Original Article

International Tax, the G20 and the Asia Pacific:From Competition to Cooperation?

Miranda Stewart*

Abstract

Nation states in the Asia Pacific need toincrease tax revenues but face many chal-lenges. This article discusses the challenge oftaxation in an age of capital mobility and taxcompetition. It then considers two opportuni-ties that have recently been championed by theG20, which could enable governments tostrengthen national tax systems by interna-tional cooperation. The first opportunity is theestablishment of transnational tax administra-tive cooperation. The second opportunity is thepotential for countries to develop a new mul-tilateral framework for sharing the interna-tional capital tax base, which may arise underauspices of the Organisation for EconomicCo-operation and Development Base Erosionand Profit Shifting project. As Chair of the G20in 2014, Australia has a key leadership role toplay in supporting countries in the region tograsp these opportunities.

Key words: international tax, tax haven, G20,tax competition, ASEAN, OECD, BEPS, fiscalpolicy, tax treaties

‘These are the rights which make the essence ofSovereignty . . . the power of raising money.’Hobbes (1651, 2011, p. 93)

1. The Need for Revenues

The power to raise revenues is an essentialfeature of national sovereignty. Nation statesin the Asia Pacific need to raise more revenues,but face many challenges in the current era ofeconomic globalisation. At the same time,governments seeking to improve the well-being of their people through economic devel-opment and growth often seek to attractforeign direct investment through lower taxeson capital. This in turn causes political dissentespecially in light of increasing inequality inincome and wealth, for which taxation—andadequate public spending—is likely the bestsolution (IMF 2014).

The government’s task in taxation, viewedin isolation from other countries, is one ofidentifying, and implementing, the distributionof governmental benefits and fiscal burdensthat is able to be negotiated with interests in itsown population, in such a way as to ensure astable fiscal bargain (Levi 1988). Of course,states do not exist and taxes are not levied in avacuum. The existence of other states, andof an international economy, affects both thecapacity and the way in which governmentsraise money. Today, when passive and activeinvestment (and skilled labour) is increasinglymobile across borders, the ‘fiscal bargain’ isfundamentally changed. The state is no longer

* Director, Tax and Transfer Policy Institute,Crawford School of Public Policy, The AustralianNational University, Canberra, Australia; email�miranda.stewart@anu.edu.au�.

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Asia & the Pacific Policy Studies, vol. 1, no. 3, pp. 484–496doi: 10.1002/app5.42

© 2014 The Author. Asia and the Pacific Policy Studiespublished by Wiley Publishing Asia Pty Ltd and Crawford School of Public Policy at The Australian National University.This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License, whichpermits use, distribution and reproduction in any medium, provided the original work is properly cited and is not used for

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simply allocating fiscal benefits and burdensamong its own population. Instead, the statebecomes a ‘recruiter’ of capital and skilledlabour, and this changes the entire dynamic offairness and efficiency that is the mainstay ofcontemporary tax policy (Dagan 2012). Thistax competition between countries is seem-ingly irresistible to many governments.Yet it ismost likely to undermine the sovereignty—orpolicy autonomy (e.g., Mosley 2005)—ofgovernments seeking to raise sustainable taxrevenues in the long term.

This article first discusses the need for rev-enues of governments in the Asia Pacific, andthe challenge of the international, in particularof tax competition, to the power of govern-ments to raise revenues. It then considers twoopportunities for governments to strengthennational tax systems by international coopera-tion, which have both been championed by theG20. The first opportunity is the establishmentof new modes of transnational tax administra-tive cooperation that are particularly addressedat international tax evasion using tax havens,especially by individuals. The second oppor-tunity is the nascent potential for a newglobal framework enabling sharing of theinternational capital tax base that may takeshape under auspices of the Organisation forEconomic Co-operation and Development(OECD) Base Erosion and Profit Shifting(BEPS) project (OECD 2013). As Chair of theG20 this year, Australia has a responsibility tolead in furthering both of these opportunities tosecure tax systems.

