Globalization is breaking down frontiers around the world. For the first time in centuries, freedom is a reality for most people in most countries. But freedom — both political and economic — can only serve all citizens when exercised responsibly and fairly. Disappearing borders for business, in an environment where law-enforcement systems are mostly still anchored in national territories, enable powerful players to seek advantage by abusing freedom to the disadvantage of others.
One of governments’ most urgent tasks in the 21st century is to create a framework that will allow economic and political freedom to flourish in a climate of fairness. The stakes are high, and so are the temptations to resort to dirty practices. Over a recent five-year period, according to evidence submitted by U.S. companies to the U.S. government, rival foreign firms attempted to bribe their way to success in nearly 300 different competitive tenders for international contracts worth a total $145 billion. In the developing world, some $50 billion a year in tax revenues is lost to tax havens, according to estimates by Oxfam, an international development agency.
This is the dark side of globalization. Abuses of free markets create a multibillion dollar drain on the global economy, distorting world trade and the allocation of capital and services. By undermining the ability of democratically elected governments to raise money through taxation, tax abusers shift financing burdens unfairly onto the shoulders of honest taxpayers. Deprived of legitimate tax revenues, governments are either forced to cut back on social and infrastructure projects that their citizens have voted for or to raise extra taxes to pay for them.
Why isn’t there more of a public outcry against such unfairness? In my opinion, there are three main reasons. First, the direct impact of such abuses is scarcely visible to most ordinary people — unlike acts of terrorism that kill dozens of people, for example, or a big bankruptcy that destroys large numbers of jobs. Second, though they are enormous in dollar terms, their effects are spread across the broad body of consumers and taxpayers, with the result that no single individual or groups of individuals seriously feels real pain. Finally, tax inspectors aren’t most people’s favorite people. But when the tax man is cheated, injustice is perpetrated on large numbers of citizens in a subtle, almost invisible manner.
It is against this background that the OECD, an intergovernmental body composed of 30 nations, has launched a drive to address abuses related to globalization. Through a range of different programs, we are fighting to improve global governance by cracking down on bribery and corruption, illicit price-fixing and fiscal practices that distort competition. But we can’t succeed on our own. We need cooperation with other countries, particularly with those in the developing world.
One of the keys to success, we have realized, is transparency, and with it goes information-sharing among authorities. Transparency is crucial in exposing dubious activities, thereby deterring cartels, bribery and tax abuse. Information-sharing is vital if governments are to enforce a rule of law in cross-border business. For our efforts to be effective, we must establish common standards through international cooperation. To detect and prevent violations of tax laws, we are promoting transparent tax systems and information-sharing between tax authorities and other bodies such as financial regulators. To promote fairness, we are asking governments to abstain from “ring-fencing” specific tax regimes and giving favorable treatment to certain beneficiaries separately from the domestic economy, on the grounds that such regimes distort competition and enable one country to unfairly benefit at the expense of others.
Last June, we identified 47 tax regimes within OECD countries that are potentially distorting in their impacts. Most OECD countries have pledged to eliminate harmful features of these regimes by 2003. We also identified 35 non-OECD jurisdictions whose fiscal systems pose what we consider to be a threat to fair competition in a global environment. We have asked these jurisdictions to end their harmful tax practices by 2005.
Pursuing such goals is not easy. We must respect the sovereignty of each jurisdiction. We must also encourage competition to attract foreign capital.
As other nations achieve a better understanding of our aims, initial skepticism about our intentions is giving way to support. Last June, 29 non-OECD countries took part in an OECD ministerial conference on harmful tax practices and expressed their willingness to work with us. More recently, OECD and non-OECD jurisdictions in the Caribbean and the South Pacific region have agreed to convene multilateral conferences in Barbados, on Jan. 8-9 and in Tokyo in February 2001, to discuss ways of combating tax abuse. These meetings will, I hope, consolidate cooperation to eliminate distortionary tax practices. In doing so, they will help to underpin freedom in the global economy.
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