Search Class

Photo Credit:

Tax Highlights The Failures Of The G7

I have watched G7, G8 and G20 Summits for a long time, and attended a couple. Usually, you can detect a theme, and say that there is a notable feature that characterises the outcome of a particular meeting. This time that was not true. Unless we look a little deeper, that is. Then we can see that this Summit was characterised by differences, whether between the UK and the EU and the major European countries, or the US and China over trade, or the US and France over tax and Iran. What characterised this Summit is the fact that the world’s major nations are now so far apart, and that the gaps seem to be getting wider.

Tax is an issue that highlights the failure of the G7 on this occasion. The final statement issued by the Elysee Palace had this to say on the issue: "The G7 commits to reaching in 2020 an agreement to simplify regulatory barriers and modernize international taxation within the framework of the OECD."

The brevity of the statement contrasts with the detail of communiques from earlier years with regard to tax e.g. the statement from Louth Erne in Northern Ireland in 2013, which included detailed commitments on many tax issues. The evidence could not be clearer that on this occasion the G7 did not take the risk of trying to reach an agreement, or to even issue a communique because France remembers all too well that President Trump walked out of the G7 in 2018 rather than agree to any statement. 

This then leads to the obvious question as to what the stated commitment means? It has to be set in the context of the current international tax disputes that the OECD failed to resolve with the supposed conclusion of the Base Erosion and Profit Shifting initiative, itself undertaken at the behest of the G7s in 2012 and 2013.

It would be churlish of me to decry the OECD’s efforts at that time: I took part in the negotiations and my proposal for what is called country-by-country reporting for tax purposes by multinational corporations to reveal profit shifting was adopted by the OECD and is now in use. The OECD can deliver. But what country-by-country reporting was designed to reveal was the existence of problems to be tackled. No one, me most particularly, said it solved the problems by itself. It could not. It merely indicated their scale.

And the indications are that whilst country-by-country reporting is curtailing the incentive to avoid tax in some sectors, the same cannot be said in the case of digital companies like Google. In these cases, tax shifting remains prevalent. Moreover, the countries that actively support them, like Ireland, are making token noises, at best, with regard to cooperation to solve this issue. The result is the threat of unilateral action to tax these companies in places that think they are losing out, led by France. This has only exacerbated the tensions between France and the USA, with Trump reporting to now familiar threats of tariff sanctions in response.

All the G7 did was kick the issue into touch. They threw it back to the OECD. 

The OECD knows how to solve this problem: they know that it can only be addressed by apportioning profits made by these multinational corporations to countries based on a formula - and that country-by-country reporting can supply the necessary data. But this requires agreement on both the principle of doing this and the formula to be issued. 

The OECD can put the idea forward, and I strongly suspect that they will. But will countries like the USA and Ireland agree? And will the EU be able to deliver on the issue given the number of tax havens within it? Or is what’s really happening is that the international order on tax, as well as trade and tariffs, breaking down and destructive tax competition is about to intensify, as it seems Trump might desire? Time alone will tell, but the signs are not good. 

By Richard Murphy, Professor of Practice in International Political Economy, City, University of London.