Almost five years to the day since the collapse of international investment bank Bear Stearns, G20 leaders are holding their annual summit to discuss the state of the world’s economy. This time in St. Petersburg, Russia, heads of state from around the world will be discussing the same old question – why haven’t we solved the problems that caused our countries’ economies to crash?
The G20 isn’t short of solutions. Proposals to reform the International Monetary System surfaced at the UN in 2009 and many organisations, from the Chinese Central Bank to ActionAid, have had their say.
The idea behind reform is that reducing global dependence on the US dollar would help stabilize volatile currency exchange rates. It’s an agenda that G20 countries like Brazil, India and Indonesia – who have all experienced currency downturns in the last few weeks – will wish the G20 had implemented years ago.
The Russian presidency has set out an ambitious set of priorities for the St. Petersburg summit. But little progress is expected, especially with the current crisis in Syria overshadowing matters of global economic governance.
There is at least one ray of sunshine in this otherwise cloudy sky. Earlier this year and at the G20’s request, the Organization for Economic Cooperation and Development (OECD) – a group of the world’s 34 richest economies – released its report on Base Erosion and Profit Shifting (BEPS). Don’t let your eyes glaze over at the name – this is basically a report about how companies pay tax and what could be done to make the system fairer.
Due to a complex web of treaties and regulatory loopholes, multinational companies don’t always have to pay tax in the country where they earned the money. They can often choose to pay their taxes in another country, one with lower or even non-existent corporate tax rates and without requirements that companies disclose any of their financial dealings.
And here’s where BEPS comes in. The BEPS report and its action plan, which G20 Finance Ministers endorsed back in July, put many of the key issues up for discussion.
How should tax havens be defined? Will countries automatically have access to records showing where and how much a given company pays tax? These questions and more are on the table.
The G20 Finance Ministers already gave a green light to this process. But in order for the process to go forward, G20 heads of state should also make a strong statement.
In addition to endorsing the process, they should also improve it. The G20 is much broader than its predecessor the G8, but it’s still not broad enough. Poor countries need to be at the table, as it’s their interests which are most at stake.
Estimates show that about $160 billion is lost every year due to tax dodging. That’s more than countries receive in aid and about 80% of what the UN Millennium Project estimated would be needed to meet all the 2015 development targets.
The BEPS process won’t fix everything that’s wrong with the international tax system. But if done right, it could mark a significant change in international finance, something the G20 has been unable to achieve even five years after the greatest financial crisis since the Great Depression.
Ensuring that poor countries are meaningful participants in the process would be a good first step.