1.1. Fiscal Squeeze in The Asia Pacific

The Asia Pacific is very diverse, but most gov-ernments in the region face a common chal-lenge of raising more revenues to addressdevelopment, demographic and environmentaldemands. Except in countries where there areoil or mineral resources, these revenues mustbe raised through taxation. The specific taxreform and collection challenges differ signifi-cantly across countries, as does the proportionof the economy raised in taxation—the taxratio, or revenue as a proportion of grossdomestic product (GDP). There cannot be a

single ‘right’ level of tax revenues as a propor-tion of the economy: this is a political questionabout the size, and role, of government, andthe impact on the economy of taxation in anyparticular country. Still, where there is aformal market economy at least partly estab-lished (a prerequisite for taxation), it seemsthat a tax ratio that is lower than 15 per cent ofGDP is unlikely to generate enough publicgoods to support the infrastructure and publicinvestment in capability and well-being thatmany people would see as the appropriate goalof economic development. At the upper end,while Tanzi and Schuknecht (2000) suggestthat the range of 20–30 per cent might be ideal,successful ‘tax states’ reveal a wide spectrumof tax ratios ranging from about 30 per centof GDP (Australia, United States, UnitedKingdom) up to 50 per cent of GDP (someEuropean states and the Nordic states)(Figure 1).

Whatever might be the actual or ideal taxratio, countries both rich and poor in the AsiaPacific are in a position of fiscal deficit, espe-cially since the global financial crisis. Thismeans that countries are raising funds throughborrowing, and not covering their outlays withtaxation or other fees and charges. Overall, theIMF finds a negative (average) projected fiscalbalance of approximately 3 per cent of GDPfor Asian emerging economies in the currentyear.1

Wealthy OECD member countries, includ-ing Australia, Japan, Korea and New Zealand,are all feeling the pressure of ageing popula-tions and increasing inequality. This demo-graphic pressure is also very significant inChina. Both pressures imply a need to increasetaxation or expand public expenditures onwelfare and infrastructure, but this is seen indirect contradiction of the discipline of globalfinancial markets, which calls for maintain-ing fiscal balance, reduced government debt,cutting spending and low taxes to create incen-tives for investment and work.

Countries in the Association of SoutheastAsian Nations (ASEAN) and South Asianregions face other pressures on revenues. The

1. IMF (2013, table 1) (Fiscal Balances 2008–2014).

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ASEAN economic integration process, whichis to reach its next milestone in the next fewyears, puts tariffs on a further downward track.As always, lowering tariffs causes a fiscalsqueeze for newer members or poorer coun-tries that continue to rely heavily on thissource of revenue. The most recent review ofASEAN integration finds that import dutiesrepresented between 10 and 24 per cent of taxrevenues in 2009 for Lao PDR, Cambodia andVietnam, and that participation in the integra-tion process will cause a drop of as much as 75per cent in tariff revenues that will requirereplacement from new indirect tax sources(ASEAN/World Bank 2013, p. 42).

Low income countries, including Myanmar,Lao PDR, Fiji, Papua New Guinea, TimorL’Este and many smaller countries, need morerevenue to provide the infrastructure, educationand income support their people need. Theyface the ongoing challenge of generating suffi-cient tax revenues to finance development. Forsome of these countries, resource revenues are

crucial. However, the ability of multinationalresource companies to transfer price profits outof the jurisdiction poses a big challenge. Therecent move by Indonesia to require the firststage of processing of mineral ores to take placeonshore is one, perhaps extreme, way toaddress this problem.2 On the other hand, forsmall countries, such as Vanuatu or the CookIslands, tax haven status has been one way inwhich they have sought to establish a smalleconomic base. The global developments incountering tax havens, discussed in Section 3,threaten this approach to development and maynot put anything concrete in its place.

2. The Challenge of The International

Where two states assert jurisdiction to tax,widely accepted international tax rules dothree things: (i) identify the residence or other

2. Indonesia, Ministerial Regulation No. 7/2012 imple-menting 2009 Mining Law, which required mineralsprocessing to be carried out in Indonesia.

Figure 1 Tax Revenues of OECD-BRICS as Percentage of GDP

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Source: IMF (2010).

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jurisdictional link of entities to be subject totax in the country; (ii) establish the geographi-cal source or location of income, consumptionor other activity that attracts jurisdiction and isliable to tax; and (iii) provide a rule for resolv-ing inter-jurisdictional conflicts and so pre-venting ‘double taxation’ by more than onecountry. These international tax rules are wellembedded in bilateral tax treaties (approxi-mately 3,000 globally), based on modelsestablished by the OECD and the UnitedNations (UN), and in domestic laws. Theymight even rise to the level of an internationalcustomary law of taxation (Avi-Yonah 2007).

