Mark Pragnell, Director of Pragmatix Advisory, interviews Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration on the issue of financial transparency versus privacy, the impact of COVID-19 on fiscal policy, and the future of a digitalised global economy.
MP: Pascal, thank you for making the time to answer our questions.
It’s an understatement to say that a lot has happened in the world since your last interview for IFC Review, in December 2018 with the respected Irish corporate tax lawyer Mark O’Sullivan. There’s a lot to cover ……
MP: Let’s start with one of the OECD’s greatest achievements.
Twenty years ago, few would have anticipated the mass exchange of private financial information between different jurisdictions’ tax authorities. But first, the OECD’s Tax Information Exchange Agreements and more recently its Common Reporting Standard (CRS) have created a new world order in tax cooperation and transparency. Last year, information regarding 84 million accounts with assets of €10 trillion were shared – double that of 2018.
Some want to go further. They don’t just want thorough, systematic and robust data collection, and its speedy automatic exchange between competent authorities. They want the information (or some of it) to be freely available in the public domain for anyone to access.
Where should the line be drawn between personal privacy and the ‘public interest’ need for financial transparency?
PSA: As you know, offshore tax evasion is a serious problem for jurisdictions all over the world and, more than ever, countries have a shared public interest in maintaining the integrity of their tax systems. Effective and targeted automatic exchange of information on offshore financial accounts is critical in the fight against tax evasion. It is in this context that the G20 leaders have mandated the OECD develop the CRS.
Throughout the development of the CRS we have worked to ensure it is not only effective as a tool in fighting tax evasion and enhancing compliance but is also consistent with the taxpayers’ right to privacy. This is reflected both in the scope of the information exchanged and the way countries are required to handle the information received.
The CRS has a wide scope, covering all relevant financial institutions and financial products. This is absolutely necessary to achieve the overall objectives of the CRS. Any narrower scope would allow taxpayers to easily circumvent reporting by shifting assets to institutions or investing in products that are not covered by the CRS, which would defeat the entire purpose of the CRS. We also need to ensure that the integrity of the CRS is not undermined by newly emerging financial products and work is ongoing at the OECD to ensure crypto-assets are covered by an adequate transparency framework.
At the same time, the CRS was built on the premise that taxpayers have the right that exchanged information remains confidential and is not disclosed inappropriately, whether intentionally or by accident. As a result, the information can only be disclosed to tax authorities who must keep the information confidential and can only use it for tax purposes.
As you mentioned, some want to go further. At the same time, some are of the view we have already gone too far. That is probably the best sign that we have struck the right balance between personal privacy and the public interest. We do feel strongly on data confidentiality protection, which is why the Global Forum (GF) has put in place a very demanding peer review mechanism on the protection of the information. Passing the test of the GF is also a pre-condition to joining the CRS.
MP: The debate (or is it a battle?) on how to make the multilateral tax infrastructure fit for purpose for a digitalised global economy has come alive.
You and your team should be warmly congratulated for the incredible progress that has been made towards the development of an ‘Inclusive Framework’ for BEPS, especially what’s been achieved this year against the backdrop of the pandemic.
But, if I may, I want to play devil’s advocate. From the outside, the OECD’s worthy and needed attempts to broker a global deal on the taxation of cross-border digital business look like a zero-sum game. One country’s gain will come at another’s loss. The leaked ‘Pillar One Blueprint’ document makes clear that both the ‘scope’ and ‘quantum’ (i.e. all the key details) of the proposed reallocated tax require yet-to-be-found political agreement and decision. Meanwhile, the United States looks, at best disengaged, if not hostile. In these circumstances, stalemate is a real possibility – as is fragmentation, confusion, and inconsistency. Even worse, the outcome is likely to be determined by those larger nations with the largest financial, fiscal and diplomatic clout at the expenses of smaller states and jurisdictions.
How confident are you that this process will lead to a meaningful conclusion, and one which is proportionate, reasonable and fair for all? Why? And, by when?
PSA: In October, the Inclusive Framework and its 137 members endorsed a package made of two Blueprint Reports, a political statement and an impact assessment. Recognising that there was no agreement yet, the Inclusive Framework (IF) affirmed that the Blueprints were a solid foundation for future agreement and all members agreed on a new deadline mid-2021. Contrary to your devil’s advocate assertion, this is the demonstration of a high level of commitment and engagement of all countries, including the US, and signals the ability of the IF to take a strong bi-partisan approach to denouncing unilateral measures and advocating a multilateral solution.
