09/03/2016
Through their ability to avoid paying tax to the UK Exchequer, Google, Starbucks, Facebook and sundry others have been much in the news of late. But, at long last, the EU has acted, with the European Council
announcing that it has agreed its stance on a draft directive on the exchange of tax-related information on the activities of multinational companies.
This was done with the strong support of the UK Government, as the first element of a package of proposals issued by the Commission in January 2016 to strengthen EU rules preventing corporate tax avoidance.
However, if one looks closely at the press release (depicted above), one sees that this is not in fact a Commission initiative. From the yellow-highlighted paragraph, we see that it is implementing, at EU level, an OECD recommendation. This requires multinationals to report tax-related information, detailed country-by-country, and requiring national tax authorities to exchange that information automatically.
The OECD involvement reflects the reality of the situation concerning multinationals, which have enjoyed the "free movement of capital" since the 1957 Treaty of Rome as one of the four freedoms, underpinning the Single Market.
Currently it has been re-enacted and revised, the current treaty (TFEU Article 63) declaring that: "all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited".
The article also states that: "all restrictions on payments between Member States and between Member States and third countries shall be prohibited"., by which means the UK is deprived of a considerable element of tax sovereignty. It cannot, for instance, demand that corporate earnings are retained in this country until tax has been paid on them.
Companies trading in Britain can offshore their money and if, by so doing, they can convert it or manipulate it in some way as to exempt it from taxation, they are free to do so.
But these provisions are by no means confined to the EU. For many decades, multinationals have been able to blackmail individual states, threatening a variety of sanctions, which have local politicians bowing to pressure and granting them all sorts of concessions to keep them on-side.
This means the free movement of capital applies to many countries outside the EU. The system was effectively set up by the OECD with its 1961
Code of Liberalisation of Capital Movements, to which all 34 members adhere.
These include the United States, Britain and most EU members, Switzerland and Turkey. The code has been extended to all members of the IMF and on 28 June 2012 the OECD made it open to adherence by all interested countries.
In effect, therefore, when it comes to free movement of capital, the OECD is the driving force. The role of the EU is to give binding force to the commitments endorsed in the OECD code, something we would do whether we were in or out of the EU.
The code, which has been amended and extended many times, currently runs to 173 pages, is also used externally by the EU as the basis of third party agreements, applying it to such countries as Turkey. Nevertheless, it is true to say that EU provisions are "appreciably stricter than those in the OECD", making the EU "one of the world's most open capital movement regimes".
However, for the first time in over half a century, the major economic powers have been questioning whether to reapply controls over capital movement, specifically because of the predatory behaviour of the multinationals, and their ability to play off one tax regime against another.
But it is not the EU which is taking the lead. It is actually the G20 which is making the running, working on a multilateral basis with the United Nations Conference on Trade and Development (UNCTAD).
This in turn introduces yet another element into the regulatory mix, as the as the aim of the G20/UNCTAD initiative is to resuscitate the IMF's Articles of Agreement of 27 December 1945, which allow that "members may exercise such controls as are necessary to regulate international capital movements".
To that effect, in March 2011 the Working Group on the Reform of the International Monetary System, set up by the G20,
reported on a contribution by the UNCTAD Secretariat to the obscure "Subgroup I: Capital Flow Management".
This amounted to a refreshing recognition of the new reality, noting that experience with the current financial crisis challenged the conventional wisdom that dismantling all obstacles to cross-border private capital flows was the best recipe for economic development.
That, effectively, amounted to a green light for the international system selectively to re-introduce controls on the movement of capital, the fruits of which we saw in the European Council announcement.
Interestingly, for the UK, this is a two-edged sword. On the one hand, it kills stone dead any idea that the nation is dependent on the EU for its regulation. Here, as in so many other areas, the agenda is determined globally. And, in dealing with multinational companies, it is hard to see how this could be otherwise.
On the other hand, it illustrates how restraints would still apply even after the UK has left the EU. Even within the EEA, Britain could not unilaterally implement any G20/UNCTAD recommendations and re-impose capital controls â under normal conditions.
That, of course, does not rule out
exceptional measures which EFTA/EEA members are entitled to take under Art 43.4 of the EEA Agreement, in order to protect their balance of payments. This option was adopted by Iceland at the end of 2008 in response to its financial crisis, an action which was subsequently approved by the EFTA Court.
This aside, even as a fully independent state completely outside the EU, the EU would be bound by international rules, and in particular the OECD Code, to which it is a party.
This again brings into high profile the increasing globalisation of regulation. Removing one level simply exposes another. One can compare Britain with the victim in a horror movie, trapped alive in an as-yet-unburied coffin. Having broken through the lid in a bid to escape, he finds to his consternation that there is another lid over the first.
This "double lid" in respect of capital movement is, on the one hand, the EU treaty obligations and, on the other, the OECD code. The main effect of breaking through the EU/EEA legislative layer would be to reveal the second "lid".
As regards relief from the "over-liberal" capital movement regime, the most optimistic outcome is that G20/UNCTAD recommendations deliver revisions to the OECD code, allowing for more flexibility in controlling capital movements â as we're now beginning to see, and even the EU acknowledges.