Fundamentally, these international tax rulesleave the power to tax, and the definition of thetax base, to each nation state. Unlike otherarenas of global governance or regulation,international tax rules do not establish aregime that actually addresses the problem ofhow to tax international flows. That is, theserules do not have the purpose, or effect, oftaxing entities or transactions in the interna-tional economy, or of creating an internationalregulatory framework through which nationstates agree to tax international activity. If ‘fulltaxation’ in contrast to ‘non-taxation’ of aninternational capital transaction comes about,this is a result of a happy coincidence ofnational tax rules for source, exemption orcredit, or of national tax rates. It is unrealisticto expect such an outcome in the contextof competitive pressures, diverse country taxrules and tax planning practices of multina-tional enterprises (MNEs) today.

2.1 Trends in Company Tax Rates andTax Incentives

National governments seeking to attractinvestment have also undermined their owndomestic tax bases through competitivebehaviour in which they enact tax concessionsor incentives, or generally lower the tax rate oncapital that is mobile. In this way, states havebehaved as ‘rogue fiscal sovereigns’ seeking toengage competitively in their national interestin a global economy (Braithwaite & Drahos2000). In particular, in respect of the taxationof capital, states have failed to capture tax both

from individual cross-border passive invest-ment and from monolithic and flexible MNEsplanning tax-effective transactions acrossmultiple jurisdictions.

In many Asia-Pacific countries, companytax revenues form a significant part of the taxbase. A threat to these revenues is then a majorchallenge to the fisc. Empirical evidence abouttax competition in general and in the regionis mixed (Tahori & Retnawati 2010). Whiledeveloped countries have managed to maintaincompany tax revenues over time, even as head-line company tax rates fall (Devereux Griffith& Klemm 2002), there is evidence thatcompany tax revenues have indeed declined inmany developing countries and that tax com-petition harms developing countries more(Keen & Simone 2004).

Moreover, tax competition in respect ofcompany tax is likely to continue, causing boththe ‘headline’ company tax rate to decline, andthe maintenance or expansion of tax incentivesor exemptions targeted at foreign direct invest-ment (e.g., KPMG 2014); see Figure 2 forcurrent company tax rates. Tax incentives arepervasive in in the Asia Pacific.3 This has longbeen the case, and tax experts have long arguedthat countries do not benefit from such taxincentives, moreover that they generate signifi-cant opportunities for tax planning so that eventhe ‘real’ economic benefit of investment maynot be as significant as is hoped (e.g., Holland& Vann 2000).

3. Opportunity I: Tax AdministrativeCooperation

The first opportunity that may enhancenational revenue raising capacity is transna-tional cooperation between tax agencies.4 Therecent and ongoing developments in this arenaare unprecedented. While transnational taxadministrative cooperation has a long history(Jogarajan 2011), it was until very recently,secretive, narrow and occasional in nature.

3. An illustration of the range of incentives is at AsianDevelopment Bank, Regional Integration Centre, �http://aric.adb.org/taxincentives�.4. For a detailed analysis of these developments globally,see Stewart (2012).

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Yet in the last five years, national tax agen-cies have taken a path towards effectivecooperation involving the building of transna-tional administrative networks.

Tax cooperation has to date focused mainlyon information exchange with the main goal ofidentification, assessment and collection oftaxes in respect of individuals who haveinvested in tax havens. The ability to obtaininformation has been essential to the extrac-tion of revenues that produced the success ofthe ‘tax state’ (Hood 2003). In the twentiethcentury, many developed country national taxagencies established systems for accessing andmanaging information and the collection of taxwhich grew hand in hand with corporate capi-talist enterprise, in a striking illustration ofsuccessful ‘regulatory capitalism’ (Braithwaite2008). The technologies of pay-as-you-goemployee wage tax and social securitywithholding, self-assessment, company taxinstalment systems, tax file numbers, comput-erised data matching utilising informationfrom corporations and banks, and sophisti-cated risk-based investigative audit haveenabled developed country tax agencies tocollect very large tax revenues from businessesand individuals. These technologies aresupported by laws that grant extremelywide information-gathering powers to revenue

agencies, empowering them to demand infor-mation from taxpayers or third parties abouttheir own or others’ income, assets and finan-cial transactions (Seer & Gabert 2010).

Transnational tax administrative networksextend these systems to the international arenaand involve multiple actors, such as differentgovernment agencies, supranational organi-sations and financial intermediaries. These net-works are becoming increasingly legalised andinstitutionalised. They fit Slaughter’s definitionof a global governance network as ‘a pattern ofregular and purposive relations among like gov-ernment units working across the border thatdivide countries from one another and thatdemarcate the “domestic” from the “interna-tional sphere” ’ (Slaughter 2003, 2004, p. 14).In this process, the nation state disaggregatesinto separate, functionally distinct parts, whichwork directly with their counterparts abroad.The state does not disappear but its separateparts—such as tax agencies or subdivisions—participate in ‘a dense web of relations thatconstitutes a new transgovernmental order(Tshuma 2000, p. 130).

