Quality over Quantity? The Aftermath of the G-20 ‘Lists’

By Francoise LM Hendy, International Tax and Investment Attorney, Invest Barbados, London (01/10/2011)

The world re-discovered the Group of Twenty (‘G-20’) in the aftermath of the recession. Few thought this agricultural lobby group qualified to pronounce on global economic recovery. It was therefore surprising that not only did this body pontificate on the ‘cure’ but, to the near exclusion of the ‘Brettons Woods’ institutions set up after World War II, they set about to compel near-universal compliance though its own ‘toolbox’ of so-called effective counter measures.

For many their intervention, especially in the area of transparency and tax information exchange, signalled a retreat from investment attraction in the financial services sector based on quantity fuelled by secrecy and other anathemas to sound and prudent regulatory practices and the ushering in of a new age characterised by a government-sanctioned ‘flight’ to jurisdictions of ‘quality’ .

In the two years since the G-20 weighed in on the causes, cures and consequences of the economic disintegration that still engulfs much of the world there has been a dogged entrenchment of the status-quo where jurisdictions labelled as non-compliant with the accepted norms of transparency and tax information sharing have been re-classified based on the principle and not the sustained practice of the rules to which they have become latter-day adherents.

Sadly, not only have G-20 countries left the patterns of investment in the area of financial services and products largely untouched, they have ensured additional advantage to those countries who have been ‘persuaded’ to accept best practices by concluding what can only be termed as ‘tax information exchange agreements’ with benefits.

How Did It All Go Wrong?

In 2009, high on the G-20’s ‘to do list’  to stabilise the global economic and fast track recovery was the reformation of the regulation of the financial sector, based on a set of principles designed to strengthen transparency and accountability; enhance sound regulation; promote integrity in financial markets and reinforce international cooperation.

So determined was the G-20 to achieve quick results - perhaps unsurprisingly given its overlapping membership - they placed their reliance on the work started by the Organisation for Economic Cooperation and Development (OECD). Indeed, at the end of their London Summit they published a colour-coded list of jurisdictions classified according to their level of compliance with the norms developed by the OECD as part of its 1998 Harmful Tax Initiative.

In this 2009 Communiqué, the Group recorded their agreement that the ‘road to economic recovery’ required that “public finances and international standards be protected from un-cooperative jurisdictions”. To that end, they also published a list of authorised countermeasures for use by G-20 members. The more widely known elements of this relate to increased disclosure requirements on the part of taxpayers and financial institutions to report transactions involving non-cooperative jurisdictions; withholding taxes in respect of a wide variety of payments; and denying deductions in respect of expense payments to payees resident in a non-cooperative jurisdiction.

Lesser known but perhaps more damaging for developing countries supporting international finance sectors are the ‘sticks’ which would require international institutions and regional development banks to review their investment policies; and give extra weight to the principles of tax transparency and information exchange when designing bilateral aid programs.

Encouragingly this Communiqué included a G-20 manifesto titled - Global Plan for Recovery and Reform. This document pledged more than just the strengthening of the financial system but top of the agenda was the restoration of confidence, growth and jobs; and the promotion of global trade and investment by rejecting protectionism to underpin prosperity. The document declared, inter alia, “that country regulators are to avoid adverse impacts on other countries and support competition and dynamism”. Also key to the plan was the recognition that as the engines of recent growth, it is imperative that capital continue to flow to emerging markets and developing countries. To that end the G-20 pledged to reinvigorate world trade and investment; minimise any negative impact on trade and investment of their domestic policy actions including fiscal policy and action in support of the financial sector; and refrain from retreating to measures that constrain worldwide capital flows.

For a developing country like Barbados, characterised by the OECD as a significant financial centre and finding itself the only Caribbean country included on the original G-20 ‘white-list’ referred to in its 2009 Communiqué, this endorsement should have acted as the clearest vindication of its financial polices and long-history of tax information exchange. In turn this should have signalled the deliberate redirection of investment away from those countries who had continued to exist outside of the established norms of good governance in the areas transparency and tax cooperation.

Arguably as an institution more akin to the Bretton Woods arrangements and less aligned to the United Nations system, which is charged not with wealth generation but the allocation of the resources generated by such wealth, it was perhaps too much to expect the G-20 to be concerned with the practicalities and interrelatedness of economic development and financial services regulation. That said, however, given that its own manifesto straddles both areas it might not be unreasonable to expect more deliberate and concerted action to encourage the growth of financial services in jurisdictions with an established track-record in the promotion and enforcement of responsible policies in this area pivotal to the avoidance of economic meltdowns in the future.

If this was too great an expectation to be had of the G-20, then at the very least for a country like Barbados its continued ‘white-listing’ two years later should have acted as a shield against the arbitrary harm to the growth and viability of its own financial services sector, promised by the G-20 member states. Indeed, based on their own utterances, sovereign states, like Barbados, cognisant of what historians refer to as ‘interdependent independence’, might have hoped for a more balanced approach to global recovery rather than what has become a disproportionate reliance on countermeasures for non-compliance.

Apologetics for the application of global rules and standards by unrepresentative assemblies – national or international - might be expected to conclude that the recovery plan was not designed to reward ‘white-listed’ jurisdictions found to have been in ‘substantial compliance’ with existing standards. Nor was the plan designed to penalise ‘grey’ and ‘black’ listed who had – until now – been obstinate in their refusal to comply.

 In theory one would have expected that a stamp of approval by a Group bent on ensuring that those who had contributed nothing to the collapse of the financial system but were most affected by it would translate to a country like Barbados receiving tangible economic recognition of its responsible approach to tax competition. This is especially so in circumstances where the capital and investment flows to financial centres are largely contingent on the polices, rules and regulations of the countries from which these investment flows are derived.

Barbados regulators, policy makers and private sector professionals often chided for their conservatism as they push for ‘quality over quantity’ would have been forgiven for expecting a retreat from financial centres whose global market share of financial service products was largely based on secrecy and non-transparency and the direct promotion of investment flows to countries, which have been uncompromising in their adherence to responsible fiscal policies even in the face of stiff competition.

Unfortunately, the work of the Organisation entrusted by the G-20 to correct some of the imbalances in the financial system through its work on transparency and tax cooperation has in large measure focussed more on hurriedly providing ‘proof positive’ of the manifest disinterest in the G-20 and its partners in the reallocation of investment to historically responsible countries on the right side of the global conscience and away from those countries who continue to do the bare minimum to deflect attention from fiscal policies that even if dislodged from their competitive profile in theory remain untested in practice.