Efforts around the world to crack down on tax dodges by businesses and wealthy individuals via overseas tax havens are making progress. A draft criteria compiled by the OECD to beef up international rules on taxation is likely to be formally approved at the Group of 20 summit in Hangzhou, China, early next month, with the number of countries taking part in the framework for such efforts expected to top 100 by the end of the year.
This is a positive development that will enhance transparency in the flow of money, which is crucial for fair taxation. The efforts have been driven by the rise in international criticism against overseas tax evasion triggered by the Panama Papers scandal, which exposed how multinational corporations, wealthy people and some politicians hid their assets in tax havens — whereas previously the moves led the OECD Committee on Fiscal Affairs and other parties for measures to tighten the screws on tax evasion and excessive tax-saving measures have often been hindered by the secrecy surrounding countries and jurisdictions that serve as tax havens.
Tax evasion by way of tax havens not only expands unfairness in taxation. Tax dodging by businesses, which some estimates put at roughly ¥24 trillion around the world, eats into the financial resources of governments. Money that dodged taxation by state authorities makes for a pool that supplies massive speculative funds that can be a source of financial crises, and can be a hotbed of financing for terrorist activities. The time is ripe for countries to beef up the international regime to fight tax evasion.
The new criteria for taxation rules to be endorsed at the G-20 summit imposes a set of benchmarks for exchanges of information on accounts at financial institutions — so that mutual supervision by governments would make the international flow of money more transparent.
Nations and jurisdictions that fail to comply with the benchmarks will be blacklisted as “noncooperative” and become subject to punitive sanctions. Dozens of countries and jurisdictions — including emerging economies and those widely known as havens for tax dodgers — have rushed to join 46 countries that have already imposed tougher taxation rules, increasing the number of parties to the effort to 82. This shows how they wish to avoid being blacklisted and having their credibility tarnished.
Efforts against dodging taxes tend to get bogged down because the flow of funds often proves difficult to track down. Small nations and territories serving as tax havens maintain tight confidentiality laws, along with loose taxation rules and financial regulations, to lure money from multinationals and wealthy individuals.
Many of the tax havens are concentrated in small island nations in the Caribbean, but they also exist elsewhere around the world, and some major powers such as Britain have well-known tax havens among their territories. Facts exposed in the Panama Papers scandal, in which files from a Panama-based law firm specializing in establishing shell companies implicated large numbers of politicians and business leaders in tax avoidance, are believed to represent only the tip of the iceberg.
Introduction of the new rules will likely enhance transparency in the flow of money to a certain degree, but it will require greater efforts and additional steps before the efforts will start effectively cracking down on tax dodging. It will be necessary to secure enough manpower with expert knowledge in the countries joining the regime to make sure the efforts work.
Business sectors, meanwhile, have expressed concern that participation by a greater number of countries, including emerging economies, could result in dual taxation for some companies due to varying interpretation and application of the rules between tax authorities of different nations. How to reconcile the need to ensure appropriate taxation and to avert excessive cost on business activities will also be a challenge going forward.
The News Lens has been authorized to republish this editorial. The original can be found here.
First Editor: Edward White
Second Editor: J. Michael Cole