The involvement of banks or MNEs in thesenetworks is recent, but crucial. The networkedregulation of financial intermediaries ensuredthe success of tax information collection at thenational level, and it is this that will ensure that

Figure 2 Headline Company Tax Rate Percentage: Asia Pacific

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sh

Bhutan

Brun

ei

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ChinaPR

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India

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Japan

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golia

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ar

Samoa

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Thailand

Timor

L'Este

Tonga

Vanu

atu

Vietnam

Headline company tax rate %: Asia Pacific

Source: Author’s table, data sourced from International Bureau of Fiscal Documentation database, www.ibfd.org (July2014).

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states can fully govern on tax matters in theinternational arena. The involvement of finan-cial institutions, in particular, has received asubstantial push from the intricate and slowlyprogressing evolution of the US ForeignAccount Tax Compliance Act (FATCA)regime into a network of similar bilateral trea-ties with other countries, requiring financialinstitutions to supply information backed bythe threat of a substantial withholding tax oninvestors.5

Developing countries have been muchless successful at collecting and utilising taxinformation through such systems to generaterevenue. There are many reasons for this,including administrative capacity and thestructure of the economy, especially theinformal sector or a significant non-marketsubsistence economy (Bird & Casanegra deJantscher 1992; Prichard 2010). A conse-quence is that it is also more difficult for devel-oping countries to participate in transnationaltax information exchange, or to benefit frominformation obtained in such exchanges so asto enhance domestic revenue collection.

3.1 Bilateral Tax Treaties

A web of bilateral tax treaties providesthe legal authority for increasingly regularexchange between national tax agencies. Mostbilateral tax treaties are based on either theOECD Model Tax Convention on Income orCapital or the UN Model Double Tax Conven-tion Between Developed and DevelopingCountries. The obligation and form of infor-mation exchange in these treaties were fairlynarrow when the OECD model was formalisedafter World War II. Since the 1970s, themodels and many bilateral treaties DTAshave gradually expanded the possibilities forexchanging information, a process that hasdramatically accelerated in the last decade.

The OECD has now proclaimed a ‘univer-sally agreed’ international standard on taxinformation exchange. Under the OECD stan-dard, information exchange is not limited toresidents of either contracting state; it is autho-rised for all taxes, not simply the taxes onincome and capital covered by most tax trea-ties; and it is mandatory and cannot bedeclined ‘solely because the information isheld by a bank, other financial institution,nominee or person acting in an agency or fidu-ciary capacity, or because it relates to owner-ship interests in a person’ (Article 26.5). As aresult of this clause, the G20 made its widelyreported claim, in one of its first major state-ments about cooperation, that ‘the era of banksecrecy is over’ (G20 2009).

However, the actual provisions in tax trea-ties vary widely. Most older treaties do notcontain the provision overriding bank secrecy,while some limit the forms of informationexchange. On the other hand, some countrieshave taken cooperation further under theauthority of bilateral treaties, for examplethrough establishing informal cooperativenetworks, such as the Joint InternationalTax Shelter Information Centre, establishedbetween Australia, Canada, the United States,United Kingdom and Japan (China is anobserver).6 Bilateral treaty negotiation is time-consuming, ad hoc and linked to other eco-nomic and political pressures so that theseprovisions will be fragmented for some time tocome. The network of bilateral tax treaties inthe Asia Pacific is far from complete. TheASEAN member states had as a goal to com-plete their network of bilateral treaties by2010; however, there are still significant gaps,while many countries in South Asia and thePacific do not have a wide network of tax trea-ties. Even so, renegotiation of treaties, or theaddition of protocols incorporating an updatedprovision, is underway between many coun-tries. India has more than 80 treaties, including19 recently negotiated and 23 renegotiationsor protocols to existing treaties, aimed at

5. US Hiring Incentive to Restore Employment Act of2010, Pub. L. 111–157 (HR 2847), Title V Subtitle A. SeeUS Treasury, �http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx�, for model inter-governmental agreements and guidance. So far, only Japanand Australia have signed FATCA agreements in theAsia-Pacific region.

6. Joint International Tax Shelter Information CentreMemorandum of Understanding, available from �http://www.irs.gov/pub/irs-utl/jitsic-finalmou.pdf�.

