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OECD Shows Its Mettle in Times of Economic Crisis

Posted on Apr. 20, 2020

OECD Secretary General Ángel Gurría now has the unique distinction of having led the organization through two severe global economic downturns. Gurría, who assumed the top spot in 2006, had barely settled into his position when the 2007-2008 financial crisis hit, unraveling the world’s financial markets. Thirteen years later he is dealing with an even more unprecedented crisis — a widespread economic shutdown caused by the coronavirus pandemic. Gurría, a former Mexican finance minister who adeptly helped restructure his country’s debt in the 1980s and 1990s, is equipped for this kind of fight. It is forcing the OECD to show its mettle. When the 2007-2008 financial crisis hit, the OECD focused more attention on tackling tax havens, and making sure that financial institutions that contributed to the crisis were not avoiding taxes offshore.

This time around, the OECD is handing out much more targeted advice on how countries can use taxes to help maintain liquidity. It’s a more assertive approach than the OECD’s immediate response to the 2007-2008 financial crisis. That response was largely controlled by the G-20. Today’s response reflects the organization’s changing influence and power — influence that circles back to the earlier financial crisis and the pact lawmakers drew to tighten the global financial system.

The 2007-2009 Financial Picture

The state of the world is highly uncertain right now, but it was equally uncertain during the 2007-2008 financial crisis. When the global recession hit, no one could predict how long it would last, how deep it would be, and what recovery in the financial sector would look like. The OECD expected GDP in 2009 would shrink by a third of a percent among its member countries.

The OECD’s chief economist at the time, Klaus Schmidt-Hebbel, painted a worrisome picture: Unemployment numbers within the OECD would increase by 8 million in two years and the incoming recession would be just as bad, if not worse, than the economic downturn of the early 1980s. There was a small chance that some countries could experience deflation.

On the tax side, revenues among OECD countries plummeted to unexpected lows. The average tax revenue as a portion of GDP hit 32.7 percent in 2009 its lowest level in nearly two decades. Beyond that, tax revenue in cash terms shrank in nearly all member states. Only Switzerland, Luxembourg, and Turkey escaped the cash crunch that year.

G-20 Takes the Lead, OECD Responds

But we can’t talk about the OECD’s response to the financial crisis without talking about the G-20’s lead role. The financial crisis seriously tested the group, which was not yet 10 years old when the markets started to tumble in 2007. But European lawmakers largely saw the events as an opportunity for a new sort of Bretton Woods agreement, a “new global financial order.” Never mind the fact that the original Bretton Woods system, which was inked in the shadow of World War II, fell apart before it reached its 30th birthday after then-President Richard Nixon decided to pull the U.S. dollar, the world’s reserve currency, off the gold standard.

Nevertheless, some G-20 leaders at the time continued to push this “Bretton Woods” narrative. U.K. Prime Minister Gordon Brown was one of the most vocal advocates and laid out his case in a well-publicized speech in London, in which he said the world had waited too long to revisit its financial architecture and needed to seize the moment.

“The global financial system is too clouded with opacity, conflicts of interest, irresponsible risk taking, and when problems occur countries have tended to look inwards and deal with them in isolation when it is clear they should look outwards and join in international cooperation,” he said.

French President Nicolas Sarkozy was not far behind Brown. He too wanted a new financial system and felt the time was ripe to move beyond what he called the “Anglo Saxon financial model.” The two forged an unlikely alliance. Italian Finance Minister Giulio Tremonti fell into the reform camp but didn’t explicitly team up with Brown and Sarkozy. Some of his aims were a little different: He wanted to fold emerging countries into the conversation — Brazil, China, Egypt, India, Mexico, and South Africa — and unlike Sarkozy and Brown, Tremonti publicly attacked the U.S. response to the crisis. According to him, the economic downturn was “not the end of the world, but the end of a world,” according to the Financial Times.

