Why Developing Countries Should Care About the G8 Summit

June 19th, 2013

The leaders of the world’s eight wealthiest economies have finished their meetings, headed home, and issued a final communiqué for the G8 summit in Lough Erne. And though emerging economies are not represented at the meetings,[1] there are plenty of reasons they should deeply care about what was said. In general, the G8 communiqué goes a long way to calling out important tax issues, but in particular understands the importance of tax in the context of mobilizing domestic resources, curtailing illicit financial flows, and promoting development. And while the G8 did not go as far as they should have on some issues, they did make a fair number of important promises on tax and transparency to developing countries. Developing countries should take heed of these promises—and hold the G8 accountable to them.

Before I dive down into the specifics, I’ll start with a quote from the G8 communiqué that reiterates the importance of these ideas:

It’s in everyone’s interests for developing countries to be able to: strengthen their tax base to help create stable and sustainable states; improve their ability to fund their budgets through their own domestic revenues; and increase ownership of their own development processes.

This quote is significant. First, it acknowledges that the world is not a zero sum game. In the last few years, the world accepted that a less polarized global economic system, one in which all of the players drive economic demand and where wealth is more diffuse, would benefit everyone. That developing countries should grow their economies is not only in the interest of those in the developing world, but in the industrialized world, as well. Second, this quote draws a strong connection between development, sustainable economic growth, and taxes. In particular, it acknowledges the importance of mobilizing domestic resources in the context of economic development. It’s a simple idea that has gained a lot of traction in the last few years. I’m glad the G8 has paired these ideas together—and taken them as given.

To the end of development and capacity in tax collection, the 2013 Lough Erne G8 Leaders Communiqué points to several issues—and makes several promises—with varying degrees of forcefulness. I outline these issues below, noting the next (concrete) steps we should watch for or take, and call out some actions developing countries should forge on these fronts.

Automatic Tax Information Exchange

G8 commitment. In light of the recent bilateral and multilateral, yet piecemeal approaches to this issue in the United States and Europe, the G8 has committed to “developing a single truly global model for multilateral and bilateral automatic tax information exchange building on existing systems.” The leaders go on to note that it is “important that all jurisdictions, including developing countries, benefit from this new standard in information exchange.”

Next steps. Expect the OECD to take over. To that end, the OECD has already released a report outlining four concrete steps to achieve a global, secure and cost-effective model of automatic exchange of information.

Developing countries should join the Convention on Mutual Administrative Assistance in Tax Matters, which is open to all countries and provides a legal basis for automatic exchange of information. They should also start looking for explicit and specific details on implementation—it’s time to move beyond generalities.

Country-by-Country Reporting

G8 commitment. Acknowledging the importance of ensuring that tax rules do not encourage multinational enterprises to “reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions,” the G8 noted that “multinationals should report to tax authorities what they pay where.” The communiqué also agreed the best way to accomplish this is via “comprehensive and relevant information on the financial position of multinationals… in a standardized format focusing on high level information on the global allocation of profits and taxes paid.”

Next steps. Sadly, this commitment doesn’t really commit these countries to doing much of anything. Broadly speaking we can look to the OECD for a common template for country-by-country reporting to tax authorities. But to achieve real change, we need multinationals to publicly report revenues, profits, losses, taxes paid, and number of employees in each country where they operate. We’ll have to keep pushing.

Developing countries should be heartened by the G8’s acknowledgement that developing countries should be able “to secure the benefits and progress made on this agenda.” Unfortunately, they also remain exposed to risk from abusive transfer pricing and profit shifting.

Beneficial Ownership

G8 commitment. On generalities, the G8 hit the mark. In specifics, it fell flat. In the communiqué, the G8 leaders agreed that “a lack of knowledge about who ultimately controls, owns and profits from companies and legal arrangements, including trusts, not only assists those who seek to evade tax, but also those who seek to launder the proceeds of crime, often across borders.” But the G8 advocated achieving more transparency on this front with central registries, rather than public registries.

Next steps. The difference between central and public registries is immense. In the first case, this information would only be available to already resource- and cash-strapped law enforcement officials, who lack the capacity to effectively oversee and use this information. On other hand, public registries would allow citizens, journalists, and members of civil society to hold companies accountable for their actions. We’ll need world leaders–especially the Obama administration–to accept this difference and support public registries. For now, though, the ball on beneficial ownership is in the Financial Action Task Force’s (FATF) court.

Developing countries should go it alone, until further notice. They can, for example, follow the lead of the UK’s Financial Services Authority which reviewed the nation’s banks, looking to how well they deal with the risk of money laundering, and the threat to the financial system from corrupt money. Individually, they have the option of passing legislation that would require companies, trusts, and foundations to put information about their beneficial owners in the public domain.

[1] Russia is an ambiguous exception.

Written by Ann Hollingshead

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