Denmark has made huge strides in tackling tax evasion, for example by digitising tax returns and ensuring that the authorities always know who the true owner of a company is. However, the Danish minister of taxation, Benny Engelbrecht, summed up the problem at last week's IMF/World Bank summit: "I have companies coming to me saying they are being 'forced' by their competitors to use tax loopholes; they tell us we need to remove the loopholes and create a level playing field so that one company does not have an unfair advantage over another."
The need to take morality out of the tax equation is something that Francesca Lagerberg, Grant Thornton's global leader for tax services, has been very vocal on and it is why we support the G20 BEPS (Base Erosion And Profit Shifting) initiative being developed by the OECD. The problem is complex but pressing, especially for the developing world.
The panel agreed that tackling tax evasion requires the mobilisation of domestic resources, both public and private. Sri Mulyani Indrawati, managing director of the World Bank, said "an estimated 60 per cent of global trade happens between multinationals… aid will not be sufficient to reach development goals; we need to engage the private sector".
The panellists suggested a range of ways in which this could be achieved. Eric Hylton, executive director at IRS Criminal Investigations in the US, said it would continue to "aggressively pursue" financial institutions to send a message that money laundering was unacceptable. It might not catch every instance but the deterrent is strong; just ask Credit Suisse. Villa Kulild, director general of Norway's Development Agency, said the first thing she tells governments in countries starting on this journey is that they are "entitled to tax your natural resources" even though some companies might tell them otherwise.
However, the panel agreed that to address a business model which the US president of Oxfam, Ray Offenheiser, describes as "aggressive tax exploration", engagement with the private sector is the most important tool available to them.
Indrawati made the point that having good tax policy is pointless without the governance, measurement and collection processes in place to implement and revise it. However, an issue acknowledged by all the panellists is the complexity of corporate taxation, particularly involving transactions across borders in the digital age.
The IRS is helping developing world countries learn how to exchange information better and recognise illegal activity. Offenheiser welcomes this capacity building. He doubts the readiness of these economies for the reciprocity – in terms of information they would be expected to share with other countries – that signing up to a global tax agreement would necessitate. Engelbrecht thinks that developing countries need to do more themselves, arguing that multinationals are often able to extract huge, opaque tax concessions (which are not given to their domestic peers), distorting the market and giving local operators a reason to avoid paying up.
Tax evasion costs developing economies US$300bn a year in foregone revenue, according to Indrawati, who described it as "stealing people's opportunities". Luis Miguel Castilla, the former finance minister of Peru, estimates that tax evasion in his country reduces income tax revenues by 50 per cent and VAT receipts by 35 per cent. These are missing revenues that governments could spend on social programmes, for example boosting productivity though health and education, but if people do not see a trade-off in improved public services they are unlikely to get behind increased openness and transparency.
Clearly the BEPS initiative is important beyond the G20 and multinationals. Offenheiser summed up the scale of the issue: "There is no hope of us reaching the (World Bank) sustainable development goals without tackling tax avoidance."
For more information on the questions a business leader can ask to ensure tax compliance please see Global tax: it's time to act.