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Meeting challenges of globalized financial markets: the tax dimension
By Angel Gurra (China Daily)
Updated: 2009-10-26 07:31 As countries start to come through the global economic crisis, their governments are looking more and more to tax systems to help secure long-term financial stability. Their determination to shore up their revenues by closing off loopholes for tax evaders was given a huge boost by G20 leaders at Pittsburgh last month with the announcement of plans to monitor the clean-up of secretive tax havens. This week, government representatives from over 84 countries and regions are meeting in Beijing to take forward the debate on how the tax and financial systems interact, and to see how tax can best support a sound financial sector environment in future.
When the OECD, IMF and World bank jointly formed the ITD process, back in 2002, they were conscious that the increasing globalization of the economy and the focus on sustainable development underlined the need for strengthened international cooperation on taxation across all countries - not to set rules, since that is the prerogative of nation states, but to cooperate through dialogue and support. The ITD has since grown to include the European Commission, the Inter-American Development Bank and the UK Department for International Development (DFID). It aims to share experiences and knowledge which will help governments design and administer tax systems for a globalized economy which can effectively raise revenues needed for vital public services, welfare and infrastructure development while encouraging enterpreneurship and growth. This is particularly important for developing countries which need the resources to invest in their long term future.
This week's conference is truly groundbreaking in bringing tax into the global debate on financial stability, as countries look beyond the current crisis to rebuild a sustainable and vibrant financial sector in future. The global economic climate is now one of international cooperation, as never before. Led by the G20 - a forum where China plays a key role - world leaders are determined to adopt policies which will lay the foundation for strong, sustained and balanced growth, identifying and addressing potential risks to financial stability. The OECD and its ITD partner organizations are fully engaged in this process, contributing with expert analysis, exchange of experience and good practice, and the strategic insights which we can bring to to support countries as they move out of recession. In the critical area of combating international tax evasion the dialogue has already borne fruit. This dialogue is vital to support developing countries desperate to raise tax revenues to pay for schools, roads and hospitals, but also vital for developed countries to balance their books. Thanks to pressure from the G20, the strengthened global forum on transparency and exchange of information - with China asa a vice-chair of the forum - and the end of the era of banking secrecy will allow countries to fully enforce their tax laws to protect their tax base. Since April, over 90 tax information exchange agreements have been signed and over 70 tax treaties have been negotiated or renegotiatied to incorporate the now globally endorsed OECD tax transparency standards. Financial institutions will have a huge contribution to make in the coming months and years in supporting the new climate of tax transparency. But the tax dialogue has to extend beyond tax enforcement. Tax influences virtually every financial and economic decision, and has a crucial role to play in supporting a stronger as well as cleaner and fairer economy in future. To lay the foundations for a stronger global economy for the generations to come, regulations and incentives across the financial sector need to be aligned to ensure tighter oversight and risk management. That means looking at tax policy and its administration alongside other structural policies to support the reform and strengthening of financial markets, to ensure that taxation does not introduce distortions and does not promote excessive risk taking or leverage. The factors which led to the extraordinary events in the financial landscape in 2008 were many and varied. But central to them was a latticework of incentives and structures which failed adequately to manage risk. And the failure occurred in a sector (financial services) where the consequences for the global economy - for developed countries and even more so for developing countries - were extremely serious. In economic terms, the crisis has hit jobs, output, and the taxation revenues needed to support public goods and services, welfare and development. In human terms, the crisis has increased poverty and unemployment, it has reduced wealth, and has put back global growth and development by several years. In response to this crisis, governments took rapid and unprecedented action to shore up financial systems. Those actions are now bearing fruit, and now that economic recovery is taking hold, governments need to start plans to withdraw from extraordinary measures to support financial markets and institutions. They also need to turn to the structural reforms needed for markets and institutions to operate in future in an environment supportive of stable growth. Sorting out what were the incentives and failures that led to the crisis will take time. These clearly had to do with, inter alia, financial sector remuneration structures, risk management, corporate board performance, changes in capital requirements, and possibly even the structure of financial sector institutions. But these factors may also have interacted in unexpected ways with taxation rules and exacerbated financial instability. The OECD is exploring how taxation policy may affect financial instability and what lessons might be drawn from this for the future. As well as supporting countries in addressing the issue of securing sustainable tax revenues, in the wake of the crisis, it is reviewing tax incentives to debt, and to risk-taking more generally in the areas of the capital and financial markets. It is also assessing the special challenges to tax revenues which come from arbitrage of national corporate tax rules made possible by financial innovation. What is clear is that the financial sector cannot again be allowed to expose global markets to the sort of damage which has been experienced over the past year. So a key plank of the OECD's strategic response to the crisis, alongside an emphasis on restoring the conditions for global economic growth, is to emphasise the need to align regulations and tax measures in the financial sector to ensure more appropriate oversight and risk management. OECD's goal is for a global economy that is not only stronger but also cleaner and fairer. Making the economy stronger will include strengthening the support which taxation systems give to growth and financial stability. Making the economy cleaner and fairer will include addressing tax evasion and avoidance, improving information flows between the financial sector and tax authorities, and between tax authorities, and reducing the scope for tax evasion, avoidance, and for costly and destabilising arbitrage between national tax systems. Through its active engagement in the work of the OECD Fiscal Affairs Committee, the People's Republic of China provides a much welcomed contribution to these efforts. This week in Beijing, governments have a unique opportunity to share experiences of how they are now addressing these issues, and of what more they could do together so that the global tax system can better support a sound and sustainable financial environment. The author is OECD Secretary-General (For more biz stories, please visit Industries)
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