by Vito Tanzi, Former Director, Fiscal Affairs Department, International Monetary Fund           


There was a time when countries operated much like isolated islands, with limited contacts among them. At that time, each country could establish and follow its own rules with little concern about the impact that these rules might have on others. There was no need to coordinate the  rules because cross-countries spillovers were not important. This is clearly no longer the world we now live in. Spillovers have become common and often highly significant, as was shown by the recent financial crisis, that was a disastrous example of these international repercussions.    



Some observers might still believe that an "invisible hand" operates globally, so that there is no need for any international cooperation: let the markets operate freely, without any coordinated rules, and the world welfare will be maximized. In spite of the many benefits that globalization has brought to the world, it has produced a growing number of opportunities, especially for enterprises operating globally, to take unfair advantage of differences that exist in rules, regulations, and other characteristics across countries.         



It would be naïf,  in  today’s world,  to expect that countries could be made to follow identical and precise rules in different markets, such as the financial market, the labor market, and other markets. It would also be naïve to expect that identical rules or laws could apply to the governance of corporations, tax systems, and other areas in different countries. However, it should be possible to agree on a broad set of principles that, like the ten commandments, could give some useful guidance to the activities and the actions of governments and to the various global economic operators. These principles would have the character of "soft laws". If followed, they might, over the long run, help promote a process of amalgamation of rules , regulations, and formal laws to achieve better coordination of economic activities among countries. 



Within the Global Standard 12-point proposals (followed up in the "Lecce Framework"), there is that of "tax coordination". The text states that: "Tax evasion and avoidance are harmful to society as a whole, and companies and all business entities…should fulfill their fiscal duties…". It would be difficult to disagree with this principle. Two points need to be made with respect to it.

The first is that the statement does not call for tax harmonization but for tax coordination among countries. Calling for tax harmonization would have been unrealistic. Thus, countries will continue to have the tax systems that they wish, provided that these systems do not specifically include features aimed at shifting tax burdens on other countries; or attracting unfairly to them the tax bases of other countries, as now happens with unfair tax competition. 



The second point concerns the link between the tax principle and some of the other principles contained in the " Lecce Framework". Let us consider briefly some of these links. The link between tax evasion and bribery, especially in international business transactions, is rather obvious. It is often easy for a rich corporation to bribe a poorly paid employee of a tax administration, especially in poor countries. This has been a common problem and in some countries the companies paying bribes could even claim the bribe as a business expense against their taxable income. The payment of bribes, as well as the acceptance of bribes, should definitely be made criminal offenses by all countries. This would make the international playing field more even for multinational corporations. The link with money laundering is also obvious. The money to be laundered has, in most cases, avoided paying taxes. The link of tax evasion with bank secrecy and with the lack of timely and accurate information, regarding the activities of foreign companies and individual investors, is also rather obvious.   



Globalization has changed the character of tax evasion. In today’s world, tax evasion has become progressively more a global, rather than a predominantly domestic phenomenon. There are estimates that hundreds of billions of dollars are evaded every years though global illegal operations. Some believe that these global, tax- avoiding operations may even have contributed to the financial crisis. A global standard that, over time, promoted better and better coordinated rules would reduce this problem.