis.
23. Earlier this year, in my role as rapporteur, I had the privilege
to look at an OECD working paper setting out some of the considerations
that are guiding the OECD’s work. I was both surprised and gratified
to find phrases referring, for example, to “the need to revisit
the objectives of macroeconomic policies” and “the need to upgrade
the regulatory capacities of governments”. At one point, the paper
referred to the “flawed assumptions about the self-equilibrating
character of the economy”, while at another it noted “the need for policies
to be better oriented towards promoting well-being through reduced
inequality, better jobs and improved environment and not just macroeconomic
outcomes”.
24. New Approaches to Economic Challenges (NAEC) was launched
at the OECD in 2012 as an organisation-wide reflection process with
the aim of catalysing a process of continuous improvement of OECD analytical
frameworks and policy advice. Consistent with the ambitions of this
endeavour and to ensure a “whole of the house” approach, the Secretary
General himself is overseeing this work, with the support of his Chief
of Staff and Sherpa to the G20, Gabriela Ramos. While the financial
and economic crisis is an immediate catalyst, such a reflection
is timely for a number of other reasons as well, to adapt to evolving
policy challenges, including a further integration of large emerging
markets in the world economy; technological change; increases in
international division of labour; population ageing, migration and
other demographic shifts; and growing natural resource scarcity,
climate change and environmental degradation. A cross-cutting theme
in the NAEC initiative is the limitation of existing analytical
tools, policy frameworks and governance arrangements to address
the significant rise in interconnectedness and complexity of the
global economy. This includes interconnectedness across and within
countries, between the financial sector and the real economy, and
at a deeper level, among various global trends that have been building
up for decades.
25. The ultimate objective of NAEC is to develop a strategic policy
agenda for well-being and sustainable, inclusive growth built on
the interconnectedness, complementarities and trade-offs among different
policy objectives and instruments. Working within the NAEC framework,
and building on its flagship work on growth, inequalities and well-being,
the OECD aim to deliver a new vision that combines strong economic
growth with improvements in living standards that matter for people’s
quality of life – good health, jobs and skills, and a cleaner environment,
including from an intergenerational perspective. A critical element
in this agenda is the work on inclusive growth that was launched
at the OECD with the support of the Ford Foundation. In its May 2013
report to its annual Ministerial Council Meeting, the OECD set out
the objectives of its “New Approaches to Economic Challenges” as
being to:
- improve our understanding
of the complex and interconnected nature of the global economy and
find better ways to cope with policy trade-offs and profit from
synergies (such as between growth, inequality, stability and the
environment);
- recognise the importance of economic growth as a means,
but not as an end, of policymaking. This means having a broader
definition of well-being outcomes and developing policy outcomes
that combine strong economic growth with improvements in living
standards and outcomes that matter for people’s quality of life
(good health, employment, etc.);
- identify areas where OECD analytical frameworks need to
be adjusted or complemented; and examine the potential for mainstreaming
new economic data, tools and approaches (for example behavioural economics);
- enable governments to identify, prioritise and combine
reforms to support sustainable, inclusive growth.
26. If such statements are harbingers of a shift in economic thinking,
not just in relation to Europe but at a global level, there may
indeed be hope for a long overdue meeting of minds between North
and South in search of policies for a better shared well-being for
all the people of the world. I feel that the OECD is to be encouraged to
pursue its work on “New Approaches” with a view to bringing new
thinking to a debate that for too long has been going round in circles.
The world needs to break out of the bind that it finds itself in.
As a grouping of nations committed to best practices in economic
policy, the OECD is the right forum in which to take this debate forward.
4. Handling the liquidity
trap
27. In the meantime, however, we must not lose sight
of the harsh realities. One important observation with far-reaching
consequences that emerges from the OECD’s studies is the fact that
the crisis seems to have permanent effects on economies’ growth
potential. Not only are there short-term effects, with economies underperforming
at levels below trend: the long-term productive capacity of a country’s
economy is damaged. Economists call this effect hysteresis: the
long-term consequences of short-term effects.
28. There are numerous channels through which hysteresis works:
reduced capital investments, reduced investment in research and
development, reduced labour force attachment on the part of the
long-term unemployed, scarring effects on young people who have
trouble starting their career, reduction in governments’ physical
and human-capital investments. All have the effect of depressing
an economy’s potential. Even when the economy recovers, it will
find itself on a lower growth path then before.
