Financial Transparency Coalition

This article is cross-posted at Triplecrisis.com. Click on ‘Continue Reading’ to download ChristianAid’s G20 Scorecard on taxes and development.

Back in September I was sitting in the salubrious office of an official from one of International Financial Institutions – when he slouched back in his chair, sighed and said ‘I can’t even bear to read those G20 communiqués – they are so vacuous.’ That evening, I found myself at a dinner hosted by DC law firm Jones Day where former Mexican President Zedillo branded the G20 ‘a disappointment.’

But last week Christian Aid welcomed the G20′s bold pronouncements on tax havens, financial transparency and development. President Sarkozy went as far as to say that havens that didn’t comply would be excluded from the international community. A whole programme of work on tax and development was agreed.

This was a major coup for organisations like Christian Aid and the Tax Justice Network that just three years ago were struggling to garner political support for these issues.

But haven’t we been here before? Back in 2009, the G20 declared ‘the era of banking secrecy is over.’ Yet this year the UK and Germany agreed to deals with Switzerland in lieu of tax from offshore account holders. Why didn’t the UK and Germany just get the information and pursue these individuals for what they owe? Banking secrecy, of course. It is alive and well. These deals, branded a disgrace by Christian Aid, were applauded by the Swiss bankers association for preserving their treasured ‘privacy’; read secrecy.

Meanwhile, the G20’s development working group took forward a piece of work on Domestic Resource Mobilisation – helping developing countries to raise their own taxes.

Of course the G20′s role is high level political statements and policy coordination. We shouldn’t expect it to deliver the world. But has it delivered anything?

Of course NGOs are always going to push for more. But are the G20 even following the advice they have requested from international experts? Last year the G20 asked intergovernmental organisations and international financial institutions to write a report. And the report is pretty good. It makes recommendations on exchange of information, transfer pricing, compliance of multinationals and capacity building for tax administrations – all important issues which we have been pushing.

Our scorecard compares the recommendations made, with what the G20 actually delivered. The scores that we attribute to the G20 simply evaluate their response to that expert opinion.

On this objective analysis of tax issues, the G20’s welcome political commitment has been translated to decisive action on only one of twelve suggested actions, while some tentative progress has been made on only three other issues.

‘Passes’

The G20 has urged Multinationals to improve transparency and full compliance with applicable tax laws. This sends a strong political message to Multinationals that tax dodging is no longer OK in developing countries and provides civil society and governments with the political backing to stand up to companies.

‘Could do better’

The G20 agreed on strong support for capacity building for designing and efficient managing of tax administrations and revenue systems. But they failed to commit any finance to make this a reality.

All G20 countries agreed to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters – a tool to facilitate exchange of tax information – and have offered to exchange information automatically, although only on a voluntary basis. While this sends a strong signal that the crackdown on tax evasion is a priority, loopholes and caveats within the agreement mean that it could remain ineffective. We need evidence that this agreement is actually working and that secrecy jurisdictions will be strongly invited to participate before we know whether it is worth developing countries signing on. And of course, without tax havens signing on, it remains of limited value.

The G20 has encouraged International Organisations to strengthen their programmes to assist developing countries diagnose their transfer pricing legislative needs and adopt, and then effectively implement, transfer pricing rules. This is clearly something that many developing countries want and need in order to challenge the abusive transfer pricing which costs billions in lost revenue every year. But the G20 failed to commit any resources to this.

‘Failures’

The G20’s major opportunity lay in pressurising tax havens to share information with developing countries to live up to its 2009 commitments. This is a missed opportunity for the world’s leaders to take a leadership position and ensure that their commitment to ending banking secrecy is delivered.

The International Organisations suggested that the G20 look into the feasibility of making further improvements to the transparency in reporting tax information by MNEs taking into account existing regulatory proposals for the extractive industry developed by the US and EU. Yet the G20 failed to make recommendations on as issue which is already law in one G20 country and is likely to be implemented in many others across the EU very soon.

Similarly the report recommended that G20 countries disclose information on tax exemptions in their own countries thus showing a leadership position on transparency – a crucial tenet of tax reform – but this proved too difficult for the G20.

Finally, the International Organisations recommended G20 countries undertake an analysis of the impact of G20 countries’ tax policies on other countries. This is particularly relevant because corporate tax reform – such as the UK’s review of its controlled foreign company rules- could have a significant impact on developing countries by increasing the incentive for UK companies to shift taxable profits offshore. But again the G20 failed to act.

Next steps?

Not a great score this time – but the political momentum generated should not be underestimated. To have the G20 recognise the harmful impact of illicit capital flight and the importance of tax for development is a significant coup. Civil Society Organisations will keep pushing G20 countries to deliver on their commitments with concrete supporting actions. So as the road to Mexico begins, we shouldn’t be surprised if the voice of civil society and governments in both the North and the South becomes much stronger.