Is it, at best, a zero sum game? Not at all. If you look at the impact assessment, it shows that, absent a solution, there could be a very negative impact on growth. This would be devastating at a time when COVID-19 has seriously harmed our economies in addition to the terrible toll it has taken on humanity. The worst-case scenario, the failure to reach agreement, could reduce global GDP by more than 1 per cent[i], at a time when we can least afford it, and lead to significant trade wars. The absence of a consensus-based solution would lead to a proliferation of unilateral digital services taxes and an increase in damaging tax and trade disputes, which would undermine tax certainty and investment.
It is therefore imperative that we find a solution. Everybody recognises that the status quo is not an option. To avoid a further fragmentation of the international tax system and the proliferation of uncoordinated measures, it is crucial that countries continue working together to compromise and reach an agreement as quickly as possible.
Big countries may have more influence than small, as is the case in all other international matters, but be assured that small countries would suffer even more than large countries from a trade war.
MP: There are also deeper jurisprudential and sovereignty concerns over the proposals. Where Pillar One may be seen as an agreement between sovereign nations over the allocation of tax jurisdiction in an increasingly intangible and intermingled world, Pillar Two, and the so-called ‘global minimum tax’ proposal, goes further. It impinges on the rates of taxation set by national government. And, arguably, it risks undermining fair and economically efficient competition between nations – and, again, may disproportionately benefit larger nations versus smaller states.
How will Pillar Two rules protect sovereign nations and self-determining jurisdictions that legitimately and democratically choose to be ‘tax neutral’ and/or have zero or low rates of profit tax?
PSA: Jurisdictions are free to determine their own tax systems, including whether they have a corporate income tax and the level of their tax rates. That is a fact, and Pillar Two does not aim to undermine any country’s sovereignty. However, as countries are sovereign, they also have the right, subject to their international obligations, to tax the income sourced on their territory or the income of their residents the way they want, which includes the right to impose a minimum level of tax. This is what the US did in 2017 as part of their tax reform. It is, by the way, interesting to note that this reform was adopted by the Republican majority in Congress. This is why Pillar Two is not an infringement on countries’ sovereignty. On the contrary, coordinating on a measure, which is fundamentally a domestic measure, would limit the risk of double taxation and could incorporate some concerns of low tax jurisdictions which are participating in the work.
Overall, Pillar One and Pillar Two are likely to have modest effects on global investment, and a much better impact than no solution as they would lead to a more favourable environment for investment and economic growth than would likely be the case in the absence of an agreement.
MP: Then there’s the pandemic. Beyond the immediate public health crisis and the tragedy for so many families across the world, COVID will leave nations economically and fiscally injured. The emergency measures brought in by many governments to keep families, businesses and economies afloat through lockdown will leave public finances in a worse state than after the 2008 global financial crisis. The United Kingdom, for example, will have debt as a share of national income last seen in the era of the post-war Marshall Plan. While governments will follow fiscally expansionary policies in 2020 and 2021, the brakes will have to be applied to spending and taxes will have to rise in the medium and long term. Soon, politicians will be looking to increase revenues and placing pressure on tax regimes to deliver more.
COVID has been a seismic societal event that, arguably, provides a once-in-a-generation opportunity for systemic change. One area where we may see a step change in attitudes and behaviour is around the environment and climate change. More broadly, businesses and individuals are looking for more innovative ways to deliver both social good with commercial gain. ESG and impact investments are gaining mass appeal.
Is the global tax system in a better place now than it was after the global financial crisis to handle the stresses of deeply indebted governments? What advice do you have for governments, big and small, about how to manage the long road to post-COVID fiscal recovery?
How much more should national governments be using tax to reduce negative environmental (and other) externalities? What’s the future role for the OECD here?
PSA: The COVID-19 pandemic is mobilising a lot of effort from governments around the world and the OECD has been working to support governments during this challenging time. On the tax side, we have analysed the emergency measures taken to support households and businesses and have looked at the role that tax policy can play in mitigating the impact of the crisis to facilitate the recovery.
It seems clear that tax revenues are likely to be significantly reduced for a number of years, due to the direct effects of the crisis as well as understandable policy actions during the crisis. The best way to boost tax revenue will be to support solid growth, including through sufficiently strong and sustained stimulus. This crisis represents an opportunity to reflect on whether the tax structure of countries could be modernised, in particular to address environmental challenges. Fiscal stimulus can, of course, connect with decarbonisation but recovery policies will also provide opportunities to help attain environment-related objectives. The use of tax incentives could support stronger environmental commitments and help countries to phase out fossil-fuel subsidies.
Tax policy can contribute to covering the costs of the COVID-19 crisis but efforts to restore public finances, i.e. fiscal consolidation, should not be brought in too early, to avoid repeating the mistakes of the 2008 crisis.
