By William Vlcek

When the leaders of the world’s most powerful economies gather in Northern Ireland on Monday, one issue will overshadow all others: tax. For years the matter of how global corporations engage with offshore finance and tax havens received the occasional verbal volley from political leaders. But little was done.

Now, the pressure is on. A series of revelations about companies taking tax-efficient routes on massive earnings have dominated media outlets in recent months, ensnaring household names such as Apple, Amazon, Starbucks and Marks and Spencer.

There is wide revulsion at apparent tax avoidance that has leaders worried and and that has ramped up the political pressure on those heading to Enniskillen. The key delegations have already talked about the significance of the moment, making it clear that tax will dominate proceedings.

Concern over tax has been building for more than a decade. But for a couple of years, amid the global financial crisis, attention was focused elsewhere.

However since late 2012 the topic of tax havens has returned to the top of the agenda. British Prime Minister David Cameron stated to the World Economic Forum in January 2013: “When some businesses aren’t seen to pay their taxes, that is corrosive to the public trust.”

Consequently taxation is one of the three issues at the center of the UK Presidency of the G8 (the other two are trade and transparency). So what can be expected in terms of action?

Part of the problem for those attempting to address the situation is that the term “tax haven” refers to only one feature of the many services provided in an offshore financial center – the reduction, elimination, avoidance or evasion of paying tax on the asset or income generated in that location.

Yet at its most basic, any jurisdiction other than the one in which you live may serve as a tax haven for you — as long as it does not report the presence of those assets back to the government where you live. So there is a drive on to exchange data on non-residents holding a bank account with other countries.

And it is this point that establishes the United States as the largest tax haven in the world (as long as you are neither a US citizen nor a resident) due to the fact that at present account details on non-resident, non-citizen account holders remain with the financial institution.

On a corporate level, offshore centres have emerged as important intermediaries in the flow of capital for the world economy and as the home to subsidiaries for the transnational structures of multinational corporations. An International Monetary Fund study in 2010 found that the offshore tax havens served to “channel funds sourced globally” within the integrated international financial architecture.

This function is demonstrated in some of my research and that of a number of colleagues in Australia and the UK. Companies registered in the British Virgin Islands, Cayman Islands and Hong Kong have a prominent role in channeling foreign direct investment to China, as well as direct investment from China.

Legislative committee hearings in the United Kingdom and United States over the past eight months have exposed the extensive use of subsidiary firms registered in several countries. These countries have special tax regimes which encourage a corporate structure that significantly reduces the parent firm’s corporate income tax obligation in the UK and US.

Those structures are a reaction, first to the US corporate income tax regime, and second to a desire to consolidate profits in a country with a lower corporate income tax rate. As other countries observe these hearings, their governments have themselves taken a closer look at the local operation of multinationals.

Taxing the multinational corporation highlights the complexities, and voids, found among different countries’ tax legislation at the points they intersect across national borders.

Setting one country’s tax laws against another’s, in combination with the clauses contained in any taxation treaty agreed between these two countries, means there are loopholes to exploit. It may result in the phenomenon whereby an Apple subsidiary company can have no national tax jurisdiction and pay no corporate income tax to any country as a result.

But that is not the same thing as saying that no tax will be collected on that income. As soon as it is transferred to the parent firm in the US, corporate income tax must be paid. And when the remainder of that corporate income is paid out to the shareholders as a dividend, those shareholders will again pay income tax on the dividends received from Apple.

A successful change to international policy on cross-border tax collection could lead to a more equitable distribution from the profits of business activity. However, a change in the local tax regime may mean that local business activity is no longer profitable.

While the treasuries of the G8 countries could benefit from changing the international tax treatment of multinationals, there would also be some losers. Those citizens with investments in the multinationals would lose some of the dividends currently distributed from profits untaxed elsewhere.

But with more taxes collected locally, not only could European countries collect more tax from American multinationals, but more tax could also be collected by developing economies from American and European global firms.

In other words, the status quo may mean that developed countries don’t collect tax on the profits of foreign multinationals, but it also has the same impact in developing countries. This effectively transfers wealth (profits) from developing economies to developed economies.

This shift in wealth (along with grand corruption and capital flight) is what motivates development charities to campaign against the tax practices of multinationals.

The G8 leaders have to do more than make bold statements about international resolve. Trite platitudes have been the order of the day for the past two decades; this time they must go beyond this.

National legislation must be re-crafted, with international objectives at their center. Current tax laws are full of exceptions that benefit a particular nation’s firms when they operate internationally.

Reforming the global taxation system is a matter of political will, that must be demonstrated by all countries.

Over the past several months it appears as if such political will has been growing among EU member states. Austria and Luxembourg have announced their intentions to change national policy, while in the UK the Prime Minister has indicated a desire to force changes in the Crown Dependencies and Overseas Territories that host offshore financial centers.

Yet the US remains a major sticking point. It has not yet required the collection and exchange of account holder data with other countries, Canada aside. This is just one example of the continued resistance to legislative change orchestrated by the US banking industry and some members of congress.

In the end, dealing with the problem created by tax havens involves gaining the cooperation of countries beyond the G8, and beyond even the G20. It is a collective action problem because it is necessary to convince all countries of the collective benefit as well as to gain their cooperation to accept the cost from taking action. China, for instance, was not convinced when other G20 members proposed action in April 2009, and it is not represented at the G8 meeting.

For this summit to accomplish anything serious countries that benefit from the status quo must become satisfied that things need to change. Unfortunately, these countries, from China to Mauritius, have little incentive to relinquish that benefit.

William Vlcek (University of St Andrews) received funding from The Carnegie Trust for the Universities of Scotland in 2010 and a Leverhulme Research Fellowship in 2008. This article was originally published at The Conversation. Read the original article.

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