29. Economists such as DeLong and Summers
have
pointed out that hysteresis adds an important new dimension to the
austerity debate. Indeed, it is clear that hysteresis endangers
the long-term viability of public finances since it puts the economy
on a lower growth path. The corollary of that observation is that
temporary fiscal expansion may be self-financing in the long run
if hysteresis effects are sufficiently strong. If there are moderate
to large fiscal multipliers, fiscal expansion will cause the economy
to grow in the short run. The hysteresis effect allows the short-run
boost to have long-lasting positive effects. Applying the model
to the eurozone, DeLong
states that if long-term real borrowing
costs in the eurozone do not exceed 5%, temporary stimulus will
probably strengthen fiscal conditions and improve confidence.
30. DeLong and Summers are careful to point out that this effect
only works in limited cases. As a first rule, interest rates must
be reasonable. Obviously, a government with acute liquidity problems
will not be able to finance a short-term fiscal expansion. Also,
fiscal multipliers must be reasonably high. DeLong and Summers argue
that this is not the case in most instances. In normal times, central
banks tend to offset fiscal stimulus through monetary tightening:
the fiscal expansion will not have any effect, multipliers are close
to zero.
31. In severe crises such as the one that we are living through
today, monetary authorities may not “lean against the wind” as they
do in normal times. Indeed, their tools are likely to be insufficient
to combat the crisis: this phenomenon is called a liquidity trap.
These conditions may characterise large parts of the western world today.
32. As your rapporteur, I should like to share some other considerations
that I have found interesting in preparing this report. The work
of Gauti Eggertson and Paul Krugman
has
shown that countries that need to cope with excessive debt may not
profit from policies that are otherwise considered as beneficial
for growth. They show that increased flexibility and an increase
in labour supply may even result in adverse effects. Falling prices
and wages due to these policies increase the real value of debt,
so that the burden of indebted households becomes even larger than
before. The cycle of debt deflation becomes even more vicious than before.
33. In a recent paper, Eggertson et al
apply
this framework to Europe. They find that structural reforms may deepen
the recession, worsening deflation and increasing real interest
rates. They suggest designing reform packages in such a way that
structural reforms kick in only when the threat of liquidity trap
has passed. They even suggest that
during the
slump structural reforms should be going in reverse, before being
implemented during normal times. Nonetheless, results are sensitive
to the credibility of the reforms announced and the ability of the
central bank to provide for policy accommodation. Likewise, OECD
analysis suggests that some reforms can have positive effects on
activity even in the short run depending on the nature of the reforms
and, as implied by Eggertson et al, the state of the economy.
34. A large debt overhang from speculative bubbles is a serious
problem for many periphery countries. Portugal, Ireland and Spain
in particular have seen a large build-up of private household debt
in the decennium preceding the financial crisis.
35. A shift from labour taxes towards VAT is sometimes presented
as another tool to redress competitive imbalances. Received wisdom
on this matter says that such an operation can have only temporary
effects: after a while, wages rebalance to restore purchasing power
which negates the pro-competitive effect. Some studies conclude
that these reforms only produce small effects for reforms with relatively
large budgetary sizes.
36. If consolidation is needed, the choice of tax instruments
to achieve it should take account of equity concerns as well, since
it turns out that economic contraction does not hit everyone in
the same way. Ball
et al.
show
that spending cuts, in addition to raising long-term unemployment,
hit wage-earners the most, while profit and rent income recover
rather quickly. These results suggest that an equitable consolidation
package should contain reforms that shift the tax burden away from
labour and towards capital income.
37. From this short review, it should be clear that the economic
challenges that lie ahead of us require carefully tailored policy
advice to make sure that recommendations fit the needs of the countries
in question. Both specific circumstances, such as the existence
of a large debt overhang, and the time period in question, including
the threat of a liquidity trap, should be taken into account.
38. But in the context of the European monetary union, the shared
responsibility of member States should be acknowledged too. If full-fledged
budgetary union is not possible, intermediate policies should be considered.
For instance, Paul de Grauwe
argues
that countries which have been able to stabilise their public debt-to-GDP
ratio should stop trying to balance their budgets and keep debt
ratios constant to the level of 2012.
39. The OECD has a vital role in providing policy advice, not
just to the governments of its member countries, but to the world
community at large. It has already drawn governments’ attention
to the challenges posed by widening income inequality in most countries,
and it has broadened its analysis of pro-growth structural reforms to
highlight trade-offs, synergies and unintended consequences of structural
reforms on the distribution of income within countries.
