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A U S T R A L I A 2 0 1 4 
TRADE & FINANCE 
Reforming the international 
tax rules: the importance 
of a global approach 
...
Sight and Life is a 
humanitarian nutrition 
think tank of DSM
4 
A U S T R A L I A 2 0 1 4 
Published By: 
Intrinsic Communications Ltd 
Provident House 
Burrell Row 
London BR3 1AT 
M...
42 60 84 78 80 74 
96 46 38 90 36 62 
INTRODUCTION & WELCOME 
8 Message from the Prime Minister of Australia 
Tony Abbott ...
8 I N T R O D U C T I O N & WE L C O M E I N T R O D U C T I O N & WE L C O M E 9 
Towards strong, sustainable 
and balanc...
10 I N T RODUCT I O N  W E LCOME 
Message from the Premier 
of Queensland 
Campbell Newman, Premier of Queensland 
Queensl...
12 I N T R O D U C T I O N  WE L C O M E I N T R O D U C T I O N  WE L C O M E 13 
Since 1999, the G20 has achieved 
remar...
14 T R A D E  F I N A N C E T R A D E  F I N A N C E 15 
Improving the 
The major components of the 
regulatory reforms fo...
Recent years have witnessed 
considerable public anger over 
apparently low tax bills paid by certain 
companies. As a res...
18 T R A D E  F I N A N C E T R A D E  F I N A N C E 19 
Taxation creates an essential 
element of trust between 
governme...
20 T R A D E  F I N A N C E T R A D E  F I N A N C E 21 
early actions could also threaten to 
undermine the basic princip...
Restoring integrity of tax systems – a taxing crossroad Restoring integrity of tax systems – a taxing crossroad 
It may be...
24 T R A D E  F I N A N C E T R A D E  F I N A N C E 25 
“If you are looking for a safe 
environment to retire and or to 
...
26 T R A D E  F I N A N C E T R A D E  F I N A N C E 27 
competition to carry out these low-skilled 
tasks is often intens...
28 T R A D E  F I N A N C E T R A D E  F I N A N C E 29 
The financial crisis has 
disillusioned investors in many 
ways. ...
30 T R A D E  F I N A N C E T R A D E  F I N A N C E 31 
Why should sustainable 
investing be a priority in 
2014? 
Climat...
32 T R A D E  F I N A N C E T R A D E  F I N A N C E 33 
ILO Director 
General’s 
address on 
G20 labour 
markets 
The Dir...
34 T R A D E  F I N A N C E T R A D E  F I N A N C E 35 
wage growth policies, such as minimum wage increases and 
collect...
G20 Australia 2014
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  1. 1. A U S T R A L I A 2 0 1 4 TRADE & FINANCE Reforming the international tax rules: the importance of a global approach Gabriela Ramos, OECD Chief of Staff and G20 Sherpa discusses the issues Page 18 ENERGY Maria van der Hoeven talks about the role of the G20 in developing long-term sustainable energy security strategies Page 80 In partnership with
  2. 2. Sight and Life is a humanitarian nutrition think tank of DSM
  3. 3. 4 A U S T R A L I A 2 0 1 4 Published By: Intrinsic Communications Ltd Provident House Burrell Row London BR3 1AT Managing Director: Robi Harper E: info@intrinsic-communications.com Editor-in-Chief: Linette DeGraaf EMEA Sales: Robi Harper, Richard Sharp APAC Sales: Anthony Leigh-Jones Design: Hervé Boinay E: herve.boinay@thamesdesign.com T: +44 (0) 788 306 5859 Produced in Association with G20 Foundation G20 Foundation e.V. Große Bockenheimer Strasse 33-35 60313 Frankfurt Printed in the UK by Warners Midlands PLC using only paper from FSC/PEFC suppliers www.warners.co.uk Intrinsic Communications Ltd can assist with a range of specialist printing and multimedia requirements. For more information please contact Robi Harper. © Intrinsic Communications Ltd. All rights reserved. No part of this publication may be produced, transmitted in any form or photocopied or otherwise without the written consent of the publisher. The publisher accepts no responsibility for the content of advertisements appearing in the magazine. The opinions expressed in editorial material or otherwise do not necessarily represent the views of the publisher. Collaboration. Now that’s what we call a medical breakthrough. At Janssen, we are making bold advances to solve some of the most important unmet medical needs of our time in oncology, immunology, neuroscience, infectious diseases, and cardiovascular and metabolic diseases. We are further committed to making a meaningful difference in global public health. Inspired by the legacy of Dr. Paul Janssen and our commitment to patients, we have established the Janssen Global Public Health group to improve access to medicines, foster collaborations,and support public health solutions to sustainably advance health care worldwide. We believe nothing is more powerful than collaboration and are today working with members of the global health community to bring solutions that aim to both extend and improve the quality of life for people worldwide. Our mission drives us. Our patients inspire us. We collaborate with the world for the health of everyone in it. www.janssen.com Janssen Pharmaceutica N.V. © JPNV 2014