In 2008, the G-20 held its first leaders’ summit and at that meeting, leaders specifically flagged tax issues: They said tax authorities needed to ramp up their tax information exchanges and pursue tax transparency, based on the guidance of the OECD and other standard setters.

At the time, the OECD’s language focused a lot on partnership — Gurría said the organization would work in tandem with governments and institutions to reform accounting and regulatory standards and potentially overhaul the global economic governance framework, according to a 2008 speech. He also emphasized that the OECD needed to help promote better culture: better risk management, responsible and ethical accounting, and better implementation of its standards.

OECD Strategic Response

Enter the OECD Strategic Response. That initiative came at the end of 2008 and tackled two key areas: finance, competition, and governance; and restoration of sustainable long-term growth. The OECD pledged to issue policy recommendations, conduct necessary surveillance, and broker pledges and other actions between countries.

In the immediate aftermath of the 2008 financial crisis, the OECD’s general message was that measures implemented should be the least harmful to long-term growth. It noted the overwhelming number of tax cuts implemented by member states in order to boost cash in the economy. Low-income workers and business entities were large beneficiaries, although the organization felt that corporate tax cuts could take some time to become useful, because business profitability had generally taken a hit.

VAT and other consumption tax rates received considerable cuts, a move that failed to generate an enthusiastic response from the OECD. The organization felt the rate cuts might push tax regimes toward more distortionary measures and therefore not be a good growth option.

The OECD looked more favorably upon research and development tax measures, and tax cuts offset by public spending reductions in less productive areas. But tax cuts — those enacted immediately before the crisis and those implemented in response — became the Achilles’ heel of sorts when tax receipts among OECD countries started to fall in 2008 and 2009.

In 2009, the OECD declared that corporate income taxes were the most harmful for long-term growth, with property taxes the least harmful. Labor income taxes ranked second and indirect taxes third. Given that ranking, countries seeking money could redistribute their tax bases to rely more on property and indirect taxes if they felt their bases were skewed toward the other two.

Tax Transparency Fight

Then tax haven naming and shaming came into play. In 2009, G-20 leaders assembled summits in London and Pittsburgh at which they expanded their tax focus from tax information exchanges to identifying tax havens.

“We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over,” the G-20 said in London. Accompanying that statement, the OECD released its first list of countries that failed its tax information standards. Four countries were named — Costa Rica, Malaysia, the Philippines, and Uruguay — and the brevity of that list annoyed some critics, who accused the OECD of ignoring several other countries.

Months later in Pittsburgh, the G-20 announced that the OECD’s Global Forum on Transparency and Exchange of Information had been tapped to tackle tax information issues and develop a new peer review system. At that time, the discussion had expanded to include developing countries, and the G-20 pledged that the work would help jurisdictions “fully enforce their tax laws to protect their tax base.”

“Tax provisions may have encouraged excessive risk taking and reliance on debt by market players; a tendency for top management of financial institutions to focus on the short rather than the medium to long term; and to move to less transparent jurisdictions offshore to evade tax and regulatory provisions,” the OECD said in 2009.

The organization set its attention on distortionary tax measures — especially those that interfere with investment vehicle choices or discourage financial product choices that reduce the cost of capital. It called on countries to dismantle these provisions.

The OECD also urged countries to look at the tax impact of their bailouts and how those packages might influence future risk-taking attitudes among financial institutions. From there, the OECD published roughly one report per month in the first half of 2009 on tax havens, collective investment vehicles, financial institutions and tax compliance, and more.

That work came on the back end of an October 2008 OECD conference in Paris, at which government leaders assembled to discuss tax havens and tax transparency. The edict breathed new life into the OECD’s Forum on Tax Administration, which set a sharper eye on banks, offshore tax activity, and wealthy individuals, issuing several blueprints for its future work. These included two reports issued at the 2009 Forum on Tax Administration meeting on “Building Transparent Tax Compliance by Banks” and “Engaging With High Net Worth Individuals on Tax Compliance.”

