In the battle against tax evasion by large multinational companies, the authorities have one very effective weapon - perseverance.
Two years ago, the world’s 20 largest economies – the G20 – decided to take action against illegal tax evasion. But chief financial officers at global corporations weren’t all that worried. Experience had taught them that international efforts on enacting new tax rules take a long time and mostly peter out after a few years.
Since the financial crisis, however, the world is very different. More than 50 countries are working to undercut tax evasion, which was often shielded with the help of Swiss banks. Starting in 2017, banks have agreed to provide data on foreign accounts to their respective home countries.
Swiss banks have been preparing for the move since 2013, and have already begun to request tax documents from clients.
The plan means tax authorities will no longer have to depend only on stolen data, such as the list of possible tax evaders taken from Swiss HSBC, which Christine Lagarde, French finance minister at the time, passed on to European Union colleagues in 2010.
The plan is aimed at legal tax avoidance by multinational companies, such as Apple and Starbucks.
This latest success has inspired finance ministers as they try to shine light on the murky world of international money flow. It is also speeding up a G20 project, known as the BEPS Action Plan, to fight “base erosion and profit shifting.” The plan is aimed at legal tax avoidance by multinational companies, such as Apple and Starbucks, which shift profits to subsidiaries in tax havens or low-tax countries.
The G20's finance ministers are meeting in Istanbul this week to determine how they will set up monitoring of multinationals. Starting in 2016, all companies with sales of more than €750 million, or $848 million, annually must report how much tax they paid and in which country.
Starting in 2017, countries will start sharing this data with each other, creating some much-needed transparency. Members of the European parliament still complain that big multinationals are not being forced to disclose tax payments, country for country, on their balance sheets.
Transparency is just one of 15 new tax reforms coming by the end of the year. Shifting profits to low-tax countries such as Ireland, for example, will be pursued as criminal fraud in the future.
At the same time, the Organization for Economic Cooperation and Development is considering how to implement new regulations.
Shifting profits to low-tax countries such as Ireland will be pursued as criminal fraud in the future.
The 40 OSCE countries want to agree on one formulation that would be part of all tax treaties, after gaining the consent of national parliaments. That would prevent having to make changes to each of the 3,000 existing tax treaties. Instead of taking 20 years, it could possibly be done in two.
However, there are still two glaring weaknesses in the G20’s approach to tax reform.
First, it does not tackle license and patent loopholes that create tax advantages in countries such as Ireland and the Netherlands.
Second, profit-shifting limits would only be effective if national authorities actually use them.
Even in a model country such as Germany, much work remains. For example, tax authorities in its 16 states must get busy monitoring the balance sheets of multinationals. And for the reforms to really work, federal and state governments will have to invest in new software and IT expertise to spot tax evaders.
In the European Union, competitive tax tricks must also be prevented. For example, Luxembourg has gained notoriety for its "tax rulings," which take the form of secret, cosy agreements between its government and big corporations to save the firms billions. In the best case, countries that offer “tax-rulings” should be made to disclose them.
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