G8: an unexpected mini-breakthrough on tax

If you dig deep enough into the G8 communiqué (I accept you might not want to do that), there are one or two surprises when it comes to the question of tax.

We knew this summit was going to be largely focused on tax evasion – that there would be provisions agreed by the eight member governments to clamp down on companies that use tax havens. We knew there would be lots of words about sharing information on who is and isn’t paying taxes.

What we didn’t expect was some genuine progress on the battle against tax avoidance – in other words those who drastically reduce the amount of tax they pay while remaining within the law. This is a more high-profile issue, given it is tax avoidance and profit-shifting which companies like Google and Starbucks have been accused of in recent months, and is usually the territory of the G20 and OECD.

However, somewhere at the bottom of the first page of the communiqué was the following sentence: “We will work to create a common template for multinationals to report to tax authorities where they make their profits and pay their taxes across the world.”

What this rather bland sentence promises is that in future companies like Google may have to provide more detail on where their profits are generated (through this “template” which the Treasury has been working on) – then, in turn, it will become harder for them (supposedly) to shift their profits to where they are really generated. The problem for forensic accountants and HM Revenue & Customs is that international companies’ accounts are opaque, declaring where sales (“turnover”) is generated, but not where actual profits are made. But it is profits, and not turnover, that are subject to corporation tax.

Insiders say they are confident that this extra pledge will increase the pressure on the OECD and the G20 (whose summit happens in September in St Petersburg) to clamp down on profit shifting in the coming months.

However, the problems are numerous: for one thing the G8 has merely issued a pledge today – it is quite feasible that it will allow it to fall by the wayside in the coming years. For another, it is likely to be relatively easy for businesses to manipulate their accounts to disguise where profits are genuinely made. Finally, shedding some light on companies’ tax affairs may well cause them to change their behaviour, but there is no guarantee of that – and no teeth to this agreement.

Moreover, it transpires that neither Germany or Russia wanted to sign up to some of the G8 pledges on tax evasion. Other countries remain less enthusiastic about the avoidance/evasion clampdown. Others remain sceptical about the UK’s motives – earlier this year Austria’s finance minister Maria Fekter said she laughed when she first heard George Osborne was focusing on tax.

“Great Britain has many money laundering centres and tax havens in its immediate legal remit – the Channel Islands Gibraltar, the Cayman Islands, Virgin Islands.

“These are all hot spots for tax evasion and money laundering.”

However, for the time being, Mr Osborne and the Prime Minister can indeed claim to have made some progress. But the international tax system was built over a century or more; reforming it will take a long time.