The world's top financial officials have ramped up co-operation to combat offshore tax evasion after the G20 meeting in Sydney signed off on a global standard for the worldwide automatic exchange of tax information.
A communique released after the meeting of G20 finance ministers and central bank governors on Sunday said ''profits should be taxed where economic activities deriving the profits are performed and where value is created''.
It endorsed an international standard for sharing tax information developed by the Paris-based Organisation for Economic Cooperation tht will allow tax information to be automatically exchanged between nations, not just when it is requested.
The communique also warned jurisdictions used as tax havens that the G20 members ''stand ready to give tougher incentives'' for jurisdictions that have not complied with existing international information exchange schemes.
Treasurer Joe Hockey said the new standard would significantly enhance transparency and reduce opportunities for tax evasion.
''Some global companies aren't paying their fair share of tax anywhere,'' he said. ''We want a global response. We expressed our continued full support for the G20 OECD action plan and I am pleased to say this work is on track for delivery at the Brisbane summit at the end of this year … The globe needs to know who is paying tax where.''
The automatic information exchange standard is expected to be in operation among G20 members by the end of next year.
OECD director of tax Pascal Saint-Amans said reforms to fight tax evasion were needed to rebuild public confidence in tax systems.
''If taxpayers don't have trust in the fairness of the tax system, the level of compliance drops,'' he said.
''What governments have been facing over the past two years is the awareness that big multinationals are not paying much.''
The globalisation of the world's financial system has made it increasingly simple for individuals and corporations to shift money across borders to evade tax.
Mr Saint-Amans said it was possible to ''neutralise'' the impact of tax evasion schemes by changing the international rules.
''We think we can succeed,'' he said.
Mr Saint-Amans said there was a very strong commitment among G20 members to move ''as quickly as possible'' to implement measures to reduce tax ''base erosion'' and ''profit shifting''. Even so, it is likely to be several years before the measures endorsed in Sydney are fully implemented.
The amount of tax revenue being lost globally because of the use of offshore tax havens in not known, but Mr Saint-Amans said ''I can tell you that it's really big''.
Last year the magazine The Economist estimated about $US20 trillion ($22.3 trillion) could be stashed in tax havens.
In September the OECD will present the G20 with a report on the challenge to tax regimes posed by the digital economy.
It will also report on how information technology can be used to efficiently facilitate the automatic exchange of tax information.
Joachim Fels
Chief Global Economist
Manoj Pradhan
Economist
Morgan Stanley & Co.
For the final months of 2013, the global economy and policymakers largely followed the script we laid out in September. Global GDP growth accelerated to an annualized pace of 3.8% in the third quarter, up from 2.5% in the first quarter and 3.5% in the second quarter. When the fourth quarter is tallied, we expect GDP to run in the same high-3% range. Central banks continued to provide monetary accommodation as the US Federal Reserve decided to postpone tapering in September, the European Central Bank cut its refinancing rate in November, and several other developed-market (DM) central banks managed to push out expectations of their first rate hikes through dovish talk.
We think that our narrative comprising economic acceleration in the developed markets, stabilization in the emerging markets and continued central-bank accommodation will continue to play out in early 2014. According to recent surveys and hard data, the global trade and manufacturing cycles are on the up, suggesting decent growth momentum as we start 2014. The Fed decided to begin tapering ahead of expectations in December, but, with its reassurance that the near-0% policy rates will continue, the markets responded positively. As for the European Central Bank (ECB), anticipate a cut to its refinancing rate yet again in the first quarter. This all suggests a fairly benign near-term economic and policy outlook over the next few months.
Looking at the broader picture, 2014 will mark year five of a postcrisis global economic expansion that has seen bumpy, below-par and brittle growth. The first four years of this expansion have been characterized by deleveraging and balance sheet repair in the financial, household and corporate sectors of many DM economies; massive support from central banks through conventional and unconventional means; swelling public-sector debt; a full-blown debt crisis in Europe; and rising leverage and volatile inflation in the many emerging markets that benefited from abundant global liquidity and the commodity supercycle.
If all goes well, 2014 could mark the transition to a sounder, safer and more sustainable second half of this expansion. That means a DM expansion that is less dependent on monetary and fiscal stimulus, instead driven by private consumption and capital expenditures and supported by a normalization of the credit mechanism. It also means an EM expansion that is helped by structural reforms aimed at more sustainable growth models.
However, for the expansion to embark on a sounder, safer and more sustainable second half, we believe policymakers around the globe will have to master five crucial and tough transitions this year.