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strengthening information exchange, amongother things.7 India and Australia recentlysigned a protocol that updates the informationexchange article, and includes additional pro-visions for mutual assistance and enforcementof tax debts across countries.8

3.2 Tax Information Exchange Agreements(TIEAs) and the Global Forum

The OECD campaign for negotiation of TIEAshas the main purpose of enabling countries toaccess information about their own residents’offshore investments in and through taxhavens. The campaign grew out of the HarmfulTax Competition project (OECD 1998) andinitially made slow progress. In 2002, theOECD released its Model TIEA and accompa-nying commentary; up until 2008, there hadbeen only 44 TIEAs signed. However, betweenthe G20 summit on 15 November 2008 and theG20 summit in Cannes on 4 November 2011,700 TIEAs were signed, primarily betweendeveloped countries and tax havens. There arenow more than 800 TIEAs (Global Forum onTransparency and Exchange of Information forTax Purposes 2013). Triggers for this massiveincrease include the Liechtenstein, Luxem-bourg and UBS bank tax haven scandals(Kampen & de Rijke 2008), and the globalfinancial crisis. Initially, identified tax havenjurisdictions were each required to sign 12TIEAs with other governments in order to getoff the ‘black list’. Australia has, since 2008,negotiated 34 TIEAs.9

The central, and new, international orga-nisational player is the Global Forum onTransparency and Tax Information Ex-change.10 The Global Forum was establishedinitially by the OECD in response to concernsexpressed by tax haven countries, whichsought a voice in the coercive process of listingtax havens and requiring TIEA negotiation.

The Global Forum was restructured at itsmeeting in Mexico in 2009 to give all countrymembers an equal vote, even though techni-cally it remains a program initiated by theOECD. Member countries contribute toadministrative costs, with the bulk of fundingcoming from OECD member countries. TheForum is open to all and now has a member-ship of 121 countries, plus the EU and numer-ous international organisations as observers.The TIEA process and the Global Forumdirectly engage national tax agencies witheach other. However, the Forum is a ‘soft’ insti-tution in the sense that it has no rule-making oradministrative power of its own and is not sup-ported by any multilateral treaty or other del-egated legal authority.

The Global Forum initially tracked andpoliced the signing of TIEAs; it has nowmoved to a detailed peer review process ofdomestic country laws to ensure that these willenable the practical implementation of TIEAs,for example by modifying bank secrecy lawsand empowering the revenue agency to doinformation collection. The process has beencriticised as too limited (e.g., Sawyer 2011)but it is unprecedented in scale and depth.

Asia Pacific countries are engaged, but notfully, in the Global Forum. The most recentmeeting of the Global Forum was hosted inJakarta, Indonesia (November 2013). Malaysiasat on the previous peer review group, andHong Kong sits on the 2014 peer review group.Many smaller Pacific nations, which are taxhavens are members, including the CookIslands, Vanuatu and Samoa. However, manycountries in the region have still not joined theForum, including Thailand, Lao PDR,Vietnam, Myanmar, Fiji, Papua New Guinea,Timor L’Este, Bangladesh and Sri Lanka.

3.3 A Multilateral Tax AdministrationRegime

The G20 has been critical in pushing forwardthe most important global development in taxcooperation, the Multilateral Conventionon Mutual Administrative Assistance in TaxMatters. After it was released in 1988 forEU and OECD member states only, the

7. See �http://law.incometaxindia.gov.in/DIT/intDtaa.aspx� for information on Indian tax treaties.8. Protocol to Australia-India tax treaty, 11 December2011, available from �www.treasury.gov.au�.9. ATO, �http://www.ato.gov.au/businesses/content.asp?doc=/content/00161158.htm�.10. Global Forum, �www.oecd/tax/transparency�.

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Multilateral Convention entered into force on1 April 1995. However, it did not achievewidespread implementation. In 2010, a proto-col was agreed that opened up the Conventionto non-OECD or EU member states and madeother amendments to expand its scope. TheG20 was determined ‘to make it easier fordeveloping countries to secure the benefits ofthe new cooperative environment’,11 and thisprotocol entered into force on 1 June 2011. Aprocess was established for a new country tojoin, which requires a decision by consensus ofexisting parties. Factors to be taken intoaccount include confidentiality rules and prac-tices of the applicant country and its member-ship of the Global Forum. The G20 leaderscalled in September 2013 for ‘all countries tosign the Multilateral Convention . . . withoutdelay’.

