Stopping tax avoidance without causing “flight”

Original Reporting | By Meade Klingensmith |

As an example of how such a system could operate, Tichon pointed to the success of the Foreign Account Tax Compliance Act (FATCA), a piece of legislation passed by the U.S. Congress in 2010 that, among other measures, requires foreign financial institutions to report information about their U.S.-based clients to the IRS. “FATCA is already working,” she said. “Some of the big banks are turning away clients. They realize they’re going to be held accountable if they don’t comply.” An international agreement for a similar scheme aimed at requiring multinationals to report their profits, she said, would go a long way toward deterring tax avoidance.

Macdara Doyle, a communications officer for the Irish Congress of Trade Unions, the primary umbrella organization for trade unions in both Northern Ireland and the Republic of Ireland, agreed that transparency is “essential,” though he added, “I’m not going to be prescriptive about it…There are a thousand ways to possibly do these things.” As a general rule, however, he believes that first “there needs to be clear transparency around who’s doing what, who’s paying what, and I think we might be very surprised at the results…Based on that, we can start making proper policy proposals for the future.”

 

Smaller-scale cooperation across borders

Smaller-scale international cooperation might also emerge from regional supranational institutions. Emer Traynor told Remapping Debate that the European Commission (the executive body of the European Union) passed an action plan in December. She characterized this plan as containing “the first ever measures in the world specifically designed to tackle corporate tax evasion.”

The action plan’s two primary recommendations are for EU member states to create, using common criteria, national blacklists of tax havens, and to adopt a common “General Anti-Abuse” rule. That rule would allow countries to “ignore any artificial arrangement carried out for tax avoidance purposes and tax instead based on the basis of actual economic substance,” the plan stated. In other words, the UK would have the right to tax Starbucks based on the profits the company actually earned in the UK, even if Starbucks reported them as being earned by its Irish subsidiary.

 

Time to act?

Tax experts agree that regardless of the approach, the international community has strong incentives to act as quickly as possible. According to Nicole Tichon, “one of the things that makes this issue particularly powerful and unique in a way is that countries of all shapes and sizes are being affected…This is something that should outrage everyone.”

Tax avoidance, said Macdara Doyle, “Ultimately rots everybody…It creates the sense that this is not a fair society.”

Steve Wamhoff believes the OECD and other international institutions have powerful motivation to act, but questions whether their actions will have any real teeth. “People in [OECD member states] have gotten a lot angrier, and that’s provided a lot pressure on their governments to act like they’re doing something,” he said. “That in turn has put the OECD under pressure to act like it’s doing something. Now, whether or not the OECD is going to do something that’s just cosmetic, that’s going to pay lip service to all this sentiment, is still unclear.”

The OECD’s Pascal Saint-Amans, however, said the OECD’s action plan would address corporate tax avoidance in “a comprehensive manner,” and added that the time is ripe for countries to agree to action: “This concern has translated into a high level political will for action…Politicians cannot afford having their taxpayers facing higher taxes and cuts in public expenditure, and then seeing taxpayers like the multinationals not paying anything, or hardly anything…It’s difficult,” he said, “but I feel there is a good chance to come to something meaningful in the coming weeks and months.”

Macdara Doyle of the Irish Congress of Trade Unions agreed that the pressure is on, and believes there is more than just tax income at stake. Tax avoidance, he said, “ultimately rots everybody…It creates the sense that this is not a fair society; that this is not a fair system; that it will never be fair; that the wealthy can always play by their own rules. Once you get that into a system, history will teach you that will generally lead to some kind of reaction.”

When asked about his hopes for the OECD action plan, he cautioned that “I wouldn’t exactly be holding my breath that you’re going to see a transformation,” but said he was “hopeful in the sense that I think that pennies are dropping, be it because of financial crisis that the governments are short of tax revenue, or be it because there’s a realization that this sort of conduct is in the long term socially and politically damaging.” Because of these pressures, the era of the “cozy tax deal,” he said, is coming to an end. “It may take a couple years longer than we think, but I think it is coming to a close.”

 

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