MELBOURNE: 19 June 2013 - Taxation revenue is not only the lifeblood of governmental, and subsequently multiple other organisational structures, but also taxation infrastructures are key determinants of both micro and macro-economic policy, and of the organisation of commerce itself, within both the public and private sectors, and also between them.  As such taxation policy, practice and taxation-oriented business decision-making are often core elements of the tensions and conflicts that are perennial features of many trading contexts.  This realpolitik of the strategic importance of taxation has been highlighted on the global stage, (yet again), at the G8 summit held this week at Lough Erne, Northern Ireland. For example, the G20 meeting in London in April 2009 pledged to take action against non-cooperative jurisdictions including tax havens and to protect national taxation revenues. This was re-affirmed by the G8 Meeting in L’Aquila Italy in July 2009, where the major nations committed to further efforts in international tax and prudential cooperation and in combating illicit financing.

The Lough Erne Declaration by G8 leaders is reproduced in full below and it is immediately clear how central to this latest G8 summit meeting taxation matters were, and in particular, multi-lateral agreements and cooperation regarding exchange of information between national taxation authorities about taxation revenue gathering: 

‘Private enterprise drives growth, reduces poverty, and creates jobs and prosperity for people around the world. Governments have a special responsibility to make proper rules and promote good governance. Fair taxes, increased transparency and open trade are vital drivers of this.  We will make a real difference by doing the following:

1. Tax authorities across the world should automatically share information to fight the scourge of tax evasion.
2. Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.
3. Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily.
4. Developing countries should have the information and capacity to collect the taxes owed them – and other countries have a duty to help them.
5. Extractive companies should report payments to all governments - and governments should publish income from such companies.
6. Minerals should be sourced legitimately, not plundered from conflict zones.
7. Land transactions should be transparent, respecting the property rights of local communities.
8. Governments should roll back protectionism and agree new trade deals that boost jobs and growth worldwide.
9. Governments should cut wasteful bureaucracy at borders and make it easier and quicker to move goods between developing countries.
10. Governments should publish information on laws, budgets, spending, national statistics, elections and government contracts in a way that is easy to read and re-use, so that citizens can hold them to account.

That taxation should feature so prominently at this latest G8 summit is not a great surprise because the Presidency of the G8 is currently held by the UK Government and it has been quite candid that the G8 agenda under its presidency would be driven by its determination ‘..to achieve change..’ regarding the 3Ts: advancing trade; promoting tax compliance; and promoting greater transparency.

The ‘scourge of tax evasion’ both by individuals and corporate groups is a perennial political hot potato, but it has been especially prominent in recent times due to a complex cocktail involving many factors including: the ongoing fiscal emasculation of many nation states in a post-GFC environment; the ongoing contest between jurisdictions to attract investment finance capital; similarly the ongoing contest between jurisdictions to attract corporate investment that will build industries and create employment; and the desire of many jurisdictions, (many of which are quite small and lacking substantial natural resources), to promote themselves as finance centres, often facilitating strategies by corporates and individuals to reduce their taxation exposures.  Together these factors help to constitute a murky contested environment riddled with contested interpretations about the legitimacy of various taxation policy and beneficial ownership positions.

The G8’s Lough Erne Goals 1-4 are about information sharing, transparency, regulatory policies, infrastructures and revenue gathering capability in taxation contexts.  The G8 will seek to build on the momentum gained in these areas in recent years by the Organisation for Economic Cooperation and Development (OECD) and the European Union Savings Tax Directive (EUSTD). 

Information gathering between tax authorities has been at the heart of efforts by many developed nations, (especially in Europe), and international organisations such as the OECD, to counter what they label the harmful tax practices of finance centres, some of whom they viewed as tax havens because they assist individuals and corporates to conceal their wealth from national tax authorities.

These regulatory efforts have at times been tortuous and hotly contested politically.  For example in May 2000, in its first tax haven blacklist the OECD named thirty-four jurisdictions that met the OECD’s technical criteria as tax havens. There were numerous other (smaller) blacklists published by the OECD between 2000 and 2009, before in May 2009 the OECD’s Committee on Fiscal Affairs decided to remove all three remaining jurisdictions Andorra, Liechtenstein and Monaco from the list of uncooperative tax havens in the light of their commitments to implement the OECD standards of transparency and effective exchange of information and the timetable they set for the implementation.That nine year period and its struggles between the OECD and various finance centres hold lessons regarding the prospects of the Lough Erne taxation goals. 