40. With the 2015 deadline for the Millennium Development Goals
close at hand, the OECD is working in the context of its Strategy
on Development to strengthen engagement and knowledge sharing with
developing countries. Continuous efforts are being made to mainstream
development into the organisation’s work and achieve Policy Coherence
for Development. In the environmental policy area, too, the OECD
is taking a lead role in offering guidance to governments. Its Green
Growth Strategy, launched in 2011, is now being mainstreamed into
core policy areas. The education work is also covering more and
more the realities of developing countries.
41. It is gratifying to see such examples as evidence that the
OECD is at last taking a much needed holistic approach to economic
policy issues. Specifically, it is taking this work forward with
its reflections on “New Approaches to Economic Challenges”, which
highlight the inclusive growth dimension of its policy advice. I recommend
that the enlarged Parliamentary Assembly urge the OECD to continue
in these endeavours with a view to presenting clear conclusions
at an early date.
5. Tax evasion and
aggressive tax avoidance: a threat to democratic institutions
42. As we have seen, the financial and economic crisis
is constricting governments’ ability to finance necessary health,
education, welfare and infrastructure spending. Fiscal pressures
are creating a political backlash, as citizen’s protest against
the double squeeze of recession and rising tax burdens. Revenue shortfalls
due to tax evasion and the aggressive tax avoidance practices of
multinational companies challenge democratic systems. It is to be
welcomed that the OECD is addressing these issues through its campaign against
tax havens and its work on BEPS.
43. More needs to be done, however, both to crack down on illegal
tax evasion and to promote far-reaching reform of tax systems in
order to combat aggressive tax avoidance. Governments have a duty
to ensure that taxes are levied both fairly and efficiently. Much
of today’s tax legislation is based on an outdated vision of economic
activity dominated by fixed assets and with limited cross-border
exchange. A digital economy, based on intangible assets and rapid
cross-border transfers, requires radical new approaches to taxation.
The OECD, given its mission to develop rules supporting the efficient
operation of global markets, provides an appropriate forum for the
elaboration of new approaches. What is needed now is forceful new
thinking, backed by the determination to act.
44. I view this as a matter of extreme urgency. In Europe, leaked
documents and e-mails concerning funds allegedly hidden in secret
accounts in tax havens by politicians, business people and other
wealthy individuals have undermined confidence in democratic institutions.
Tax evasion and tax avoidance deprive European Union governments
of around one trillion euros in annual revenues, according to the
European Commission. This exceeds the total amount that European
Union member States spend on healthcare and it amounts to four times
the amount of money spent on education.
45. European Council President Herman Van Rompuy put the issue
in stark relief ahead of the summit on 22 May 2013 at which European
Union leaders reaffirmed their commitment to crack down on tax evaders.
“Tax evasion is unfair to citizens who work hard and pay their share
of taxes for society to work. It is unfair to companies that pay
their taxes but find it hard to compete because others do not. Tax
evasion is a serious problem for countries that need resources to
restore sound public finances.”
6. Combating base
erosion and profit shifting
46. The issue is not just a matter of concern for developed
countries. Developing countries suffer massively from a fiscal haemorrhage
to tax havens. Nor is the issue just a matter of illegal tax evasion.
It also concerns fully legal practices that are used by multinational
companies to minimise their tax bills. In Britain, companies like
Amazon, Google and Starbucks have come under fire for accounting
arrangements that enable them to minimise legitimately the amount
of tax they pay to the United Kingdom Treasury, despite buoyant
sales on British soil. In the United States, Apple has been criticised
in Congress for avoiding taxes on tens of billions of dollars in
revenues from its international operations that were channelled
through offshore entities. In other countries, concerns are also
growing that multinational corporations are unfairly exploiting
cross-border accounting opportunities to maximise their profits
by reducing the amount of taxes that they pay.
47. At the heart of such operations is a clever manipulation of
the so-called “arm’s-length principle”, a concept long considered
as a core element in efforts to maintain a level fiscal playing
field for international businesses. This arm’s length principle
requires different entities within a multinational group to book transactions
between them as if they were independent enterprises for tax purposes.
It was conceived as part of a construct to help promote cross-border
business by eliminating the double taxation of profits.
48. Recent examples of corporate activities such as those mentioned
show, however, that the construct has undergone such a monstrous
distortion that in many cases it actually results in artificial
profit shifting. The much vaunted level playing field has become
a rock-strewn, crater-pitted terrain in which the skilful and unscrupulous can
easily outmanoeuvre tax inspectors armed only with outmoded rule
books.
