Following the financial crisis in 2008, millions of citizens faced hardship as they set about repairing the damage done to their economies and to public finances. For most people, the necessary sacrifice was bearable as long as it was shared fairly by everyone in society. Unfortunately, the evidence shows that this was not the case when it came to some large global companies.
It is well known that trust is hard to earn and easy to lose. It is just as obvious that, in times of crisis, people find it harder to accept anything on trust alone. Since 2008, those two elementary truths have had the effect of propelling taxation to the heart of public policy discourse. This is no surprise. After all, a healthy tax system is an essential requirement for a resilient society.
The trouble is, the international tax system designed almost a century ago to prevent double taxation (companies being taxed at home and abroad on the same transaction) had been overtaken by modern business methods and could now be manipulated by some companies to pay low, single-digit, effective tax rates. Profits could be shifted in and out of jurisdictions to reduce tax bills, leading to an erosion of tax bases in the process. Citizens, who have shouldered higher taxes everywhere, could not understand why companies, some of which were blamed for causing the financial crisis, were being allowed to get away with it. Corporate tax issues, which in the past may have got a passing mention in the financial press, became front page news.
Trust in the international tax system was evaporating fast, and governments were under pressure to take action, even unilaterally. Otherwise, it would have taken a generation to rebuild an international tax system based on consensus. That matters because cross-border investment and world growth require an efficient tax system that prevents double taxation, tax avoidance and abuse.
The need to move quickly to sustain and restore trust in the international system was clear. Our work on Base Erosion and Profit Shifting (BEPS) has been founded on the clear determination of G20 leaders to modernise the world’s tax system on a multilateral basis. This could not be done by OECD countries alone if it was going to work. That is why we have involved non-OECD countries from the outset, with everyone working together on an equal footing. Responsible business leaders also back the work we are doing. After all, large firms have come to realise that the way they arrange their tax affairs now has a direct impact on their reputation and their trustworthiness. But to restore trust, it is not the only tax issue to address. Just as citizens are not prepared to accept large-scale tax avoidance by global businesses, they will not tolerate a situation in which the wealthy few can hide their money with impunity in tax havens.
Unlike legal fiscal planning by large firms, this behaviour involves illegal tax evasion that is commonly linked to other crimes. However, the effect is the same: ordinary law-abiding people are left with the impression that they have to bear the cost of rebuilding society alone, while the rich shirk their responsibilities.
In April 2009 the G20 declared that the era of bank secrecy was over. Since then the Global Forum on Transparency and Exchange of Information for Tax Purposes, which is based at the OECD, has delivered an ambitious programme of evaluations and reviews to ensure adherence to the existing standards of exchange of information, both in principle and in practice. The Forum issued its first set of comprehensive country ratings in November 2013. A new standard, intended to deliver a truly global model for the automatic exchange of financial account information, will be issued in mid-2014. More than 40 countries have already committed to early adoption of the standard. Taken together these measures represent a comprehensive and robust response to the scourge of offshore tax evasion.
However, trust is needed on several levels for implementation to go smoothly. Take tax inspectors. The OECD’s Forum on Tax Administration brings together the heads of tax administration in 45 countries, including the G20. These 45 people lead 2 million tax officials who collect most of the world’s taxes. Their job demands placing emphasis on building positive relationships based on trust.
Building up capacity in tax administration can also help in restoring trust. This is particularly important in emerging economies, where acquiring the skills needed to address international tax issues is not always easy. Enabling them to address tax issues involving big business would not only improve tax receipts but also their own citizens’ trust in tax systems as a whole and their readiness to comply.
Finally, trust underpins the OECD’s work too. Nothing we have accomplished in the fight against tax evasion since 2009 could have been achieved without the trust that has been built between our smart, hard-working staff and the countries and institutions they collaborate with.
OECD work on tax
Base Erosion and Profit Shifting (BEPS)
OECD Forum 2014 Issues
OECD Better Life Index
Pascal Saint-Amans, Director, OECD Centre for Tax Policy and Administration
@OECD Yearbook 2014