Tax competition: The Good, the Bad and the Ugly at Davos

The topic at one World Economic Forum panel was “Beyond the Paradise Papers: Can global tax evasion be stopped?” and it provided interesting perspectives on how the debate on tax competition is moving.

First, it was entertaining to see a panel composed by the Culprit (Irish Finance Minister), Visionary (EU Tax Commissioner), Enlightened (Nobel prize winner Joseph Stiglitz), Vox Populi (Oxfam Director) and a Public Prosecutor (Davide Serra).

The Culprit

The Culprit was attacked from many sides and passed a strong message that Ireland is not and should not be viewed as a tax haven as it has a broad tax base with low tax rate.  It recognizes that Ireland has used tax competiveness to respond to being a small country in the edge of Europe and small and medium countries should have an inherent right to be competitive and create jobs. Ireland is committed to continue to be competitive in tax, support free trade and globalization and work on the issue of fair-share of taxation in a coordinated matter across EU and OECD forums. But there are many Culprits (in the EU and beyond) and it is interesting to see only a few are able to have a consistent message (like it or not) as Ireland.

The Visionary

The Visionary passed the message that the EU is much more ambitious than OECD and wants to be the Champion of this international tax reform. At the same time, the Visionary is conscious of its own limits – EU decisions on tax matters require unanimous agreement by all member governments – and recognizes that EU cannot function if “veto of one member state blocks the common will of all”. This is in line with the recent views of Germany and France. The Visionary revealed that the tax system is not broken and that EU is not making “baby steps” but consistent steps towards tackling the tax fairness debate. The EU Commissioner admits the limits of BEPS initiative should not be blamed because progress even if small should be applauded. The EU wants to be the champion of what he referred “BEPS plus plus plus” which should comprise: (i) Implement Public country-by-country reporting by providing publicly available information relating to tax paid at the place where profits are actually made; (ii) Move towards a Common consolidated tax base because this discussion should not be about nominal tax rates but effective tax rates; (iii) Find an adequate format to tax digital economy because EU tax framework does not fit anymore with new business models and therefore level playing field of digital economy should be addressed separately; and (iv) Reinforce tax transparency framework by setting mandatory disclosure rules to help shedding new light on the activities of intermediaries and the tax planning arrangements.

The Vox Populi

The Vox Populi was led by Winnie Byanyima from Oxfam that outlined that the international developments are promises but there is a need to work harder and that the BEPS seems to be directed to small countries and not the large countries. For Vox Populi the international tax avoidance debate is about human rights, it’s about the persons on the street that are unable to lift themselves out of poverty because of tax avoidance. This debate is about fairness globally and developing countries cannot wait for EU to lead the charge. United Nations (where countries seat in equality) is where a discussion like the future of tax systems should occur (not at the OECD).

The dialogue about Common EU list of third country jurisdictions for tax purposes was interesting especially after removal of eight jurisdictions following political commitments (leaving 9 small jurisdictions on the list).  For the Visionary, the leadership of EU proves the dissuasive effect by forcing countries towards commitments for better tax governance. For the EU a list without sanctions is not credible but this is a member state list (another indirect mention to unanimity). For Vox Populi, the grey list and the lack of transparency on the commitments made raises the issue of impact (only small countries) and credibility (the EU is outside). They are baby steps in the right direction but transparency needs clear rules that go beyond the privacy argument of companies.

The Enlightened

The Enlightened was blunt in its assertions that all this scandals from LuxLeaks to   Panama and Paradise papers show that global tax system remains broken and evidence of that is that Governments are (still) engaging in lowering tax rates ever further, in an effort to compete for corporations. We are in a race to the bottom or what he called trickle-down economics (in an inciting article called Post-Davos Depression). For the Enlightened, Europe should take the lead (as US is out of the race for now) and this should move towards a minimum corporate tax. For Stiglitz, transfer pricing does not work on a globalized economy and formulary apportionment may be “rough justice” but is better than today’s justice. BEPS is trying to fix a broken system by the same guys who were making the profits out of system by not addressing the big picture but only fine points of profit shifting. In a reference to Ireland, Stiglitz referred of the right of small countries of being competitive is absolutely important but diverting jobs and revenues of other countries is not an example. The Enlightened shared his doubts on whether the OECD can address in an equitable way the global problems of where value is created in a dialogue between developed and developing countries. For Stiglitz, the right form to change is not by having US leading the review. Citizens need to be outraged because only outrage will change the (tax) system.

The Public Prosecutor

The public prosecutor came with big numbers such as twenty billions of “tax elusion” and a spicy cause and effect message (to which crowds applaud). The “tax elusion” is messing with contributions of Member States to the EU budget and this ends up in losses to EU citizen. Governments are colluded and this raises populism. “The average guy on the street is not stupid” was the message.

Epilogue

This debate emphasizes in my view 3 points: (i) tectonic plates moved with the last years public tax avoidance debate and the BEPS project may be a point of passage rather than a point of arrival; (ii) EU wants to be the leader but for that needs to quick?y reform its unanimity rule; (iii) the foundations of a world tax organization are being slowly laid, when public discourse is as inflamed as this one and there is no expectation that the volume will lower in the years ahead.

As JFK put it “those who make peaceful revolution impossible will make violent revolution inevitable”.

You can now see the video of the debate.