At the end of the day, the world didn’t get a new Bretton Woods. But it did get a new tax order manned by the OECD. This momentum propelled the OECD into its anti-base-erosion and profit-shifting project and beyond.

G-20/G-7 Slow Response

In 2008, the prospect of losing 8 million jobs in two years was unimaginable. In 2020, millions of jobs are evaporating weekly — an even more devastating reality that is far from over. It’s too early for unemployment projections from the OECD, but the figures are mostly guaranteed to be staggering. In the United States alone, 16 million workers lost their jobs in a bleak three-week period between March and April. Around the same time, applications for U.K. universal credit benefits awarded to low-income and unemployed workers skyrocketed by 950,000 within a period of two and a half weeks, according to the Financial Times. Add to that countrywide lockdowns, and by all accounts the economic disruption that we’re facing far outpaces the 2008 financial crisis or any economic downturn in recent history. Gurría, who is well versed in handling economic crises, is already skeptical that future economic recovery will look like a “V,” like some had hopefully speculated. He’s buckling up for a much longer recovery.

“It’s going to be more in the best of cases like a ‘U’ with a long trench in the bottom before it gets to the recovery period. We can avoid it looking like an ‘L’, if we take the right decisions today,” Gurría told the BBC.

When it became clear that the coronavirus had ballooned into a crisis, the G-7 quickly convened multiple times to discuss strategy. But it hasn’t released a tangible action plan yet, and it has been curiously quiet since announcing in mid-March that it would do everything necessary to fight the coronavirus. Discussions are reportedly tense; much has been written about the diplomatic scuffles that have reportedly erupted between different member states, and those tensions are said to have infiltrated the G-20’s coronavirus discussions.

At the end of February, G-20 finance ministers gathered in Riyadh, Saudi Arabia, for a coronavirus summit, at which they mostly pledged to be on standby, as the outbreak was not yet a pandemic. Their tax talk largely circled around the OECD’s work on the digital economy. When they convened one month later for a March 26 summit, the coronavirus had officially become a pandemic. In response, the G-20 said it would inject $5 trillion into the global economy. Specific details are still forthcoming, but the G-20 is analyzing countries’ tax responses to the pandemic and commissioned the OECD to summarize those measures in a report issued April 15.

OECD Steps Up

Contrast the G-20 response with that of the OECD. On March 21, Gurría declared that the world was at war and released the agency’s four coronavirus policy priorities. On the tax side, it specifically highlighted VAT reductions and tax payment delays as potential economic boosters.

By the time Gurría declared war, the OECD had already released several tax policy documents identifying potential tax concerns for taxpayers and tax administrations alike and had suggested emergency tax policy responses during this unprecedented global lockdown. In the weeks following, it released more guidance on tax treaty considerations, business continuity considerations for tax administrations, and VAT base broadening, as well as documents aggregating tax administration responses around the world and tax policy measures introduced in response.

The organization is now advocating for widespread deferrals on a slew of tax payments, including VAT, payroll, and excise tax payments. It is urging tax administrations to speed up refunds when possible.

On the tax treaty side, it has issued guidance for tax administrations and businesses concerned with how the global lockdowns and virtual halt in cross-border traffic could affect the creation of permanent establishments or shift a company’s effective place of management.

As governments release tax policy measures in response to the coronavirus, the OECD is tracking them regularly and releasing updates to the tax community.

This activity caught the eye of two OECD advisory groups, Business at OECD and the Trade Union Advisory Committee to the OECD. Toward the end of March both expressed concern with an apparent lack of international cooperation and commended the OECD for stepping up. On their end, they’ve pledged that their networks will fully comply with the OECD, which is now engaged in other multilateral tax strategizing with the Intra-European Organisation of Tax Administrations and the Inter-American Center of Tax Administrations. These quick, pragmatic responses are arguably fruits of the OECD’s labor over the past 12 years, and they demonstrate how agile and quick the organization has become in times of crisis.

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