49. What is needed now, in addition to a crackdown on tax evasion,
is wholesale tax reform. In my view, merely tinkering with the present
system will not suffice to address the fiscal challenges facing
Europe and the entire world. In the United States, President Barack
Obama acknowledged as much in the President’s Framework for Business
Tax Reform, a joint report published in February 2012 by the White
House and the US Treasury. “The empirical evidence”, this report
stated, “suggests that income-shifting behaviour by multinational
corporations is a significant concern that should be addressed through
tax reform”.
50. G20 leaders have taken up the challenge, stating “the need
to prevent base erosion and profit shifting” in the final declaration
following their June 2012 summit in Mexico. Responding to a request
from G20 finance ministers, the OECD published a report entitled
“Addressing Base Erosion and Profit Shifting” in February 2013.
This report, which analyses the root causes of base erosion and
the reasons why profit shifting takes place, identified a number
of technical elements linked to accounting procedures that facilitate
these practices. They include hybrids and mismatches which generate
arbitrage opportunities; the residence-source tax balance, notably
in the context of digital transactions; and intragroup financing,
whereby companies in high-tax countries are loaded with debt; and
transfer pricing issues, such as the treatment of intangible, group synergies,
and location savings.
51. Hybrids, for example, exploit the possibility of having the
same money or transaction treated differently by different countries
to avoid paying tax. Typical examples include hybrid instruments
allowing a company to treat something as debt in one country and
equity in another and hybrid transfers that treat a transaction
as transfer of ownership of an asset in one country and as a loan
with collateral in another. In my view, the enlarged Assembly should
welcome this analysis and urge the OECD to follow through with clear
proposals for reform.
52. The OECD Secretary-General presented “Addressing Base Erosion
and Profit Shifting” at the February 2013 Moscow G20 meeting of
finance ministers, who expressed strong support for the work done
and urged the development of a comprehensive Action Plan. The Action
Plan was developed by the OECD Committee on Fiscal Affairs between
February and June 2013. Non-OECD G20 countries participated in this
work and they were all present at the meeting held in Paris on 25
June 2013 where the Action Plan was approved by the Committee on
Fiscal Affairs. The Action Plan was presented to the G20 finance
ministers’ meeting of 19 July 2013, where it received unprecedented
support.
53. The ambitious Action Plan sets forth 15 actions to address
BEPS in a comprehensive and co-ordinated way (for a summary, see
Annex). These actions will result in some of the most fundamental
changes to the international tax system since the 1920s and are
based on three core principles: coherence, substance and transparency.
The Action Plan also calls for further work to address the challenges
posed by the digital economy. Looking towards innovative approaches
to deliver change quickly, the Action Plan calls for a multilateral
instrument which countries can use to implement the measures developed
in the course of the work.
7. Who is to blame?
54. At the same time, it is to be noted that tax avoidance
cannot just be blamed on the aggressive strategies of individual
companies; it is also the result of the tax policies of national
governments, including those designed to attract investment by foreign
corporations.
55. The OECD’s February 2013 report warned that the effectiveness
of anti-avoidance rules was often reduced as a result of heavy lobbying
and competitive pressure. It also pointed an accusatory finger at preferential
regimes which lure companies to more attractive tax locations with
only minimal benefit to the receiving host country and significant
tax base erosion elsewhere. Those familiar with the issue acknowledge that
there has been hypocrisy on the part of governments in complaining
about erosion of their tax base while offering tax advantages to
foreign companies.
56. Following on from its February 2013 report, and for purpose
of developing the Action Plan which was presented to G20 Finance
Ministers in July 2013, the OECD consulted a range of stakeholders
in March and April 2013, including business and industry, through
the Business and Industry Advisory Committee to the OECD (BIAC),
labour unions, represented by the Trade Union Advisory Committee
to the OECD (TUAC), civil society organisations and non-governmental
organisations (NGOs). While business and industry representatives
expressed predictably nuanced views of the issues raised, the representatives
of the labour movement and civil society made no bones about their
concerns.
57. In a report entitled “No More Shifty Business”, 58 NGOs from
across the world greeted the OECD analysis as “an urgent call to
design a new international tax system that: (i) redresses the current
unjust distribution of the global tax base, (ii) treats multinational
corporations (MNCs) as what they really are: complex structures
that are bound together by centralised management, functional integration
and economies of scale, and (iii) makes MNCs pay their taxes where
their economic activities and investment are actually located, rather
than in jurisdictions where the MNC’s presence is fictitious and
explained by unacceptable tax avoidance strategies.”
