Cape Town — Short-term measures taken by multinationals to evade or avoid tax would inevitably undermine the global system of trade and result in a retreat to protectionism, Finance Minister Trevor Manuel warned yesterday.
Opening the fourth meeting of the Forum on Tax Administration, a body of the Organisation for Economic Co-operation and Development, Manuel said the global system of trade could work in the long term if there were a set of rules that were simple, transparent and equitable.
These rules needed to differentiate between legitimate competition between countries and measures that facilitated tax evasion or avoidance.
"Smaller, poorer countries with tax administrations that are less sophisticated cannot be expected to develop the expertise required to unravel the complex structures that multinationals and other large companies put in place to minimise tax," he said.
Manuel dealt in his speech with the interconnectedness of the global economy, saying it required greater collaboration between tax authorities.
He said a country could be engaging in what it considered to be legitimate and rational behaviour, but which could do considerable damage to the global economy or seriously affect other countries.
For example, lower interest rates and a higher budget deficit might have been a legitimate response in the US to the slowdown following the bursting of the dotcom bubble.
Similarly, the accumulation of dollar assets by Asian central banks was a legitimate strategy to grow their exports and cushion their economies against financial contagion. But "the combined effect of these actions places the global financial system in a much more precarious position".
Also, the tax policies of a single country -- for instance the steady downward adjustment in corporate tax rates -- could have negative consequences for tax administration globally, he said.
Manuel said the tax burden on the top 1% of earners had declined precipitously, all in the name of competitiveness, but this was taking place in the context of growing global inequality.
"It must be of concern to policy makers and tax administrators that changes to tax policies have been a significant factor driving rising inequality in the world today," he said.