Denmark has made huge strides in tackling tax evasion, for example by digitising tax returns and ensuring that the authorities always know who the true owner of a company is. However, the Danish minister of taxation, Benny Engelbrecht, summed up the problem at last week's IMF/World Bank summit: "I have companies coming to me saying they are being 'forced' by their competitors to use tax loopholes; they tell us we need to remove the loopholes and create a level playing field so that one company does not have an unfair advantage over another."
The need to take morality out of the tax equation is something that Francesca Lagerberg, Grant Thornton's global leader for tax services, has been very vocal on and it is why we support the G20 BEPS (Base Erosion And Profit Shifting) initiative being developed by the OECD. The problem is complex but pressing, especially for the developing world.
The battle cannot be won without private sector engagement
The panel agreed that tackling tax evasion requires the mobilisation of domestic resources, both public and private. Sri Mulyani Indrawati, managing director of the World Bank, said "an estimated 60 per cent of global trade happens between multinationals… aid will not be sufficient to reach development goals; we need to engage the private sector".
The panellists discussed various methods to tackle financial crimes. Eric Hylton, executive director at IRS Criminal Investigations in the US, emphasized the importance of pursuing financial institutions to deter money laundering, using Credit Suisse as an example. Villa Kulild, director of Norway's Development Agency, highlighted the right of governments to tax natural resources, even if some companies challenge it. Ray Offenheiser of Oxfam stressed that addressing "aggressive tax exploration" requires engaging with the private sector.
Reform means greater transparency and reciprocity
Indrawati made the point that having good tax policy is pointless without the governance, measurement and collection processes in place to implement and revise it. However, an issue acknowledged by all the panellists is the complexity of corporate taxation, particularly involving transactions across borders in the digital age.
The IRS is helping developing countries improve information exchange and identify illegal activities. Offenheiser supports this capacity building, as he doubts these economies are ready for the information-sharing reciprocity required by a global tax agreement. Engelbrecht believes developing countries need to take more responsibility, noting that multinationals often secure large, opaque tax concessions not available to local businesses, distorting the market and discouraging domestic tax compliance.
Tackling tax evasion is vital for developing economy growth
Tax evasion costs developing economies US$300bn a year in foregone revenue, according to Indrawati, who described it as "stealing people's opportunities". Luis Miguel Castilla, the former finance minister of Peru, estimates that tax evasion in his country reduces income tax revenues by 50 per cent and VAT receipts by 35 per cent. These are missing revenues that governments could spend on social programmes, for example boosting productivity though health and education, but if people do not see a trade-off in improved public services they are unlikely to get behind increased openness and transparency.
Clearly the BEPS initiative is important beyond the G20 and multinationals. Offenheiser summed up the scale of the issue: "There is no hope of us reaching the (World Bank) sustainable development goals without tackling tax avoidance."
For more information on the questions a business leader can ask to ensure tax compliance please see Global tax: it's time to act.