58. In a subsequent follow-up comment, which I think is worth
quoting
in extenso, this group
stated as follows:
“Base erosion
and profit-shifting result from a deep structural flaw in the international
tax system, and is indeed a major cause of the instability of that
system. This flaw is the failure to treat multinational enterprises
according to the economic reality of their activity. Instead, a
principle has become gradually entrenched that they should be taxed
as if they were operating as separate enterprises in each country dealing
independently with each other. This fiction does not merely allow
but encourages multinationals to organise their affairs by forming
entities in suitable jurisdictions to reduce their overall effective
tax rate.
The systematic tax avoidance which results from this basic
structural flaw has many extremely harmful results. Governments
and tax authorities are rightly concerned by the immediate revenue
losses, but the ramifications go much wider:
systematic tax avoidance by the largest and most powerful
companies in the world undermines the legitimacy of taxation everywhere,
as the February report on BEPS acknowledges;
it gives the multinationals which exploit these avoidance
opportunities very significant competitive advantages over national
firms, resulting in inefficient allocation of investment and major
distortions to economic activity;
at the same time, it distorts the decisions of these firms
themselves, resulting in some benefits to some countries but overall
economic welfare losses;
it has particularly distorted the finance sector, greatly
contributing to the creation of shadow banking, excessive leverage
and other techniques, and hence the financialisation of economies,
leading to the bubble which caused the financial crash of 2007-9,
and the economic devastation that has followed;
it sustains the international tax avoidance industry,
resulting in enormously wasteful expenditures for both firms and
governments;
the techniques and facilities devised by the tax avoidance
industry, using the `offshore’ tax haven and secrecy system, are
also used for all kinds of evasion, not only of taxes, including
money-laundering for crime, corruption and terrorism;
Base erosion and profit-shifting, and generally tax avoidance
and evasion, seriously undermine efforts to tackle poverty and inequality,
including official development aid.”
59. As such considerations demonstrate, national governments are
going to have to review many aspects of their tax policies. We should
neither underestimate the complexity of this challenge nor the urgency
of dealing with it. In particular, governments need to ensure that
the international rules for the taxation of MNCs are thoroughly
reformed so as to adequately reflect production and trading practices
in today’s global economy. The enlarged Assembly should thus call
on the OECD to take a determined lead in moving this process forward.
8. Time to consider
“unitary taxation” of transnational corporations
60. In particular, more attention should be paid, in
my view, to the distortions that arise as a result of the present
application of the arm’s-length principle. The “separate entity”
approach gives MNCs tremendous scope to shift profits around the
globe to suit their own affairs. The OECD has sought to address
weaknesses in the system through enhanced co-operation and co-ordination
between governments, as well as changes to the OECD Transfer Pricing
Guidelines to ensure that the rules achieve the desired effect.
61. However, some commentators have suggested that it is time
to give closer consideration to proposals for unitary taxation of
MNCs, whereby these are treated as single entities. Under such an
approach, MNCs would be required to submit a single set of worldwide
consolidated accounts in each country where they have a business
presence, apportioning a share of their overall global profit to
each country in accordance with a weighed formula that would reflect
the true nature of their economic presence. Each country would be
able to see the full picture provided by such a report and tax its
portion of the global profits at its own rate.
62. This approach, in my view, could offer a number of important
advantages. By simplifying tax administration, it could cut the
costs of compliance for firms; it could align tax rates more closely
to economic reality, improving the fairness and transparency of
the international tax system; and it could greatly reduce opportunities
for international tax avoidance through profit shifting and the
use of tax havens. All of these outcomes would help to create a
genuine level playing field for businesses and would particularly
benefit developing countries that are frequently disadvantaged by
current practices.
63. Advancing towards such a goal will not be easy. As long ago
as 1935, the League of Nations concluded that unitary taxation was
“politically impossible”. At the OECD, officials involved in international
tax policy discussions suggest that such an approach would not be
feasible in today’s environment where tax policy is a matter for
decision by sovereign States. Nonetheless, experience in the domain
of international tax policy does show that comprehensive change
can be achieved. It should be noted that the Action Plan published
by the OECD and endorsed by G20 Finance Ministers and Central Bank
Governors in July 2013, recognises that if the arm’s-length principle
is not fit to address the transfer pricing issues associated with
intangible assets, risk and over-capitalisation issues, measures
that go beyond it will be proposed.
