Mike Callaghan is Director of the Lowy Institute's G20 Studies Centre.
There were reports prior to the G20 finance ministers' meeting in Moscow on 19-20 July that, while G20 gatherings do not always set the pulse racing, this gathering had a better chance than most of grabbing the attention of financial markets. And the main interest dominating the markets was the timing of the US Federal Reserve's exit from its bond buying program.
But the Chairman of the Federal Reserve was not at the Moscow meeting. He was delivering his semi-annual report to Congress, and it was there that the markets would find the reassurance they were looking for, when Bernanke said that highly accommodative monetary policy would remain appropriate for the foreseeable future.
Back at the Moscow meeting, the drafters of the communiqué went out of their way to make sure that their words did not set pulses racing. The communiqué is far too long and is largely a stocktake of work being undertaken by other institutions (it must set a record for the number of times ministers and governors state that they 'welcome', 'support', 'endorse' or 'look forward to' the work of other bodies).
The headline outcome of the meeting was the G20's endorsement of the OECD action plan to crack down on tax avoidance by large multinational companies.
This was a response to high profile cases involving Google, Apple and Starbucks, who had minimal tax liabilities in countries where they had substantial operations. To use the jargon, the accusation is that they were engaging in 'base erosion and profit shifting' (BEPS), or shifting income and profit to low or no-tax jurisdictions. With governments battling high debts and fiscal pressure, adnd public outrage at the behaviour of these companies, there was strong political pressure on governments to be seen to be making sure that multinationals pay their fair share of tax.
Did G20 finance ministers deliver? They took a positive, although very easy, first step. They obtained the headlines they wanted, with reports that the G20 endorsed an 'ambitious and comprehensive plan' to crack down on tax avoidance by large companies. But the challenge will be to flesh out the plan and then to implement it.
Endorsing a very high level 'action plan' is easy. The devil is in the detail. The OECD has said it is seeking to fill in the details of the 15 new principles to combat BEPS over the next two years. Getting agreement on such complex matters in this timeframe will be a major challenge. This is recognised by the OECD when it states that while it has well developed processes for finding consensus on routine matters, it will 'need to find ways to accomplish the work quickly while seeking consensus'. And there will be strong lobbying by corporations against the plan, with the US Council for International Business and Britain's CBI warning that ill-considered measures could hit job creation, trade and innovation.
Not everyone was impressed with the OECD action plan. The Tax Justice Network called it a series of piecemeal patches.
Once the details of the action plan are settled, the next challenge will be implementation by governments. And as noted by the Tax Justice Network, 'It depends on governments willing to take measures and the OECD doesn't have any power to compel governments to do anything.' Nor can the G20 compel governments to do anything, and some countries have benefited from facilitating tax avoidance by major corporations.
On this point, there is a rather odd sentence in the communiqué which says that G20 members commit to take the necessary individual and collective action 'with the paradigm of sovereignty taken into consideration', suggesting there may have been some differing views. But even with the best will of governments, implementing new tax laws into domestic legislation and overhauling tax agreements can take a very long time. Look at the backlog of tax legislation in Australia.
While new international standards are necessary to stop tax treaty shopping and the cross-border shifting of profits for tax purposes, there is a great deal that governments can do unilaterally to crack down on corporate tax evasion. This is recognised in the communiqué with the reference 'we call on member countries to examine how our own domestic laws contribute to BEPS and to ensure that international and our own tax rules do not allow or encourage multinational enterprisers to reduce overall taxes'.
Another positive development on the tax front was the G20's support for the automatic exchange of tax information between countries.
So some good first steps by the G20, but it faces a tough road ahead to ensure that all pay their fair share of taxes.
Photo by Flickr user Kilgub.