Clearer tax

Jeffrey Owens, Director OECD Centre for Tax Policy and Administration*

© David Rooney

In February 2009, Singapore and Hong Kong, China, undertook to bring tax transparency up to international standards and relax bank secrecy laws for tax purposes. Hot on the heels of these announcements were others from the Cayman Islands, Jersey, Andorra and Liechtenstein, and more recently we have seen Austria, Belgium, Luxembourg and Switzerland signing up to the OECD standard on exchange of information.

Why is this happening now? World leaders meeting in London on 2 April called for new controls over tax havens and strict bank secrecy jurisdictions as part of the G20's response to the financial crisis. But despite the welter of recent commitments to improve taxinformation sharing, there are still plenty of voices calling for the havens to be left alone, on the grounds that the advantages they offer to business and private investors are irrelevant to the financial sector reforms called for by the crisis.

So is this simply a case of bullying and buck-passing on the part of the large and developed economies, or is there a genuine need to tackle what many economies increasingly see as a key faultline in the global financial system? Improved sharing of tax information is essential in a reformed global financial system. It is not that the taxation-even non-taxation-regimes of havens and secrecy jurisdictions have contributed disproportionately to the causes of the current financial crisis and economic downturn.

What is at issue is the shielding of business and private investor transactions from legitimate tax scrutiny in their home country. Recent financial-sector deleveraging has been sharp and painful. Secretive taxdriven arrangements were partly to blame for the gearing up that brought about that pain. Circular, "double-dip", financing arrangements that give companies fiscal advantages both at home and offshore ensured that normal tax benefits for debt financing were magnified out of all proportion to any conceivable tax policy justification, resulting in tax subsidies for excessive debt as well as for high-risk investments that would otherwise have been unviable.

Tax savings for borrowing engineered through such artificial and circular transactions clearly boosted financial sector balance-sheet and share values. But they added no real value to the global economy and served simply to further inflate global asset bubbles. Governments have long been alert to tax-avoidance opportunities from what is euphemistically known as "structured finance", but the involvement of secretive jurisdictions in complex chains of structures and transactions has often hampered their attempts to counter this distortive scandal. Tax havens are also home to the majority of the funds-mutual funds, hedge funds, private equity funds-investing in high-yield securities and highly leveraged shareholder investment that drove the pre-crisis credit boom. Investors in offshore funds are of course responsible for reporting their offshore income and gains to their own tax authorities, and there are of course reasons other than tax minimisation for locating funds offshore.

But tax secrecy can tip the balance between an unattractive, taxed investment and one which is only attractive on the basis of non-taxation. Some would argue that tax is inherently distortive, and that all tax systems are far more complicated than they should be. It's true that most countries' tax systems have an inbuilt bias to companies financing themselves with debt. It's also true that complexities and differences between many countries' tax systems offer opportunities for tax arbitrage that can distort investment decisions, irrespective of the level of transparency. And it may be that administrative burdens, complexity, or perceived ineffectiveness of some tax systems encourage taxpayers to evade or avoid tax, with or without the use of tax havens.

However, if so many countries are now signing up to OECD's tax information exchange standards, it is because they recognise that with the privilege of participation in the global financial market comes the responsibility of cooperation and transparency-not just for the benefit of the tax revenues of other countries, but also for the stability of the financial sector as a whole. All countries have a responsibility to use their tax systems to promote, and not distort, sustainable economic growth, and to bear down on tax-driven distortions in the economy, while addressing local public expenditure needs.

That is a tall order for any country, even within its own tax system. At an international level, it calls for an open, co-operative approach. It is inconceivable that any country could be part of a future stable, global financial market without a clear commitment to that approach. This is the message that came out clearly from the G20 summit, and that the OECD will continue to promote.  

*The views expressed in this article are those of the author and do not necessarily reflect those of the OECD or its member countries.

Visit www.oecd.org/tax

Visit www.oecd.org/finance

©OECD Observer No 273 June 2009

 




Economic data

GDP growth: +0.6% Q2 2018 year-on-year
Consumer price inflation: 2.9% Sept 2018 annual
Trade: +2.7% exp, +3.0% imp, Q4 2017
Unemployment: 5.2% Sept 2018
Last update: 13 Nov 2018

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Globalisation will continue and get stronger, and how to harness it is the great challenge, says OECD Secretary-General Gurría on Bloomberg TV. Watch the interview here.
  • OECD Secretary-General Angel Gurría with UN Secretary-General António Guterres at the 73rd Session of the UN General Assembly, in New York City.
  • The new OECD Observer Crossword, with Myles Mellor. Try it online!
  • Watch the webcast of the final press conference of the OECD annual ministerial meeting 2018.
  • Listen to the "Robots are coming for our jobs" episode of The Guardian's "Chips with Everything podcast", in which The Guardian’s economics editor, Larry Elliott, and Jeremy Wyatt, a professor of robotics and artificial intelligence at the University of Birmingham, and Jordan Erica Webber, freelance journalist, discuss the findings of the new OECD report "Automation, skills use and training". Listen here.
  • Do we really know the difference between right and wrong? Alison Taylor of BSR and Susan Hawley of Corruption Watch tell us why it matters to play by the rules. Watch the recording of our Facebook live interview here.
  • Has public decision-making been hijacked by a privileged few? Watch the recording of our Facebook live interview with Stav Shaffir, MK (Zionist Union) Chair of the Knesset Committee on Transparency here.
  • Can a nudge help us make more ethical decisions? Watch the recording of our Facebook live interview with Saugatto Datta, managing director at ideas42 here.
  • The fight against tax evasion is gaining further momentum as Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention on 24 January, bringing the total number of signatories to 78. The Convention strengthens existing tax treaties and reduces opportunities for tax avoidance by multinational enterprises.
  • Rousseau
  • Do you trust your government? The OECD’s How's life 2017 report finds that only 38% of people in OECD countries trust their government. How can we improve our old "Social contract?" Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2018