64. Article 26 of the OECD Model Tax Treaty provides for exchange
of information on demand as the minimum standard for the bilateral
treaties to be signed by member States, but allows for all forms
of exchange of information, including automatic exchange, as explained
in the Commentary to the OECD Model Tax Treaty. The OECD has worked
on automatic exchange of information for many years and many OECD
member countries already routinely engage in automatic exchange
of information on a number of items of taxable income, as reflected
in the OECD Report, “Automatic Exchange of Information: What it
is, How it Works, Benefits, What Remains to be Done”, which was
welcomed by G20 Leaders in 2012.
65. In July 2013, G20 Finance Ministers declared automatic exchange
of information as the new global standard. I note with satisfaction
that the OECD is at the forefront of promoting it internationally,
is advancing on the design of a single global standard for multilateral
and bilateral models for automatic exchange of information, and
that its Global Forum on Transparency and Exchange of Information
for Tax Purposes, which currently has 120 members, has been tasked
by the G20 to monitor and review its effective implementation.
66. With respect to efforts to ensure the fair taxation of MNC
earnings, I suggest that the enlarged Assembly should call on the
OECD not to close the door on unitary taxation, but rather to consider
a step-by-step approach which should start with the obligation for
MNCs to produce comprehensive global financial reports including
country-by-country reporting. Once this has been achieved, further
steps could be considered, including possibly the adoption of the
unitary taxation approach at the level of regional groupings such
as the European Union, the Association of Southeast Asian Nations
(ASEAN) and Mercosur, as a prelude to more widespread adoption.
67. In this connection, I further suggest that the enlarged Assembly
should call upon the OECD to do more to associate developing countries
with the work on BEPS. I note that the OECD has set up focus groups
to discuss key aspects of the issues at stake (Countering Base Erosion,
Jurisdiction to tax and Transfer Pricing). The OECD notes that countries
were invited to volunteer and that the focus groups were constituted
on that basis, with most countries’ requests being accommodated.
However, the participants in these focus groups are exclusively
drawn from OECD or G20 membership. As rapporteur, I feel it is important
that provision be made for smaller developing countries also to
have a voice in such forums.
68. In order to facilitate greater involvement of major non-OECD
economies, in the framework of the Action Plan, the “G20/OECD BEPS
Project” has been launched with G20 countries that are not OECD
members participating on an equal footing. Other non-OECD non-G20
countries can also be invited to participate on an ad hoc basis.
Moreover, the OECD’s outreach programmes will be used to involve
developing countries in the work. In particular, the four Global
Fora on Tax Treaties, on Transfer Pricing, on VAT, and on Transparency and
Exchange of Information for Tax Purposes, will be useful platforms
for developing countries to provide relevant input, as will the
Task Force on Tax and Development. In addition, the Committee of
Fiscal Affairs (CFA) will benefit from the input of the United Nations,
which has been a participant to the CFA since January 2012.
9. Stepping up the
fight against tax havens
69. In parallel, I believe that the enlarged Assembly
should urge the OECD to step up its fight against the widespread
illegal tax evasion that continues to be encouraged by tax havens.
In particular, the enlarged Assembly should support the OECD efforts
to press internationally for the implementation of arrangements
for automatic exchange of information for tax purposes in order
to combat illegal tax evasion.
70. The OECD has highlighted that automatic exchange of information
can help to counter offshore non-compliance in a number of ways.
It can provide timely information in cases where tax has been evaded
either on an investment return or the underlying capital sum. It
can also help detect cases of non-compliance even where tax administrations
have had no previous indications of non-compliance. Finally, it
has a deterrent effect, increasing voluntary compliance and encouraging
taxpayers to report all relevant information.
71. In this connection, the enlarged Assembly should welcome the
progress achieved so far on transparency and exchange of information
on request through the work of the Global Forum on Transparency
and Exchange of Information for Tax Purposes and of the Forum on
Tax Administration. Set up by the OECD in 2000 to agree global tax
standards, the Global Forum now has 120 member countries and jurisdictions.
Since 2009, when the G20 launched its crackdown on tax havens by
calling for the effective implementation of internationally agreed
standards of exchange of information on request, the Global Forum
has published 113 peer review reports.
72. Progress has been achieved, in particular, in the number of
bilateral agreements between jurisdictions for the exchange of information.
Five years ago, most exchange of information on request took place
on the basis of a network of tax treaties between jurisdictions
with a long history of exchange of information. Today, there are
over 850 bilateral tax information exchange agreements (TIEAs) worldwide.
