The international cooperation on tax evasion has been on the G20 agenda since 2009 but tax avoidance is a fairly new topic for the G20. Unlike tax evasion – which is illegal – tax avoidance is in the grey area of compliance. It involves aggressive corporate tax planning schemes by Multinational Enterprises (MNEs) and financial institutions that exploit differences between jurisdictions to shift profits away from economically relevant jurisdictions (“Profit shifting”) or to artificially reduce the taxable corporate income base (“Base erosion”). It is more difficult to detect and to deter but it leads to similar outcomes than tax evasion in terms of losses of revenues for governments.
For years, the OECD has not taken tax avoidance to heart but was rather more concerned about the risk of “double taxation” of MNEs operating over several jurisdictions. Prior to the 2009 crisis, OECD staff would in fact never miss an opportunity to praise “tax competition” between jurisdictions and the competitiveness of low-tax economies. But the political mood within OECD finance ministries changed post-crisis and, with that, the realisation that national tax laws have not kept pace with the globalization of businesses. In turn, this leaves gaps that can be exploited by MNEs to artificially reduce their taxes.