The Sunday Program: International Tax Cooperation in the G20

Christine Lagarde suggested in a recent IMF Blog that G20 Finance Ministers and Central Bank Governors should concentrate their efforts on three fields when they meet in Buenos Aires on Sunday: global trade, emerging market vulnerabilities, and the impact of technology on jobs.

International tax cooperation should be added to the priority list.

Taxation has featured on G20 agendas for a long time. The communique of the G20 Ministerial in 2000 underlined the joint resolve of member countries to combat tax evasion. The final declaration from the first meeting of G20 heads of state urged tax authorities to continue efforts to promote tax information exchange and to draw upon the work of relevant bodies such as the OECD in doing so. In 2012, G20 leaders meeting in Mexico requested the OECD to develop an action plan to prevent tax evasion in the context of corporate taxation. A year later, they supported a proposal to develop a global standard for automatic exchange of tax and financial information. In 2014, they endorsed the OECD’s Common Reporting Standard and a year later did the same for the OECD’s Action Plan on Base Erosion and Profit Shifting.

This Sunday, G20 members should take further steps.

The need for international tax cooperation has not subsided. On the contrary. As highlighted in a recent policy brief by the T20 – the global G20 engagement group of think tanks – “the world is facing a new round of international tax competition that may result in a ruinous race to the bottom”. The authors are particularly concerned about a potential downward spiral in statutory tax rates as well as the introduction of new distortive tax breaks. Others point to a growing worry that the US tax reform of December 2017 “could make the tax systems on either side of the Atlantic Ocean incompatible, with a risk of companies forced to pay twice on their international earnings”. Brexit, the taxation of the digital economy, and the prevalence of illicit financial flows create further challenges and an urgent need for deeper cooperation in this field.

One step in that direction, as proposed by the T20 authors, is a minimum corporate tax rate to be applied to the worldwide profits of private companies. The authors echo a call for a minimum rate earlier this year by the Independent Commission for the Reform of International Corporate Taxation (ICRICT).

They also endorse proposals for a common consolidated corporate tax base as currently discussed in the EU – a scheme that would define a single set of rules how to determine corporate profits across different jurisdictions. Harmonizing the calculation of corporate income will reduce incentives to implement aggressive tax planning strategies. It will also increase the simplicity of tax systems and thus reduce compliance costs. A potential win-win situation for governments and businesses, but nonetheless a highly sensitive issue for national governments who are obviously reluctant to give-up parts of their fiscal sovereignty.

A second T20 policy brief puts an additional spotlight on a related and equally important topic: tax expenditures.

Tax expenditures – benefits granted through preferential tax treatment such as exemptions, deductions, credits, deferrals and other measures – are costly and often ineffective in reaching their stated goals. They also frequently trigger unwanted side effects.

In the US, they are estimated to reduce annual federal revenues by US$1.5 trillion. The UK’s government is estimated to forego more than £400 billion every year, a significant figure when compared to total government spending – around £800 billion. According to the IMF, tax expenditures in African economies are also significant, ranging between 3.3% and 7.5% of GDP. Likewise, the Inter-American Center of Tax Administrations reports tax expenditures in Latin America amounting to 3.5% of GDP, ranging from 0.7% in Colombia to 6.6% in the Dominican Republic.

In spite of these significant price tags, transparency on the magnitude of existing tax expenditures is limited, and new tax benefits are being introduced regularly without adequate scrutiny. 10 out of 43 OECD/G20 countries do not report on tax expenditures at all and the official tax expenditure reports of the remaining countries are based on highly heterogeneous standards both with respect to the quality and scope of the data they provide.

As a result, these schemes are rarely subject to sound cost-benefit analyses. Indeed, while studies assessing the effectiveness and efficiency in reaching the stated goals of tax expenditures are crucial, they remain an exception.

This must change.

Improving reporting on tax expenditure by systematically estimating and publishing their fiscal cost is crucial for governments to better scrutinize the effectiveness and efficiency of these measures. It is also critical to enhance transparency and democratic accountability.

In 2017, the T20 already called for more and better technical cooperation among G20 governments, including the “compilation and publication of reliable tax expenditure data” as well as the standardization of the reporting of tax expenditures. Unfortunately, progress in the field has been slow and – if anything – mainly based on unilateral initiatives rather than a coordinated strategy among G20 governments.

Sunday’s meeting in Buenos Aires is an invaluable opportunity to shift gear.