73. At the same time, the OECD’s move in 2011 to update and expand
the joint Council of Europe/OECD Convention on Mutual Administrative
Assistance in Tax Matters (ETS No. 127) has resulted in a more than doubling
of the number of signatories and a further increase in exchange
of information (EOI) relationships, including 228 new EOI relationships
where no bilateral agreement previously existed. Overall, the number
of new EOI relationships (bilateral and multilateral) has increased
by more than 1 100 since 2009. It should be noted that the convention
provides a useful and efficient mechanism for rapid implementation
of automatic exchange of information.
74. While some members of the Global Forum still have to remedy
deficiencies in their legal frameworks, it is worth noting that
most jurisdictions have now qualified at this level and are able
to move to Phase 2 reviews looking at the effectiveness of their
information exchange practices. In this phase of its work, the Global
Forum will start rating countries’ implementation of the standards
on the basis of a four-tier classification system: “compliant”,
“largely compliant”, “partially compliant” and “non-compliant”.
A first set of reviews covering around 50 tax jurisdictions will
be completed by the end of this year.
75. In parallel, the enlarged Assembly may take note of the outcomes
of the meeting in Moscow on 16-17 May 2013 of heads of tax administrations
from 45 economies in the framework of the Forum on Tax Administration,
and in particular of the work by the Forum’s Offshore Compliance
Network, which has been sharing ideas, tools and techniques for
tackling offshore tax evasion.
76. Some countries have been particularly effective in collecting
and using data about cross-border financial transactions to detect
offshore tax evasion. The tools and techniques that they have developed
have been documented in a guide that is available to network members.
This is complemented by a practical guide for international auditors
that allows them to understand the codes used by banks when making
cross-border transfers to identify the bank accounts involved in
the transactions. In addition, the Network has developed a catalogue
listing tactics, illustrated by practical examples, to help its
members develop and refine their strategies for dealing with offshore
tax avoidance and evasion, particularly in connection with the investigation of
complex offshore structures.
77. Despite such advances, however, I believe that more needs
to be done to combat the scourge of tax havens. In 2008, according
to a study by Gabriel Zucman,
of
the Paris School of Economics, around 8% of the financial wealth
of households worldwide, or the equivalent of around six trillion
dollars, was held in tax havens. Not only are vast amounts of capital
sheltered from domestic tax authorities, leading to substantial revenue
loss for strained government budgets. Offshore financial centres
no longer fit with a political environment which, in the wake of
the financial crisis, puts ever more weight on transparency and
regulation of the financial sector. In today’s world, tax havens
are increasingly seen as aberrations.
10. The need for a
“Big Bang” approach
78. Evaluating the effects of policy changes on the capital
flows between offshore financial centres and other countries is
by its very nature extremely difficult. However, a study by Zucman
and Niels Johannesen,
of
the University of Copenhagen, has thrown up some very interesting
information. Using data from the Bank of International Settlements
(BIS), they were able to track the behaviour of bilateral bank transfers
between 14 jurisdictions, including Switzerland and Luxembourg,
on a quarterly basis.
79. The results of their study shed light on the movements of
deposits from and between tax havens as the result of treaties signed
by tax havens with OECD countries. Tax evaders seem to have responded
to the signature of such treaties with only limited repatriation
of funds. This suggests that many tax evaders did not perceive a
big increase in the probability of being detected as a result of
a treaty.
80. Those that did respond to the signature of such treaties did
not, for the most part, repatriate their funds to their home country,
but instead shifted them to other tax havens that had not signed
such treaties. Indeed, after the G20 initiative of 2009 to crack
down on offshore tax evasion, the total value of deposits in tax
havens actually increased, with evidence of a moderate relocation
of deposits between tax havens. This is shown below in figure 3.
Figure 3
Source: Johannesen, N. and Zucman,
G. (2012).
81. The OECD states that it is too early to draw firm
conclusions from these data, since many of the 1 100 new exchange
of information arrangements are only now coming into effect, meaning
that their impact will not become apparent until countries begin
using them extensively. Nonetheless, I consider that the findings
of Johannesen and Zucman expose the limits of the gradual approach
advocated thus far by the G20 and the OECD.
82. The OECD has taken a commendable lead in formulating a policy
response to the phenomenon of offshore tax evasion. Its approach,
however, and that of the G20, has been to rely on soft, incremental
reform. So-called unco-operative financial centres were whitelisted
after signing 12 bilateral treaties for exchange of information,
freeing them from possible threatened sanctions. Even once such
a treaty has been signed, information exchange is not automatic:
the current standard of exchange calls only for information on request. Tax
evaders exploit loopholes left by the current approach, giving tax
havens an incentive to keep the number of treaties signed to a minimum.
