The recently concluded G8 meeting at Lough Erne took an unprecedented leap by turning the focus on corporate governance. Among the greatest institutional challenges of our times, is the regulation of multinational corporations which operate across national borders and have the ability to shift labour and capital more than ever before. The G8 agenda focussed on open trade, fair taxes and increased transparency (the 3Ts agenda). Open trade- a part of all multilateral meetings saw the usual narrative of commitment to more trade with lesser transaction costs. However, the need for fair taxes and transparency of corporations took centre-stage for the first time.
The G8 expressed their commitment to establish automatic exchange of information between different national tax authorities and their support to the Organisation for Economic Cooperation and Development (OECD) to develop a multilateral system to implement it. The G8 also proposed a common template that will require MNCs to report profits made and taxes paid across the world. The rationale behind these initiatives is to prevent corporations to actively avoid tax through tax havens and shifting profits. There was also a mention of making relevant price information available across jurisdictions to implement international transfer pricing rules. OECD in the recent years has been working on multiple initiatives to counter the problem of base erosion and profit shifting (BEPS). The G20 also expressed support for OECD’s Global Forum on Transparency and Exchange of Information which has been tasked to create international standards of tax reporting in 2008 and 2012.
While these are steps in the right direction, it is important that developing countries are taken on board while creating these new international systems. Developing countries and regions within federal states rely often heavily on tax incentives to attract investment. International reporting of taxes might lead to pressure from powerful states to withdraw tax incentives that maybe detrimental to investment attractiveness of these countries in the medium term. The G8 countries/OECD are also cognizant of the need to build capabilities of tax authorities in developing countries for proposed international standards to be effective. OECD also needs to ensure that the automatic exchange of information does not lead to information going into the hands of illegitimate regimes which will be politically difficult because of the need of reciprocity in any multilateral arrangement. Considerable investments in IT capabilities of domestic tax authorities of developing countries and standardised reporting systems need to be in place for the automatic exchange system. The information when transferred will be encrypted and bundled; the capability of tax authorities to use this information will ultimately determine who benefits most of out of this system.
The other significant piece at the G8 was continued thrust on transparency. The key issue mentioned within transparency was the use of shell companies by MNCs to manipulate expenses and profits to avoid tax. Even though, the issue was highlighted by the G8, the declaration fell short of laying down an action plan to collect and share information on real ownership of companies.
The G8 expressed continued support for Extractive Industries Transparency Initiative (EITI). The EITI sets global standards to monitor and reconcile company payments and government revenues from oil, gas and mining at the country level. While transparency standards such as these are important, more work needs to be done on domestic capabilities to consume and act on this information. There is broad support by MNCs in least developing countries for more transparent reporting by the government as it helps stability of their contracts. However, more reporting is no panacea to counter corruption and hold public officials to account, domestic institutions and civil society need to be robust in order to effectively use this information to force governments to allocate revenues for development. The G8 countries recognising the need for hand holding the governments of resource rich countries to comply with EITI standards announced country to country partnerships with Burkina Faso, Columbia, Ghana, Guinea, Mongolia, Myanmar, Peru and Tanzania. However the details of these initiatives are patchy. Lack of transparency on the nature of partnerships leads to suspicion in these countries or the partnerships often don’t go beyond words.
The focus on extractive industries at this G8 conference understandably stems from their potential to fuel the growth engine in many low income countries around the world, but there is a greater need for transparency in other industries also. The chemicals industry, for example needs their own EITI parallel to impose international transparency standards on toxic risk of their plants, safety standards and nature of manufacturing especially in countries which have weak environmental monitoring abilities.
The UK Presidency of the G8 this year has succeeded in turning the spotlight on a truly international regulatory challenge, however, there is a need to follow up on these issues with more international partners and apply these principles to a wider set of industries and trans-national actors. Equitable growth in this century depends to a large extent on the robustness of global governance institutions, international coordination mechanisms and regulation of trans-national actors.
Aparajita Bharti is currently pursuing Master of Public Policy (MPP) at the Blavatnik School of Government, University of Oxford. She is the editor of Oxford India Policy Series: http://policyblog.oxfordindiasociety.org.uk/