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6 Barriers to Financial Reform: Insights From Asiaciti Trust & McKinsey

6 Barriers to Financial Reform: Insights From Asiaciti Trust & McKinsey

The average global corporate tax rate is about 23%, according to data collected by the Tax Foundation

If that sounds suspiciously high, remember two things: First, an average is just an average, and many jurisdictions levy taxes at far lower rates. And second, business enterprises understandably work to lawfully reduce their tax obligations — efforts clearly in the best interest of their shareholders.

Advocates of financial reform take issue with both of these conditions, and they have a point. The international tax system isn’t anyone’s idea of “fair.” 

But comprehensive, lasting reform remains a distant dream at this point. These trends help explain why.

  1. Media-Fueled Misperceptions About Corporate and Individual Tax Minimization Strategies

Persistent misconceptions around tax minimization make it difficult to have rational conversations about the matter. In large part, these misconceptions trace back to misleading and occasionally inaccurate media reporting about what’s undeniably a complicated subject. 

Examples of such reporting are all around us. Take coverage of the Pandora Papers, a massive unauthorized data release that affected Asiaciti Trust and at least a dozen other international law firms and fiduciaries. Mainstream media coverage focused on sensational outlier cases — well-connected politicians engaged in activities that could reasonably be described as “corrupt” — and downplayed the far larger volume of mundane behaviors that occurred well within the bounds of the law.

  1. Financial Incentives for Low-Tax Jurisdictions

In some sense, international tax policy is a “race to the bottom.” Smaller countries and territories have clear financial incentives to lightly tax locally domiciled firms, even if the bulk of their business activities occur elsewhere. Because it’s impossible to police the activities of sovereign states, the higher-tax jurisdictions that stand to benefit from a global tax “floor” have limited recourse — efforts to establish a minimum corporate tax notwithstanding.

  1. Technological Lag in Tax Withholding and Collection

During the COVID-19 pandemic, many countries “explicitly encouraged the use of mobile money…and many mobile-money platforms have decreased or eliminated transaction fees,” according to a 2020 report by McKinsey.

The shift was especially notable in the developing world and Global South more broadly — places where, in many cases, cashless payments already accounted for a massive share of economic activity.

Unfortunately for revenue authorities, tax collection technology hasn’t kept pace. This not only threatens revenue streams but detracts from longer-term efforts to reform financial incentives for individuals and firms — as the more pressing need is ensuring taxpayers follow existing law.

  1. Political Paralysis in the Developed World

First-world governments are increasingly factional; trust between political parties is at historic lows from the United States and Canada to the United Kingdom and the European Union. Wherever our personal political loyalties lie, we can agree that interparty collaboration is a net positive for good government — and for forward-looking financial reforms that benefit taxpayers up and down the income scale.

The outlook is unclear at best. While politicians can temporarily set aside ideological differences in the face of urgent threats like the initial wave of coronavirus infections or Russia’s adventurism in eastern Europe, time tends to restore the status quo. It’s not obvious what — if anything — will change that.

  1. Increasingly Fragmented & Informal Income for Individuals and Small Enterprises

Changing payment technology is enough of a threat to established revenue collection protocols without accounting for the structural and microeconomic shifts it enables. The growth of the “gig economy” in the developed world and the expansion of longstanding informal economies in the developing world challenge traditional definitions of “enterprise” and even “income.”

The implications for financial reform are uncertain, but it’s clear that a radical rethink of the status quo is in order. And, as we’ve seen, it’s not clear the political will or capacity exists for such a rethink.

  1. Emergent Alternatives to Fiat Currency

Finally, cryptocurrency is the elephant in the room of financial reform. Central banks around the world are increasingly serious about creating government-sponsored alternatives to private cryptocurrencies, leaving the fate of fiat currencies up in the air. These efforts will have dramatic implications for financial regulation in general and could affect efforts to reform the “pre-crypto” status quo.

Can International Finance Be Reformed?

“Fairness” has long been a rallying cry for advocates of financial reform. Unfortunately, we’ve seen that “fairness” means different things to different people. When it’s difficult even to agree on the same set of facts, it’s a real challenge to work toward lasting, comprehensive change.

Not that we shouldn’t keep trying. Few would argue that the international tax system — not to mention the broader corporate regulatory structure — needs updating. Even if we can’t see the endgame today, we should continue to work in good faith toward a future that’s better for everyone.

 

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