83. In addition, the findings of Johannesen and Zucman demonstrate
the limitations on governments’ ability to track fund flows and
illegal tax evasion. Funds are frequently hidden in opaque corporate
structures, such as trusts or foundations, which conceal the identity
of their ultimate beneficial owner. So-called “secrecy jurisdictions”
use legislative and regulatory arrangements designed to reinforce
such concealment in order to attract non-compliant capital. In my
view, current evidence suggests the need for concerted action on
a number of fronts.
84. As your rapporteur, I would like to stress that the bulk of
the paper mentioned in footnote 13 is devoted to conducting an econometric
analysis that identifies the causal effect of signing on request
information exchange treaties on offshore deposits, all other things
remaining constant. The key conclusion is that nothing much happens.
Since they are on request, information exchange treaties are simply
not putting tax evaders in danger; hence the latter do not react
much. Those (a small minority) who do react simply move their deposits to
non-compliant tax havens. That is what the data say, based on a
rigorous methodology that controls potentially confounding factors.
85. I think it is essential to stress once again that there is
a real, crucial difference between on request information exchange
and automatic information exchange. There is very little information
exchanged today through over 800 existing treaties. The French tax
administration for instance receives information on about 50 offshore
bank accounts per year through its numerous treaties. But French
residents have at least 100 000 (and more plausibly 200 000 or 300 000)
offshore bank accounts. Automatic exchange of information would mean
receiving information about each of those accounts every year –
so 200 000 records or so, as opposed to 50 or so today. That is
a huge difference. It simply means that 99.98% of the work remains
to be done.
86. Experience shows that a concerted drive by major countries
can have an impact. In April 2009, when the launch of the G20 initiative
appeared to threaten non-compliant jurisdictions with financial
sanctions, tax havens moved fast to sign the treaties that were
required of them. Small matter that these treaties turned out not
to have the force that was expected of them. Nonetheless, the power
of concerted action was demonstrated. I am therefore pleased that
the OECD and G20 are leading the way in the implementation of a single
new global standard of automatic exchange of information.
87. In July 2013, the G20 declared automatic exchange as the new
global standard, called on all jurisdictions to commit to this standard
and tasked the Global Forum to monitor and review its effective
implementation. The G20 also stressed the need to assist developing
countries in implementing the new global standard. Other relevant
OECD initiatives like the “tax inspectors without borders” were
also highlighted by G8 leaders at the 2013 Summit in Loch Erne (Northern
Ireland).
88. At the same time, governments need to review basic nuts-and-bolts
aspects of their tax-reporting arrangements, including for example
the standardised use of fiscal identification numbers, in order
to make information exchange effective. On 18 June 2013, the OECD
made public a report prepared for the G8, entitled “A Step Change
in Tax Transparency”, setting out some of the practical steps that
would need to be taken in order to make automatic exchange of information
a reality. This report will feed into further discussions at the level
of the G20.
Also, at the July 2013 G20 Finance
Ministers’ meeting, the OECD was asked to submit in November a progress
report on the development of a single global standard for automatic
exchange, including a timeline for completion of the work in 2014.
89. In my view, in order to combat illegal tax evasion, there
is a clear need for more detailed statistical information about
financial flows from private households and corporations to low-tax
and no-tax jurisdictions. Action should also be taken at an international
level to ensure the ability to identify the ultimate beneficial
owner of assets held in corporate entities such as trusts and foundations,
for example by imposing on the agents that administer these entities
obligations similar to those imposed on banks to counter money-laundering.
For this reason, the Assembly should also support the G20’s call
on the Global Forum to draw on the work of the Financial Action
Task Force (FATF) on beneficial ownership.
90. Even if such measures can be agreed and implemented, however,
they are unlikely to be effective unless governments agree on a
“Big Bang” approach, whereby tax havens are required to sign treaties
with all countries, in place of the current incremental policy.
This could also be readily accomplished by requiring tax havens
to sign the multilateral Convention on Mutual Administrative Assistance
in Tax Matters. The Big Bang approach should be supported by the
threat of restrictions on financial transactions with non-compliant jurisdictions,
in order to prevent the otherwise inevitable prospect of leakage
of funds to locations that continue to offer facilities enabling
tax evasion. International co-operation at the level of the G20
is needed to achieve such an objective, but the OECD has a key role
to play in preparing the ground for such co-operation. The enlarged
Assembly should urge the OECD to work with its member countries
to significantly step up the pressure for action on all these fronts.
The OECD should be the driving force for a new, comprehensive campaign
of action against tax havens.