The Multilateral Convention sets out onrequest, automatic and spontaneous exchangeprocesses. The Multilateral Convention alsoexpands tax administrative cooperation mech-anisms to cover audits, collection of tax debts,sharing expertise and resources and manyother aspects. It aims to override the traditionalrule of international law that countries will notenforce or collect other country tax claims.This rule has been abrogated in some recentbilateral tax treaties (including Australia-Indiaand Australia-New Zealand). The ExplanatoryReport (OECD/EU 2010) states:

This instrument is framed so as to provide for allpossible forms of administrative co-operationbetween States in the assessment and collectionof taxes, in particular with a view to combatingtax avoidance and evasion. This co-operationranges from exchange of information to therecovery of foreign tax claims.

There are now 66 countries signatory to theConvention. In the Asia Pacific, however,many countries have not yet signed. Currentsignatories in the region are Australia, China,India, Indonesia (not yet in force), Japan,

Korea, New Zealand and Singapore (not yet inforce).

The most recent G20 statement is that ‘auto-matic’ information exchange is the new stan-dard (2014). Automatic exchange involveslarge-scale computerised data sharing aboutincome and assets of taxpayers on a regularbasis between revenue agencies, and it is notmandated in the bilateral treaty models nor inthe Multilateral Convention. The Indian Min-ister for Finance, Mr Gopalan, expressed in2011 the hope that the Convention wouldfacilitate widespread automatic exchange ofinformation between signatories.12 This doesseem to be happening, and there has now beenestablished an ‘automatic’ exchange groupcomprising at present 45 countries.

In addition to the Multilateral Convention,there have recently been negotiated a numberof regional administrative agreements. Theseinclude the South Asian Association forRegional Cooperation (SAARC) Limited Mul-tilateral Agreement on Avoidance of DoubleTaxation and Mutual Administrative Assis-tance in Tax Matters, between Bangladesh,Bhutan, India, the Maldives, Nepal, Pakistanand Sri Lanka. The SAARC Agreement wassigned in 2005 and has been in force since 19May 2010. It contains a provision for informa-tion exchange, although that is not as broad asthe Multilateral Convention or OECD model,and does not explicitly override bank secrecy.It also provides for regional training, meetingsand mutual assistance between tax officers ofthe different countries. This could be a modelfor ASEAN countries aiming to furtherintegrate; it may be simpler, however, forthese countries just to sign the MultilateralConvention.

Two other aspects of the Multilateral Con-vention are worth noting. First, the conventionestablishes a ‘coordinating body’ of represen-tatives of the national revenue agencies to‘monitor the implementation and developmentof this Convention, under the aegis of theOECD’ (Article 24.3). This coordinating bodyhas the potential to develop greater powers and

11. G20 Leaders Summit: Financial Regulation Session,Remarks by Angel Gurria, OECD Secretary General,Cannes, 4 November 2011, available from �www.oecd.org�.

12. Minister Gopalan, cited in �http://chinaepress.com/tag/bank-secrecy/�, 4 November 2011.

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institutional character. Outside the EuropeanCommission, it would be the first internationalgoverning body properly authorised by treatyto manage tax coordination. Second, theExplanatory Report (para (245)) envisages thateach national revenue agency should establisha single internal division to manage transna-tional information exchange and other assis-tance, to ensure ‘direct and speedy contacts’being ‘the only way to make the assistanceeffective’ and to manage taxpayer confidenti-ality, which is only waived under the condi-tions established by the convention. It is thesespecialist units within revenue agencies thatare networking across borders to build thetransnational tax administrative state.

4. Opportunity II: BEPS

In February 2013, the OECD released itsreport, Addressing Base Erosion and ProfitShifting, which argued that company tax baseswere at risk of erosion, and that ‘current inter-national tax standards may not have kept pacewith changes in global business practices’especially of MNEs. Around the same time,several countries issued their own reports ontaxation of MNEs, including Australia (Trea-sury 2013). At the request of G20 finance min-isters, the OECD released the BEPS ActionPlan in July 2013.

BEPS is a very large project, albeit with adramatically short timeline of two years, andthere is not scope to address it in detail here. TheOECD proposes 15 action items, which rangefrom more technical ‘fixes’, for example forhybrid instruments that are taxed differently indifferent jurisdictions, to broad statementsabout improving ‘transparency’, expandinggeneral anti-abuse rules and a focus on ‘com-mercial substance’, and reforming transferpricing rules and other international tax rules torespond to integrated cross-border productionin MNEs and the growing digital economy.

