Why tax­a­tion must go global

Financial Mirror (Cyprus) - - FRONT PAGE -

We are wit­ness­ing pro­found changes in the way that the world econ­omy works. As a re­sult of the grow­ing pace and in­ten­sity of glob­al­i­sa­tion and digi­ti­sa­tion, more and more eco­nomic pro­cesses have an in­ter­na­tional di­men­sion. As a con­se­quence, an in­creas­ing num­ber of busi­nesses are adapt­ing their struc­tures to do­mes­tic and for­eign le­gal sys­tems and tax­a­tion laws.

Thanks to tech­ni­cal ad­vances in the dig­i­tal econ­omy, com­pa­nies can serve mar­kets with­out hav­ing to be phys­i­cally present in them. At the same time, sources of in­come have be­come more mo­bile: There is an in­creas­ing fo­cus on in­tan­gi­ble as­sets and mo­bile in­vest­ment in­come that can eas­ily be “op­ti­mised” from a tax point of view and trans­ferred abroad.

Tax leg­is­la­tion has not kept pace with th­ese de­vel­op­ments. Most of the tax-al­lo­ca­tion prin­ci­ples that ap­ply to­day date back to a time when do­ing business in­ter­na­tion­ally pri­mar­ily meant trans­port­ing goods across a bor­der to a neigh­bor­ing coun­try. But rules that were de­vised for this in the 1920s and 1930s are no longer suit­able for to­day’s in­ter­na­tional in­te­gra­tion of eco­nomic pro­cesses and cor­po­rate struc­tures. They need to be adapted to the eco­nomic re­al­ity of dig­i­tal ser­vices.

In the ab­sence of work­able rules, states are los­ing rev­enue that they ur­gently need in or­der to ful­fill their re­spon­si­bil­i­ties. At the same time, the is­sue of fair tax­a­tion is be­com­ing more and more press­ing, be­cause the num­ber of tax­pay­ers who make an ad­e­quate con­tri­bu­tion to fi­nanc­ing pub­lic goods and ser­vices is de­creas­ing.

The re­sult­ing ten­sions be­tween na­tional fis­cal sovereignty and the bor­der­less scope of to­day’s business ac­tiv­i­ties can be re­solved only through in­ter­na­tional di­a­logue and uni­form global stan­dards. Within the Euro­pean Union, per­mit­ting groups of states to forge ahead with joint so­lu­tions to is­sues that can be ad­dressed only mul­ti­lat­er­ally has worked well in the past. If such mea­sures prove suc­cess­ful, other states follow.

This ap­proach can also serve as a global gov­er­nance model for re­solv­ing in­ter­na­tional prob­lems. In to­day’s world, even large states can­not es­tab­lish and en­force in­ter­na­tional frame­works on their own. Groups of coun­tries still can. This has been demon­strated in the con­text of fi­nan­cial-mar­ket reg­u­la­tion; it is start­ing to be­come clear with re­gard to the reg­u­la­tory frame­work for the dig­i­tal econ­omy; and it is now be­ing con­firmed in the area of tax­a­tion.

The Sev­enth Meet­ing of the Global Fo­rum on Trans­parency and Ex­change of In­for­ma­tion for Tax Pur­poses took place in Berlin last week, bring­ing to­gether rep­re­sen­ta­tives from 122 coun­tries and ju­ris­dic­tions, as well as the EU. A joint agree­ment on the au­to­matic ex­change of in­for­ma­tion on fi­nan­cial ac­counts was signed on Wed­nes­day.

The joint agree­ment was orig­i­nally an ini­tia­tive by Ger­many, France, Italy, the United King­dom, and Spain. Roughly 50 early-adopter coun­tries and ter­ri­to­ries de­cided to take part, while other coun­tries have in­di­cated their will­ing­ness to join.

The agree­ment is based on the Common Re­port­ing Stan­dard, which was de­vel­oped by the OECD. Un­der the CRS, tax au­thor­i­ties re­ceive in­for­ma­tion from banks and other fi­nan­cial ser­vice providers and au­to­mat­i­cally share it with tax au­thor­i­ties in other coun­tries. In the fu­ture, vir­tu­ally all of the in­for­ma­tion con­nected to a bank ac­count will be re­ported to the tax au­thor­i­ties of the ac­count holder’s coun­try, in­clud­ing the ac­count holder’s name, bal­ance, in­ter­est and div­i­dend in­come, and cap­i­tal gains.

Var­i­ous mea­sures are in place to en­sure that banks can iden­tify the ben­e­fi­cial owner and no­tify the rel­e­vant tax au­thor­i­ties ac­cord­ingly. The CRS thus ex­pands the scope of global, cross-bor­der co­op­er­a­tion among na­tional tax au­thor­i­ties. In this way, we can es­tab­lish a reg­u­la­tory frame­work for the age of glob­al­i­sa­tion.

The au­to­matic ex­change of in­for­ma­tion is a prag­matic and ef­fec­tive re­sponse to the per­ceived lack of global gov­er­nance re­gard­ing in­ter­na­tional tax is­sues. By mak­ing tax­a­tion fairer, gov­ern­ments will have a pos­i­tive im­pact on peo­ple’s ac­cep­tance of their tax regimes. This great suc­cess in the fight against in­ter­na­tional tax eva­sion would have been un­think­able only a few years ago. Now it is im­por­tant to con­tinue the ef­forts of the OECD and the G-20 in the area of cor­po­rate tax­a­tion. We need to make sure that cre­ative tax plan­ning in the form of prof­it­shift­ing and ar­ti­fi­cial profit re­duc­tion is no longer a lu­cra­tive business model.

A “beg­gar-thy-neigh­bour” tax­a­tion pol­icy, by which one coun­try pur­sues tax poli­cies at the ex­pense of oth­ers, is just as dan­ger­ous as beg­gar-thy-neigh­bor mon­e­tary poli­cies based on com­pet­i­tive cur­rency de­val­u­a­tion. It leads to mis­al­lo­ca­tions – and will ul­ti­mately re­duce pros­per­ity around the world.

That is why we need to agree on uni­form in­ter­na­tional stan­dards in or­der to achieve fair in­ter­na­tional tax com­pe­ti­tion. The progress achieved in Berlin on the au­to­matic ex­change of tax in­for­ma­tion shows that, by work­ing to­gether, we can re­al­ize this goal.

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