The OECD has developed a solid portfolio of work over the past decade on carbon pricing, on taxing energy use and on subsidies and tax expenditures related to fossil fuels. We have tools available to help governments meet their environmental policy objectives, including in the framework of the 2015 Paris Agreement. We will continue to promote those tools and to explore with governments what we can do to assist on carbon pricing, including at G20 level.
MP: As a macroeconomic forecaster and commentator, I have always held the OECD in high regard. It is one of the few multilateral institutions to maintain an independent and authoritative voice and has spoken truth unto power when needed.
But, founded in 1961 at possibly the height of North Atlanticism, based in a European capital, without China as a full member and with the United States appearing semi-detached, it risks looking out-dated.
How does an organisation established to “contribute to the expansion of world trade on a multilateral, non-discriminatory basis” maintain its relevance in a world of increasingly bilateral deals, power politics and populist nationalism?
How can the OECD effectively coordinate the 21st century’s global financial and fiscal infrastructure when it has so little representation from Asian nations in its full membership?
PSA: The OECD credibility and relevance is based on the quality of its analysis, it advice and its recommendations to governments; we work to allow governments speak to each other and to coordinate their response to challenges in all areas of public policies. As such, multilateralism is our DNA and we will continue to undertake all efforts to make multilateral efforts work for everyone.
The OECD membership has increased in the past 10 years, jumping from 30 to 37 members with Chile, Colombia, Estonia, Israel, Latvia, Lithuania, and Slovenia joining. Costa Rica should soon become the 38th member of the OECD. While it is true that many Asian countries are not members of the OECD, we are actively working with a number of Asian countries in the context of Asia-Pacific Economic Cooperation (APEC), the G20, and through the multiple cooperation programmes we established with regional organisations and development banks, including the Asian Development Bank.
In various areas including international taxation we have been working, for years, with an ever-increasing number of countries across all regions. The Global Forum for Transparency and Exchange of Information for Tax Purposes has over 160 members, and the Inclusive Framework has over 135 members. The Inclusive Framework members include over 20 countries and jurisdictions in Asia and the Pacific. All of these jurisdictions contribute on an equal footing, meaning that each has an equal voice. Of course, simply stating it is not enough and we are conscious that many developing countries are facing challenges in terms of resources. This is why we have developed tailored capacity building programmes to deliver technical assistance on a wide range of tax-related issues, which have been in operation for years. The capacity building programmes have continued in spite of the crisis. Between March and October 2020, the OECD Centre of Tax Policy and Administration held 30 virtual workshops which trained 8,000 tax officials from over 160 jurisdictions.
In this regard, I am proud of the work that has been achieved through the OECD/United Nations Development Programme (UNDP) Tax Inspectors Without Borders initiative. 80 programmes are ongoing or have been completed, and 20 are in the pipeline to start soon. This work has led to tangible results: over US$537 million of additional revenues have been recovered from an overall tax assessment of over US$1.85 billion since 2012.
In the context of the COVID-19 crisis, international coordination on tax can help countries improve their domestic resource mobilisation and provide the sustainable financing necessary for long-term resilience. There is potential for developing countries to increase their tax revenues, including by expanding the tax base through property, carbon, and progressive income taxes, as well as through the digitalisation of tax administration.
The COVID-19 health and economic crisis should result in a new scale of support for developing countries, which may have more limited capacity – including limited fiscal space – to cushion impacts, and larger exposure to reduced trade, tourism and lower oil prices, while taking into account the need to ensure adequate healthcare. This will require significant new external financing, as well as more systematic support to restructure and cancel debts and rebuild economies and tax systems.
[i] OECD (2020), Tax Challenges Arising from Digitalisation – Economic Impact Assessment: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, https://doi.org/10.1787/0e3cc2d4-en
Mark Pragnell, director of Pragmatix Advisory, has over 25 years’ experience as a macroeconomics consultant and forecaster. He has worked with a number of IFC governments, promotional bodies and businesses, and has led seminal research to explain and quantify the value of IFCs.
Pascal Saint-Amans is the Former Director of the Centre for Tax Policy and Administration at the OECD. Mr. Saint-Amans, a French national, joined the OECD in September 2007 where he played a key role in the advancement of the OECD tax transparency agenda in the context of the G20. Prior to his appointment as Director, he was the Head of the Global Forum on Transparency and Exchange of Information for Tax Purposes since 2009. Mr. Saint-Amans graduated from the National School of Administration (ENA) in 1996, and was an official in the French Ministry for Finance for nearly a decade.