On average, countries in Latin America and the Caribbean collect 22.8% of their GDP in taxes. Tax burden in the region is 11.4 percentage points lower than that of OECD countries (34.2% of their GDP in 2017). In addition, tax evasion prevents the collection of up to 50% of the revenues that should be raised through direct taxes.
This context creates considerable budget constraints for governments who wish to promote development and reduce inequality. As a result, it is necessary to further initiatives that help improve tax equality. On the occasion of the G20 Meeting of Finance Ministers and Central Bank Governors held on April 11 and 12, 2019, in Washington, D.C., it is interesting to evaluate how the G20 contributes to those efforts.
The G20 is the main forum of economic and financial cooperation, and international politics. G20 debates have a huge global impact, since its members account for 85% of the global GDP, two-thirds of the world’s population and 75% of international trade. Three Latin American countries participate in the forum: Mexico, Argentina and Brazil. It is a central space of debate and decision-making, aimed at adopting concrete solutions for the main economic and political challenges the world is facing.
The G20 Finance Track plays a very active role in the promotion of initiatives to improve fiscal capacity and increase revenues. In turn, efforts are made to fight tax avoidance and put an end to bank secrecy for fiscal purposes. Several actions have been taken to achieve this goal.
Among the G20 main achievements in terms of fiscal policy, the following initiatives can be mentioned:
1. Inclusive Framework on BEPS
The OECD/G20 Inclusive Framework on BEPS addresses base erosion and profit shifting between different national tax systems. The challenges posed by BEPS affect both developed and developing countries. Data also shows that BEPS reduces corporate income tax (CIT) revenues by 4%-10%, i.e., around 100-240 billion US dollars every year.
Following the release of the BEPS Package in October 2015, G20 leaders urged its timely implementation and called on the OECD to develop a more inclusive framework with the involvement of interested non-G20 countries and jurisdictions, including developing economies. As a result, the OECD established the Inclusive Framework on BEPS in June 2016 to define modern international tax rules and address the challenges posed by BEPS. Over 130 countries and jurisdictions have already joined on an equal footing in developing standards on BEPS-related issues and reviewing and monitoring its consistent implementation.
2. Automatic Exchange of Information for Tax Purposes
Transparency and the exchange of information are central to the fight against international tax avoidance. In this regard, the Global Forum on Transparency and Exchange of Information for Tax Purposes, which is made up of 154 countries, effectively promoted the exchange of information on request, in particular, since its restructuring in 2009. However, this exchange mechanism was not enough in a globalized economy. As a result, in 2014, the G20 decided to take a further step and created the Automatic Exchange of Financial Information portal. Today over 100 countries are automatically exchanging financial information for tax purposes.
With the goal of monitoring high standards of transparency around the world, the Global Forum evaluates countries through peer review activities and provides efficient mechanisms to ensure the implementation of standards regarding both on-request and automatic exchange of information for tax purposes.
In late 2018, G20 member countries signed the Punta del Este Declaration, which called for maximizing the potential that an effective use of information exchanged under international standards of tax transparency could have. It also encouraged the use of said mechanisms not only to fight tax evasion, but also corruption and other financial crimes.
3. Design of international taxation standards in the digital economy
Technological advances have created considerable changes in business models. The possibility of having a significant economic presence in a market without a significant physical presence (without offices, branches, salespeople or any other element that might define today the allocation of tax powers to the countries in the market) is particularly important for tax purposes. These changes create new tax challenges and impose the need to review the international tax standards that were designed over a century ago.
The design of international tax standards for the digital economy requires a complex analysis, as well as the joint work of all countries. Many of the developments of that analysis are explained in this document.
The discussions and initiatives that the G20 is promoting help build consensus and promote the tax agenda globally. In addition, the forum promotes the collaborative creation of concrete recommendations aimed at tackling the challenges posed by the new digital economy.
Which achievements do you consider the most important? Add your comments below!