BEPS does not focus on the issue of taxcompetition by lowering company tax rates orenacting tax incentives to encourage foreigndirect investment. In the OECD language, itaims to address ‘gaps’ in the international taxrules by which MNEs can take advantage of

the different rules of ‘host’ and ‘home’ coun-tries and can utilise tax haven jurisdictions, toachieve non-taxation or lower taxation of inter-national transactions. The OECD is focusingon ‘real’ economic activity or value-adding.For example, where countries do not haveeffective transfer pricing rules or cannotenforce them, MNEs can locate profits in lowtax jurisdictions and deductions in high taxjurisdictions, and can utilise excessive debtdeductions in what is called ‘thin capita-lisation’. BEPS also aims to address the‘digital economy’, or what one Australian taxofficial has recently called the ‘digitalisation ofthe economy’ (Konza 2014), referring to thetransfer of value from ‘real’ to ‘virtual’ trans-actions, or real assets to intangibles.

4.1 Corporate Tax Transparency

One of the important initiatives in BEPS(Action Item 13) is template and country-by-country reporting of profits and losses for trans-fer pricing purposes (see OECD 2014). TheOECD has adopted this as a goal, althoughsome studies have been sceptical of what it canachieve (Devereux 2011). While related to thesubstance of the corporate tax base, this isessentially a tax administrative step that islikely to be crucial in bringing MNEs to thetable, when combined with the exchange ofinformation and administrative cooperationdiscussed above. One reason might be that itleads to increased tax assessments in somejurisdictions, which may then demand compen-sating adjustments that require negotiationbetween governments and MNEs.

In this regard, it is interesting to note that in2013, the Australian government enacted a lawaimed at ‘greater transparency of tax paid bylarge and multinational enterprises’ (Bradbury2013). The new measure, effective from the2013–14 tax year, requires the Commissionerof Taxation to publish certain tax informationof large corporate taxpayers with ‘totalincome’ of $100 million or more each year, orresponsible for paying resource taxes.13

13. New s 3C, 3D, 3E of Taxation Administration Act1953 (Cth), introduced by Tax Laws Amendment (2013Measures No. 2) Act 2013 Schedule 5.

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The Commissioner will be required to releasethe company’s name, total reported corporateincome, taxable income and income taxpayable. These will be the details on the com-pany’s (self-assessed) annual corporate taxreturn. It will be interesting to examine whatimpact, if any, increased transparency of cor-porate tax paid by specific companies mighthave on tax law and administration.

4.2 BEPS and the Asia Pacific

The approaches of countries in the region tothe BEPS process and more generally to thesecorporate tax challenges have varied signifi-cantly. The BEPS project involves major coun-tries in the Asia Pacific, including China,India, Japan, Korea and Australia. However,there is no direct engagement with other coun-tries in the region, except insofar as the OECDand G20 have promised to engage with devel-oping countries in addressing global chal-lenges. In February 2014, the first OECD-Asiaregional meeting was held in Korea to consultwith regional tax officials.14 The consultationindicated that many countries are very con-cerned about harmful tax competition in theregion, highlighting the following:

• base erosion through interest deductions andother financial payments (Action Item 4)

• avoidance of harmful tax practices amongcountries in the region (Action 5)

• prevention of treaty abuse (Action 6)• redefinition of the concepts of resident and

permanent establishment to align the taxnexus with economic reality (Actions 6and 7)

• the clarification of the tax treatment of intan-gibles, particularly concerning royalties(Actions 8–10)

• base eroding payments via management feesand head office recharges (Action 10)

• more effective transfer pricing documen-tation requirements, including country-by-country reporting, without imposing an

onerous burden on business and tax admin-istrations (Action 13).

Many developing countries in the region lackbasic anti-abuse, transfer pricing or thincapitalisation laws, or any enforcement capac-ity for such rules, that are taken as a startingpoint in the BEPS project. In contrast, India andChina are moving fast to strengthen these rulesand are well aware that they need to engageinternationally to address global challenges totax revenue collection. Both countries areactively engaged with BEPS and also work withthe UN on transfer pricing and tax treaties.

