Developing Countries Not Ready to Enforce Global Tax Evasion Rules
We are living in the golden age of global tax reform. At no point in history have there been so many initiatives coordinated by such a dizzying array of tax authorities, all focused on one thing: replenishing municipal budgets that have been depleted over the last five years of global recession.
As of our last tally, the United States, Japan, China and the Organization for Economic Cooperation and Development (OECD), which counts 34 countries around the world among its membership, have all introduced, or are said to be planning, corporate tax reform initiatives this year. The OECD has also developed a proposal for the automatic exchange of tax information between all OECD nations designed to simplify global cooperation on tax enforcement. Meanwhile, the U.S., China and four other countries have just joined an Australia-led tax alliance to fight tax avoidance by multinational corporations. The Australian initiative will help to advance a separate G20 initiative to develop common rules on cross-border taxation to crack down on tax evasion. And let’s not forget the U.S. Department of Justice, which, as I wrote about last week, has pledged to make tax avoidance a top enforcement priority.
These issues are the subject of the two-day OECD International Tax Conference taking place in Washington right now, where tax officials representing most major economies are meeting with corporate tax professionals to discuss the possible impacts of all of these initiatives.
From the perspective of a multinational corporation, this kind of globally-coordinated inquisition can create all kinds of ripple-effects, impacting forecasting, planning and financial reporting, among other things. But it’s not just businesses who need to adapt to the new world order of tax reform; governments will need to get their houses in order as well if they want to be able to meet the huge infrastructure requirements that come along with these kinds of globally harmonized initiatives. That will be easier for some than others.
As the Thomson Reuters Foundation reported, last week, the hurdles to achieving global coordination will be much higher for developing nations that do not currently have tax systems in place that are sophisticated enough to enforce the OECD’s tax information exchange initiative. Quoting Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, the report explained that a litany of issues, ranging from lack of interest to lack of technology are contributing to the challenge:
“Most developing countries are not yet ready and most of them don’t want it. When we talk to them, and we’re deeply involved with them, a significant number of them say ‘we don’t see any interest for us in there’…
“Some don’t have an automatic exchange of information internally. They don’t have access automatically to the information of their own citizens, their own taxpayers…
“You shouldn’t engage with automatic exchange of information with a country unless that country has ‘Chinese Walls’ in all its procedures to protect the confidentiality of the information.”
This is a huge issue that very few multinational business executives or even major tax authorities ever think about. Despite huge strides forward in recent years and global efforts like those of the G20 and OECD, many emerging market nations do not have the infrastructure in place to measure or enforce a tax code.
Take Liberia, for example, which, after a 15-year civil war was left with scattered cardboard boxes and scattered scraps of paper that were once deeds to land. It took an organization called the Liberia Land Policy and Institutional Support project, working with an assortment of sponsors, international agencies and Thomson Reuters to start the process of restoring and digitizing the country’s land use records. Imagine trying to rebuild an economy and enforce tax law without any records of who owns what!
Examples like this are prevalent throughout parts of Africa, Eastern Europe, Asia, the Middle East and South America and will continue to stymie the best laid plans of global tax authorities as they set a course for complete tax coordination around the globe. But the trend toward tech-enabled tax infrastructure building in emerging market nations is gaining momentum. Unlike the resistance the OECD’s Saint-Amans noted in his characterization of emerging markets, we are encountering government officials in emerging nations who are eager to build state-of-the-art tax programs that can play ball on the global stage.
The current disconnect between the globally-coordinated tax enforcement efforts of developed nations and the fragmented emerging market tax infrastructure will make it difficult to implement truly comprehensive tax reforms in the immediate term. But the wheels are in motion for it to become a reality in the not-so-distant future. For business leaders, that means the microscope on corporate tax is only going to get more and more focused in the months to come. Be prepared.