  4. 4. 42 60 84 78 80 74 96 46 38 90 36 62 INTRODUCTION & WELCOME 8 Message from the Prime Minister of Australia Tony Abbott 9 Towards strong, sustainable and balanced growth President of Mexico, Enrique Peña Nieto 10 Message from the Premier of Queensland Campbell Newman 12 Outreach Dialogue: a chance to build a better world Victor Philippenko, Chairman of the executive board, G20 Foundation TRADE & FINANCE 14 Improving the quality of banking supervision worldwide in the post-reform world Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank 18 Reforming the international tax rules: the importance of a global approach Gabriela Ramos, OECD Chief of Staff and G20 Sherpa 26 The role of the G20 in promoting trade is more important than ever Roberto Azevedo, Director-General, WTO 30 The role of sustainable investing as a driver for change Jessica Robinson, Chief Executive Officer, Association for Sustainable and Responsible Investment in Asia (ASrIA) 32 ILO Director General’s address on G20 labour markets Guy Ryder, Director-General, International Labour Organization 36 Transparency, like technology, is irreversible Georg Kell, Executive Director, UN Global Compact HEALTHCARE 38 WHO Director-General on health and climate Dr Margaret Chan, WHO Director-General 42 We can defeat AIDS, TB and malaria if we all come together Dr Mark Dybul, Executive Director, The Global Fund 46 Dealing with noncommunicable diseases Dr Oleg Chestnov, Assistant Director-General, Noncommunicable Diseases and Mental Health, WHO DEVELOPMENT 48 The post-2015 Development Agenda UN Secretary-General Ban Ki-moon 54 Turning Africa’s digital divide into digital opportunity Donald Kaberuka, President, African Development Bank 56 National strategies to fulfill the global commitment: financial inclusion Dr. Alfred Hannig, Executive Director, Alliance for Financial Inclusion 58 Connecting the next billion: ICTs and sustainable development Dr Hamadoun I Touré, Secretary-General, International Telecommunication Union 60 Pursuing public private partnerships for infrastructure projects Deputy Prime Minister of Australia, The Hon Warren Truss CLIMATE CHANGE & SUSTAINABILITY 62 G20 and greening global finance Achim Steiner, UN Under-Secretary-General and Executive Director, UNEP 68 Sustainable water agriculture ensures environmental security Scott Vaughan, President, International Institute for Sustainable Development (IISD) 71 Tourism and the sustainability challenge Taleb Rifai, Secretary-General, World Tourism Organization (UNWTO) 74 Resource and energy efficiency is needed today for the buildings and cities of tomorrow Arab Hoballah, Branch Chief UNEP-DTIE and Jacob Halcomb, UNEP-SBCI 76 A loud and clear call from business and governments in favour of carbon pricing Dirk Forrister, President, International Emissions Trading Association 78 Infrastructure for the rise of smart cities? Michel Sudarskis, Secretary General, INTA, International Urban Development Association ENERGY 80 The role of the G20 in developing long-term sustainable energy security strategies Maria van der Hoeven, Executive Director, International Energy Agency 84 Carbon capture and storage as a tool to deliver cleaner fossil energy Luke Warren, CEO, The Carbon Capture and Storage Association 86 Balancing the Energy Trilemma: much work remains to be done Christoph Frei, Secretary General, World Energy Council 88 Insights on wind energy infrastructure development Prof. Dr. He Dexin, President, World Wind Energy Association 90 Nuclear energy – a favourable climate Jean-Jacques Gautrot, Chairman, World Nuclear Association 92 How can industry assist in reaching the EU energy efficiency targets Nicolle Raven, Policy Officer, ESMIG FOOD, AGRICULTURE & WATER 94 Improving food security and nutrition governance José Graziano da Silva, Director-General, U.N. Food and Agriculture Organization (FAO) 96 The value of achieving water security Benedito Braga, President, World Water Council 98 Towards a Zero Hunger World Ertharin Cousin, Executive Director, World Food Programme 100 Member countries 102 Sponsors index
  5. 5. 8 I N T R O D U C T I O N & WE L C O M E I N T R O D U C T I O N & WE L C O M E 9 Towards strong, sustainable and balanced growth Message from the Prime Minister of Australia Prime Minister of Australia, Tony Abbott President of Mexico, Enrique Peña Nieto In accordance with these purposes, last February, G20 Finance Ministers and Central Bank Governors decided to coordinate efforts in order to lift the Group’s GDP. The collective goal is to increase it by more than 2% over the coming five years, above the implied trajectory by current policies. I am convinced we can achieve this by promoting sound macroeconomic policies and reforms, as well as, fostering investment, trade and competition. For this reason, Mexico embraces the ambitious commitment and looks forward to discussing an action plan, at the Brisbane Summit this November. In this regard, my country has a renewed capacity to contribute to global growth. Mexicans have started an ambitious transformation agenda that includes structural changes on education, finance, energy, tax collection, economic competition, and telecommunications. These reforms, approved last year thanks to Mexico’s main political parties’ willingness and sense of responsibility, will enhance our competitiveness and development perspectives. Furthermore, Mexico