The Indian revenue agency, legislature andcourts have in various ways been extremelyproactive in this area, for some years prior toBEPS. In particular, the Indian revenue agencyhas taken cases through the courts that haveattracted significant attention from the interna-tional tax community, while the Indian govern-ment, sometimes retrospectively, has assertedjurisdiction to tax cross-border transactions byMNEs.15 India has recently strengthened itsgeneral anti-avoidance rule and broadeneddefinitions such as ‘royalty’ in relation tointangible or ‘digital’ transactions. In one illus-tration among many cases, a recent paymentfor digital bandwidth access was held by theMadras High Court to be an equipment royaltysubject to Indian withholding tax; the Courtheld that in a virtual age, the physical presenceof a taxpayer has become insignificant.16

It has recently been suggested that the ChinaState Administration of Taxation has a particu-lar interest in transfer pricing (because it hassignificant real foreign investment in its juris-diction), the concept of a business permanentestablishment in the jurisdiction and outboundfees for intangibles and intellectual pro-perty (Bell 2014). China is also interested incountry-by-country reporting of profits andlosses for transfer pricing, and in emphasisingcommercial or economic substance of transac-tions (Zhao et al. 2013).

14. See �http://www.oecd.org/tax/beps-regional-consultations-asia-latin-america.htm� for a summary ofthe meeting held on 20–21 February 2014.

15. A case of particular interest was SC, 20 January 2012,Vodafone International Holdings v. Union of India, (2012)341 ITR 1; see further Desai and Kumar (2012).16. Verizon Communications Singapore Pte Ltd v. ITO(2013) 39 �taxmann.com� 70; 263 CTR 497.

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At a minimum, the BEPS proposals willrequire substantial domestic legislation andenforcement, as well as strong internationalcooperation. For example, one of the first dis-cussion drafts in the BEPS project, on hybridfinancial instruments, recommends ‘that everyjurisdiction introduces a complete set of rulesthat are sufficient to neutralise the effect ofthe hybrid mismatch on a stand-alone basis,without the need to rely on hybrid mismatchrules in the counterparty jurisdiction’ (OECD2014, p. 11). These rules will be layered andcomplex, and will require coordination withthe rules of other jurisdictions. Even if devel-oping countries seek to engage in BEPS, it willbe a major challenge for most to implementBEPS recommendations or to influence thisinternational policy process.

5. Conclusion

Successful ‘tax states’ have harnessed thepower of taxation to raise sufficient revenuesfor stable government while also generatingeconomic growth for the well-being of theirpopulations. However, key challenges fornation states in raising money arise from theinternational context, in particular individualincome tax avoidance and evasion in havens,and competition in taxes on capital. The resultis that as the international economy has grown,states have in effect lost sovereignty over theirnational tax bases. At the same time, states arefailing to assert tax sovereignty over an ever-increasing number and size of internationaltransactions between taxpayers in differentstates, especially within integrated MNEsacross multiple jurisdictions.

Levi’s model of rule and revenue (1988, p.23) suggests that when factors such as capitalare mobile, governments would prefer to coor-dinate with interests to ensure a stable fiscalbargain. In the global context, a negotiatedcompromise must include MNEs and othergovernments; however the domestic politics ofglobal coordination must not be ignored.

Since the 1980s, tax competition seemsto have dominated in the international arena,and fiscal bargains have remained, in general,within the boundaries of the nation state.

However, the last five years have seen unprec-edented international tax cooperation, present-ing potential opportunities for nation states.On the administrative front, many countriesdo seem to be on a path towards increasingeffectiveness of tax cooperation. The newtransnational technologies and networks oftax administration have potential ultimately toextend ‘the state’s capacity to govern’ (Weiss2005, p. 346).

More fundamentally, safeguarding andincreasing each country’s national revenueswill require radically new approaches to coop-eration between countries in taxation. TheBEPS project is an opportunity, but as Brauner(2014, p. 59) observes, it ‘presents a mix ofpromise and concern’ and faces many hurdles.Its most promising feature is an explicitacknowledgement that international capitaltransactions should be subject to tax. But, thecontradictions in the BEPS process arerevealed by recent statements of the BritishChancellor, who expressed strong UK supportfor BEPS while in the most recent budgetproudly announcing that Britain has the ‘mostcompetitive’ business tax system in Europe,including a corporate tax rate of 21 per cent,enterprise tax zones, expanded research anddevelopment and film tax credits, an invest-ment allowance, and ongoing low taxation ofintellectual property (Osborne 2014).

So far, many Asia Pacific countries are onthe sidelines of the BEPS debate. Asia Pacificjurisdictions that have held back would likelybenefit from engaging seriously with theprocess. It is to be hoped that Australia’s G20leadership in 2014 may push this agendafurther in the region to secure national sover-eignty in taxation in the long term.

June 2014.

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