The initial lack of support for the listing processes by many of those listed was not surprising and typifies a lack of compliance pull.  Under this construct of compliance pull, the more legitimate a rule, initiative or regulatory framework is perceived to be by those who are subject to its effects, the greater the level of compliance they will be accorded.  Similarly, the lower the levels of legitimacy accorded to specific rules, the lower will be the levels of compliance accorded.  Interestingly the compliance pull: legitimacy relationship is an interactive one, so that increasing levels of compliance pull will strengthen the legitimacy and compliance levels achieved by rules/initiatives etcetera, and decreasing levels of compliance pull will have the opposite effect.  Many of the smaller finance centres targeted by the OECD gathered together from 2000 onwards and utilised the concept of legitimacy to shape the discourse of their relationship with the OECD, especially regarding the expectation that whatever standards the OECD expected of them, the OECD should also expect from its own member jurisdictions, eventually leading to the establishment of the Global Forum on Taxation (issues which I address in this working paper). The Global Forum sought to bring together in more cohesive ways how the OECD, certain OECD members and many of those jurisdictions likely to be affected by the OECD’s activities interact and in turn it has become arguably the most important multi-lateral clearing house on matters of tax transparency and exchange of information.

Similar forces have been at play in the evolution of the European Savings Tax Directive which has highlighted internal EU politics on taxation.  From the mid-1990s there has been tension between France and Germany in particular with some of the other Member States, especially Austria and Luxembourg about information sharing on taxation issues.  Member States finally reached political agreement at the Ecofin meeting of 21 January 2003 and it was adopted formally on 3 June 2003. However, even that agreement contained transitional arrangements for Member States Austria, Belgium and Luxembourg which were linked to agreements on comprehensive exchange of information with Andorra, Liechtenstein, Monaco, San Marino and Switzerland.  The wheels of multi-lateral taxation information sharing reform move slowly and all the pieces in the jigsaw are still not complete as Switzerland’s Parliament is yet to ratify international taxation information sharing agreements with key actors the EU and the US. This reflects the political reality that different jurisdictions have different perceptions about what are their respective legitimate positions on increased transparency in taxation and other financial contexts.

Another substantial driver for the strong international push for more rigorous tax compliance and transparency has been anger and frustration, not only within national governments and tax agencies, but also within the broader community, at perceived under or non-payment of appropriate levels of tax by corporate organisations.  The most recent high profile example of this surrounds the taxation strategies of Apple one of the world’s largest and most profitable companies.  In May 2013 in the US Congress at The Permanent Subcommittee On Investigations Hearings, Senators Carl Levin and John McCain were heavily critical of Apple, accusing it of holding tens of billions of dollars in offshore entities that it had created so that it could avoid US taxation responsibilities.  However, under fierce questioning from the Senators, the CEO of Apple Mr Tim Cook defended his company’s tax practices, claiming that Apple paid all the taxes that it owed, not only complying with the law, but also complying with the spirit of the law. Apple is just one of the corporate actors in dispute with national tax agencies and politicians offering alternative explanations and justifications of tax management strategies.  However, as mentioned above the deteriorating fiscal position of many countries is accentuating the pressures associated with the collection of taxation revenues in both national and international contexts and the pressure valves seem to be rising.

We have only to look at the lessons of history to realise the centrality of tax in international relations.  For example, a key trigger in cementing support for the ultimately successful independence struggle of the US was a taxation protest by American colonial patriots that is celebrated in US folklore as The Boston Tea Party, when on 16 December 1773 angry colonial settlers hurled hundreds of crates of tea from three English ships into Boston Harbour. The protest was not sparked by any new tax, indeed the relevant Tea Act actually removed duties and tariffs, but only for the East India Company and its nominated American merchants, as part of a series of taxation initiatives of the Government of King George III that the American colonists saw as taxation without representation.  So the Boston Tea Party was actually about issues of inclusion, exclusion, notions of equity and the legitimacy of external bodies, (in this case the British Government), to structure markets through regulation. As the G8 Lough Erne summit shows these issues of inclusion, exclusion, taxation, representation, regulation and legitimation are as intertwined and politically important today as they were in the 1770s.  If multi-lateral initiatives that seek to reconcile the competing claims of nation states for tax revenues, finance centres for market access and business organisations for freedom to operate are to be successful in mitigating tension, reducing contestation and achieving success, then they will require substantive levels of inclusion and legitimacy for affected actors.