June 6, 2017 6:11 am JST

Nations join global deal to fight tax evasion

Accord to be signed by some 60 countries, but US opts to negotiate bilaterally

TOKYO -- A pact establishing common rules against tax evasion will be signed Wednesday by about 60 countries, not including the U.S., which is choosing to deal with the issue bilaterally. 

The accord, hammered out by the Group of 20 economies and the Organization for Economic Co-operation and Development, is a uniform set of rules that do not require the renegotiation of bilateral tax treaties. About 100 countries and territories took part in the negotiations, but some are not signing the document at first.

The agreement will be signed by the U.K., France, Japan and others at a ministerial meeting of the OECD in Paris and become effective after five countries have ratified it. 

Tax-evading multinational corporations and individuals exploit differences among national rules to excessively trim their tax bills -- an issue that has become part of the charged debate on wealth inequality and the merits of globalization. Globally, $100 billion to $240 billion in annual tax revenue is lost to such avoidance, according to the OECD. Methods such as establishing shell companies in low-tax jurisdictions and re-routing business income as interest, dividends or patent royalties have become widespread, but ways of dodging the taxman grow more sophisticated by the year.

Typically, sharing a framework of rules against tax avoidance would entail revising bilateral tax treaties. Making changes to the roughly 3,000 such treaties worldwide would take nearly 10 years by some estimates. The multilateral agreement has the same effect as revising each treaty individually but quickly casts its net across many countries.

"It's natural that companies would try to lighten their tax burden as economies become more globalized," said Satoshi Watanabe, a professor at Hitotsubashi University in Tokyo specializing in tax policy. "In contrast to the usual cat-and-mouse game between regulation and tax reduction, this framework is a strong countermeasure."

The world's major industrialized nations, including the U.S., are moving in the same direction on tackling tax avoidance -- in contrast with the fight against climate change. President Donald Trump pulled the U.S. out of the Paris Agreement on reducing greenhouse gas emissions last week.

While the U.S. will not sign the tax agreement on Wednesday, it is taking the problem seriously since it stands to lose tax revenue as the home of many multinationals. Washington has expressed acceptance of the standardized rules and has taken some steps -- by targeting avoidance via the Netherlands, for example. But it appears to favor renegotiating bilateral treaties, which has the advantage of better reflecting country-specific circumstances.

The Trump administration's delay in appointing officials in charge of international tax affairs, as in many other areas, has made it difficult for Washington to take a clear policy line. American officials were involved in the tax agreement negotiations, and the country could join the accord in the future.

Some believe the U.S. is seeking stricter countermeasures, rather than a uniform set of rules, but renegotiating tax treaties tends to take time due to opposition from domestic companies. Loopholes in such countermeasures could be found in the future.

Japanese multinationals' tax obligations are also are also likely to be affected by the framework. Japan's government will seek ratification of the agreement in a parliamentary session next year.

(Nikkei)

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