New York, October 20, 2014 (Alochonaa): Next month Brisbane hosts the G20 leaders’ summit. The G20 is very much the child of a financial crisis, but originally it was the emerging market crisis of the 1997-98 rather than the larger and more global crisis last decade. It was the near-death experience for the world financial system in late 2008 that changed the G20 from a relatively obscure meeting of finance ministers into what it is today: the pre-eminent forum for global economic governance. Perhaps the most consequential G20 leaders’ summit so far was that held in London in April 2009.
Despite fiscal problems having little if anything to do with the onset of the crisis, tax, and more particularly the topic of tax havens, proved to be the most contentious agenda item. Indeed, the summit almost failed thanks to a disagreement between the French and Chinese leaders on whether or not the meeting should endorse a blacklist of tax havens drawn up by the Organisation for Economic Co-operation and Development in the days immediately before the meeting (President Obama brokered an eleventh-hour comprise whereby the list was ‘noted’, but not endorsed, by the G20).
This seemingly obscure clash is indicative of a sea-change in international tax policy that has been significantly driven by the response to the financial crisis even though, as noted, tax as such had little to do with the crisis as such, however important budget deficits have become since that time. Specifically, this contribution examines the post-crisis politics and implementation of global tax policy (the fact that there now can be said to be such a thing is an innovation of considerable innovation in and of itself) with particular reference to efforts to combat offshore tax evasion and tax havens.There is no settled definition of a tax haven, and what constitutes such a jurisdiction, also known by the synonym of Offshore Financial Centre (OFC), is very much in the eye of the beholder, as discussed below.
Nevertheless, to the extent that there is any consensus, tax havens have been conventionally said to be small jurisdictions with low or zero rates of tax for non-residents and tight financial secrecy. They have consistently been accused by large countries of facilitating tax evasion through allowing foreign individuals and companies to hide income and assets in offshore companies, trusts and banks. Because governments find it hard to tax things they do not know about, information exchange from tax havens to foreign governments, or more particularly the lack thereof, was seen as key.
The anti-tax haven cause was jolted into to life in early 2009, when the OECD began compiling a blacklist of those jurisdictions that either had not committed to exchange information exchange on request with other governments, or had made but not implemented such a commitment. The OECD itself has little in the way of sticks to beat even the smallest tropical islands into compliance, but what completely changed the game was strong hints from prominent G20 member governments that it was no longer business as usual, and they were willing to use severe economic sanctions against jurisdictions that did not fall into line.
At first blush, this threat proved incredibly effective, with targeted countries falling over themselves to sign up to international Tax Information Exchange Agreements, even those that had for years resolutely opposed such a step. OECD officials proudly noted in 2009 that more progress had been made in international tax information exchange in the preceding months than in the previous decade. From the perspective of five years hence, it might be expected that, because offshore tax evasion was above all a problem of secrecy, and because every single tax haven has begun the process of exchanging tax information with onshore governments, the G20, OECD and others might have declared victory and turned their minds elsewhere. However, this is not the case. In fact, in the years since the US, UK and various multilateral clubs including the G20 have felt the need to redouble their efforts. What has gone wrong?
The more than 1300 bilateral agreements conducted from 2009 were information exchange on request. The last part is crucial because it meant that tax authorities had to ask for information on a case-by-case basis, and each request then had to be fielded by the recipient government in the same manner. This is a labour intensive process and given that there are presumed to be thousands, if not hundreds of thousands or even millions, of tax evaders at large, only a tiny fraction are likely to be caught. By way of illustration, though they are often too embarrassed to publish exact figures, most OECD members make less than half a dozen such requests to any given tax haven in any given year.
These limitations of the information exchange on request model led to criticism that the victory of 2009 was a pyrrhic one. In response, the OECD and many national tax authorities have a fairly standard response. They admit that the number of tax evaders that can be caught via information exchange on request is vanishingly small, but say that such agreements are nevertheless crucially important in creating a deterrent against tax evasion. That is, would be tax evaders now know that if they tried to hide their money offshore, they could be one of the unlucky ones who are caught via information exchange, and thus these individuals are deterred from engaging in tax evasion. But how do tax authorities know that this deterrent effect is actually working? Tax authorities in general and the OECD tax outfit in particular seem on very weak ground in having little or no evidence that the deterrent value of information exchange on request. Rationally, tax evaders might calculate that their chances of being caught by this mechanism are less than one in a thousand, and so the deterrence value might be very slight.
As of last year, the G20 has responded to such worries by establishing a new standard: national tax authorities must exchange information with foreign counterparts automatically, rather than on request. This is advanced as both a solution to the original problem of offshore tax evasion, and the shortcomings of the on-request model. Yet this new standard again represents something of a leap of faith: to what extent will more information actually translate into more money for governments? Once again it seems that policy may have outrun evidence.
*Professor Jason Sharman is among world’s leading experts in International Relations (IR) and political science. He is the Deputy Director of the Centre of Governance and Public Policy at Griffith University in Queensland Australia. Sharman’s expert research has focussed on a range of issues, most notably those surrounding corruption, money laundering and tax havens, which culminated in his 2014 book Global Shell Games:Experiments in Transnational Relations, Crime, and Terrorism . His research articles were published in leading academic journals including International Organisation, Political Studies, American Journal of Political Science, Pacific Review and European Journal of International Relations.
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