G20 leaders in the mood to act on tax avoidance after Luxembourg leaks

Ahead of next weekend’s G20 summit, the release of leaked documents showing Luxembourg’s facilitation of industrial scale tax avoidance by multinational corporations could not have been better timed.

A cache of documents obtained by the International Consortium of Investigative Journalists, and released on Thursday, found hundreds of companies – including Australian firms such as AMP, Macquarie Group and Lend Lease – had funnelled hundreds of billions of dollars into Luxembourg, slashing their tax bills in the process.

In some cases, the firms were paying effective tax rates of as little as 1 per cent.

While immense, the “Lux leaks” documents are only a portion of the tax avoidance taking place in Luxembourg, representing only those deals arranged by global accounting firm PwC.

And while Luxembourg is arguably the world’s biggest tax haven, it represents only a sliver of the global tax avoidance game.

By their very nature, calculating the scale of secret tax arrangements is near impossible, but some guesstimates posit that wealth equivalent to almost 10 per cent of global GDP –   or about $US8 trillion – is squirrelled away in tax havens.

Others say the figure is closer to $US20 trillion.

Whatever the exact extent of tax avoidance, the challenge of combating rampant tax minimisation in the globalised, digitised economy of the 21st century is immense.

But as governments struggle to balance their budgets and deal with an increasing number of citizens enraged by the inequity of the global tax regime, leaders are ready to act.

Curbing tax avoidance is one of the key agenda items when world leaders from the group of 20 large economies gather in Brisbane.

Piggybacking on work begun by the Organisation for Economic Cooperation and Development in 2009, the G20 economies have agreed on common reporting standards for the automatic exchange of “tax information” between member countries.

There are also proposals to agree to disclose the true beneficial ownership of bank accounts and trusts, although China is reportedly resisting the move.

Either way, says Mike Callaghan, a former senior Treasury official now with the Lowy Institute, the measures – while worthy – largely impact on bank secrecy and money laundering.

“That’s dealing mostly with individuals, not companies,” Callaghan says.

The biggest problem with tax avoidance lies with multinational corporates shifting profits, debt and income through a variety of techniques, many of them done under a veil of secrecy or via hugely complex but legal arrangements devised by highly paid tax lawyers.

Some 60 per cent of international transactions occur within multinational corporations.

The problem has been magnified by the emergence of digital companies and e-commerce, with firms such as Amazon, Microsoft. Google and Apple able to easily book profits in low taxing jurisdictions.

The OECD “Base Erosion and Profit Shifting” project is examining how to address the problem, amply illustrated by what’s going on in Luxembourg.

Callaghan argues that real advances will be made if G20 nations pledge to adopt an OECD recommendation and force multinationals to report on their sales, income, debts, profits  and other financial information on a country-by-country basis, thus illuminating discrepancies between where profits are generated and taxed.

This would ensure that the G20 finance ministers commitment that “profits should be taxed in the place where the value is created and the economic activities occur” is more than just rhetoric.

There is in-principle support for this OECD initiative, but a path to concrete action would be a ground-breaking move if endorsed in the G20 leaders’ summit Brisbane on November 15-16.

Many tax justice advocates argue the country-by-country financials of multinationals should not just be shared by governments, but made publicly available to enhance transparency.

Consumer agitation and boycotts are seen by activists as essential weapons in forcing multinationals to change their behaviour.

In its report to the G20 finance ministers meeting in Cairns in September, the OECD declared that progress on enhancing transparency to combat tax avoidance has been “massive”.

According to Mark Zirnsak from the Australian arm of the Tax Justice Network, momentum for global reform is gathering pace, with Australian Treasurer Joe Hockey providing good leadership on combating the “thievery” of tax cheats.

But Graeme Cooper, professor of taxation law at the University of Sydney is more sceptical. He says self-interest of countries often trumps global co-operation.

He argues that the US, for example, is not so concerned about tax avoidance by digital giants such as Google as it helps these American companies prosper and underpins a vibrant information technology sector that is a growth engine of the US economy.

For tax havens, the rewards can be lucrative too.

Luxembourg, the tiny duchy nestled between France, Germany and Belgium, is a case in point.

It has a population of less than 550,000 but has $US3.7 trillion ($4.2 trillion) in assets under management, second behind the US. It’s clearly done well out of the arrangements. Its GDP per capita is more than $US110,000, almost twice that of the US, and the highest in the world.