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The G20 ‘convention on fighting tax evasion’: three reasons to be sceptical

Friday, November 4, 2011 - 12:19

Last night the G20 announced that they had signed a convention against tax evasion that the OECD says could raise £62 billion. The convention, which is not new but rather an update of an existing treaty, is being sold as a part of the G20’s development agenda, as the OECD’s top tax man Jeffrey Owens remarked to the Guardian: “Over the coming months we will be working with developing countries so that they will rapidly be in a position to sign the convention."

A global tax cooperation convention has been a key cornerstone of campaigners’ agenda for the G20 this year. Tax authorities in developing countries need a framework to exchange information on their taxpayers with other countries where those taxpayers have savings or other sources of income – for example if they have money stashed in an offshore account. They also need a legal instrument that allows them to discuss the tax affairs of multinational companies operating in more than one country, as African tax authorities reacting toActionAid’s report on the beer company SABMiller recently found out

So are development agencies bouncing up and down with excitement? Well, yes and no. There are three reasons to question whether this convention will be quite as effective as the OECD claims:

1. Where are the tax havens?

At present, the convention’s membership is limited to 30 or so members of the G20, OECD and Council of Europe. It’s missing many of the smaller jurisdictions – the tax havens – which have used secrecy to attract large amounts of tax dodging money. For this convention to really break open this financial secrecy, and help developing crack down on tax dodging, tax havens would need to be brought into the tent. The G20 has the power to do this, and has not shied away from a ‘name and shame’ approach to it in the past.

2. Just how effective is the agreement?

Because the agreement is based on the OECD’s information exchange standards, it’s interesting to ask how effective those standards really are. The trouble is, as French tax justice campaigners have highlighted, there is little evidence to show how much information is exchanged through treaties based on the OECD model, of which there are now hundreds. Indeed, the UK and others’ decision to pursue bilateral treaties with Switzerland that leave banking secrecy intact suggests that they themselves do not have confidence in the global process.

One of the few sets of figures in the public domain comes from India, which says it has made a total of 333 requests for information using its network of 85 treaties – that’s just four per treaty. India has received 9743 pieces of information, it says, which suggests that the world’s biggest tax authority is making some use of its treaties, but one suspects this is just the tip of the iceberg of information on Indian residents abroad. Argentina’s tax authority recently accused the ‘big four’ grain traders of evading tax, using information it obtained through its tax treaties.

But figures disclosed in the past show that only a few dozen information requests are made each year between the UK and the Channel Islands, using their information exchange treaties, despite a large flow of people and money between the two, and relatively large capacity in the UK’s revenue authority, HMRC. In any event, before developing countries are urged to participate in the convention, we need an objective and public assessment of its effectiveness.

It’s been suggested that adding an automatic exchange of information to tax treaties – so that countries don’t need to go through the laborious process of making requests – could benefit developing countries. The new convention makes this possible, but only if countries opt in. Indeed India’s PM has backed this vision yesterday, telling the press:

"The G20 countries should take the lead in agreeing to automatic exchange of tax-related information with each other, irrespective of artificial distinctions such as past or present, for tax evasion or tax fraud, in the spirit of our London Summit that 'the era of bank secrecy is over'.

I understand that the G20 communiqué is likely to endorse this position.

3. Where will the convention go in the future?

The small print of the treaty has a couple of big caveats. The first is that a coordinating body of the convention’s members, meeting under the aegis of the OECD, will “act as a forum for the study of new methods and procedures to increase international co-operation in tax matters.” This is quite a broad mandate, and suggests that the convention could go well beyond its current remit. (This is interesting, since the UK has always expressed concern about upgrades to the United Nations’ tax committee because of the risk that it might gain the power to determine its own remit).

The second is a note in the commentary which explains that the convention’s coordinating body, which has to approve any country wishing to join the forum, “may also consider whether the State concerned is a member of the Global Forum on Transparency and Exchange of Information.” The Global Forum is the body that helps – and in some cases pressures – countries to implement the OECD’s tax information exchange standards, the same ones on which the Convention is based. 

By making membership of one body contingent on being part of the other, and giving the convention such a potentially wide remit, there is a risk that the Convention further shifts the centre of gravity of international taxation towards the OECD, a body in which most developing countries have no say. A global convention should really have global origins, and chart a path towards a set of standards that developing, as well as developed, countries can influence.

Conclusion

ActionAid welcomes the G20’s commitment to participate in this updated convention, and to help developing countries that wish to do so to join. But it must be a priority to address these three concerns before developing countries are actively encouraged to devote precious time and resources to joining the convention.

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