The Fed: Second Time Lucky?
The Fed, under the new leadership of Janet Yellen, still has to manage the tapering process and create credible forward guidance on interest rates to avoid a replay of the unpleasant experience last summer, when the markets almost completely disregarded the Fed’s “tapering isn’t tightening” talk and pushed market rates significantly higher.
Japan: Crunch Year for Abenomics
This year will be difficult for Japanese GDP growth as the planned corporate tax cuts are unlikely to fully offset the drag from the consumption tax hike in April. Also, our Japan team does not expect to see major progress on structural reforms that could boost growth in the short term. Still, we expect the economy to muddle through. We forecast additional easing measures by the Bank of Japan in the course of the year in the form of increases in the amount of asset purchases, as well as the potential introduction of US-style forward guidance. Over time, this should support the transition from deflation to moderately positive inflation.
Europe: From Financial Fragmentation to Banking Union
The Euro Zone is facing a crucial transition in 2014, where we see below-consensus GDP growth of only 0.5% (see table). The comprehensive balance sheet assessment, planned ahead of the ECB taking over as single supervisor in the fourth quarter, will combine an asset quality review (AQR) and a bank stress test. This process will likely unify and cleanse the banking system, reduce fragmentation, and unclog the lending channel—preconditions for a more sustainable recovery and for allaying what we view as a major risk: “Japanification” and deflation. To support the banking sector and to sustain expectations of lower rates, we expect the ECB to cut the refinancing rate one more time, most likely in the first quarter. Europe will also have to transition from financial fragmentation to a credible banking union.
China: A Delicate Turn Toward Reform-Driven Growth
China will have to transition from growth driven by leverage and state-owned enterprises to reform-driven growth. Financial liberalization and easing of personal and social freedom can improve the quality of resource allocation beyond what rebalancing to consumption-led growth could accomplish. However, the near-term task of implementing reforms is far more challenging, thanks to China’s starting point of financial market prices that don’t reflect fundamentals, capital misallocation and deleveraging. If financial liberalization is pushed through earlier than social reforms, the movement of market prices toward their fundamental levels could clash with deleveraging, creating downside risks to near-term growth. Our China economics team expects a slow and steady implementation of reforms, with the beneficial impact of the changes likely felt in 2015. Thus, our forecast for 2014 growth is 7.2%, but we expect 2015 growth to clock in at 7.4%.
Other EM Countries Transition to New Growth Models
Investors and policymakers agree that structural reforms and not cyclical responses are the way forward. Yet we believe that EM policymakers have shied away from reforms, are on the wrong track or have near-term headwinds. The 2014 landscape is likely to remain difficult for several EM markets:
Mexico. The reform process has struggled with a watered-down fiscal package and uncertainty about the critical energy package. However, ambivalence over reforms may be the catalyst that pushes policymakers to do more. We believe that reform and Mexico’s US ties will lead to better growth, but perhaps not in the near term; our Mexico team expects growth of 3.3% in 2014.
India. Investment-oriented reforms, which saw positive momentum in late 2012 and early 2013, have all but disappeared. To improve the current account deficit, in our view, India needs higher real rates to encourage savings, along with a better investment climate. Both are missing at the moment.
Indonesia and Turkey. These two nations have indicated they will seek tighter monetary policy, which is encouraging. However, their commitment is yet to be seen, and the risks of a tightening cycle for credit and fiscal deterioration need to be kept in mind.
Brazil and Russia. Russia’s new central-bank governor is focusing on the structural frailties of the country’s growth model. If she refrains from easing policy to support growth, the administration may face pressure to pass structural reforms. Brazil, however, appears to be continuing along a more risky path of balancing rate hikes with strong credit growth.
An important aspect of this transition will be dealing with higher real rates. While current and capital-account pressures are creating upside risks for real rates in the emerging markets, central banks themselves will play a role. We see 13 EM central banks raising rates in 2014. Since these are the relatively smaller EM central banks, we do not think that this will constitute a major turn in EM liquidity. Such a move is more likely in 2015, when we expect both DM and EM central banks to lift policy rates.
However, the trickiest EM transition comes from the US. The risk is a triple cocktail of: (1) US growth reaching its inflection point; (2) much of the growth coming from capital expenditures; and (3) a failure of the Fed’s strategy to move from QE to forward guidance. Even the failure of the Fed’s transition by itself is a dangerous environment. The vulnerable EM economies, in our view, are hostage to a successful transition at the Fed.
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