is taking the necessary steps to unleash its full economic potential. For instance, we have set an unprecedented investment plan in infrastructure. Our National Infrastructure Program will channel almost 600 billion dollars from now to 2018. Since our country has a privileged geographical location, we are determined to use these resources, to consolidate our position as a high-value added global logistics center. Thus, Mexico is excited to co-chair the Infrastructure Investment Working Group, along with Indonesia and Germany. We believe the G20 has the required impulse to foster investment in this sector, promote financing to small and medium enterprises, and further enhance global economic development. We assume this responsibility as an ideal opportunity to face, as a team, the new challenges of a highly interconnected world. As one of the most open economies, Mexico fully backs the Australian Presidency initiative to hold a Trade Ministerial Meeting. We should continue strengthening this kind of discussions on G20 summits, as a means to attain more stable economic conditions, and especially, to create new employment sources and better paid jobs for our countries. One of my administration’s priorities is achieving a Prosperous and Inclusive Mexico. In that way, we will continue working on improving employment, food security, and financial inclusion levels, particularly for the most vulnerable people. This is why Mexicans welcome recent efforts to incorporate gender equality into G20 discussions and support parallel events to engage non-state actors, such as the B20, L20, Think 20, Y20, and Civil 20. I believe Australia is playing a remarkable role as G20 Chair, which will certainly lead us to a successful meeting. We must keep walking firmly towards a suitable environment for strong, sustainable, and balanced economic growth. For this reason, it is a pleasure to attend the upcoming Brisbane Summit and be part of the construction of a better future for our 20 societies. The G20 is committed to develop comprehensive strategies to stimulate strong, sustainable, and balanced growth worldwide. To do so, it has played a significant role in enhancing macroeconomic policy coordination among major economies, improving financial regulation and setting the basis for international recovery It is an honour for Australia to host the G20 in 2014. It is an important opportunity and a major responsibility. Our Presidency comes at a time when global economic growth is too low and unemployment too high. This is preventing people from reaching their full potential. So why is the G20 important? It comes down to a simple idea: the world’s major governments can do more economic good for our citizens when we work together. That is what the G20 Leaders Summit is about. The G20 has proved itself in difficult times. It helped prevent an economic collapse following the global financial crisis. The main problem we must now solve is how to strengthen economic growth and employment, to create opportunities for our people. That is our common challenge. The best way to do this is by empowering the private sector. To have strong economies, we need business to invest, build the infrastructure of the future and trade with the rest of the world. We must also implement the G20’s financial reforms to ensure our economies are more resilient to future economic shocks. The challenge for the G20 this year will be to make concrete decisions and take real steps that will improve people’s lives through stronger growth, more jobs and better infrastructure. As the chair of the G20 in 2014, I will ask world leaders to come to Brisbane with a commitment to take practical action. It means developed and emerging economies working together. And it means partnership between governments, private enterprise and the community. I look forward to hosting world leaders in the beautiful riverside city of Brisbane in November 2014. The G20 will be the most important meeting of world leaders Australia has ever hosted. I want it to make a lasting difference. The Hon Tony Abbott MP Prime Minister of Australia Our National Infrastructure Program will channel almost 600 billion dollars from now to 2018 Source: www.g20.org
  6. 6. 10 I N T RODUCT I O N W E LCOME Message from the Premier of Queensland Campbell Newman, Premier of Queensland Queenslands economy is expected to grow at a rate of 4% until 2017. That would restore Queensland to the position of top economic performer among the Australian states. The Queensland Government will do all in its power to ensure that occurs. The State’s prosperity is based on four pillars – agriculture, resources, tourism and construction. Agricultural and resources exports are major contributors to our economic health and have been for many years. Gross state product exceeds $250 billion in the financial year to June 30 2011, and merchandise exports contributed roughly 20% of that total. Resources exports are the most important by value, accounting for more than half the total. The State is about to benefit from a new industry, an LNG export industry based on abundant reserves of coal seam methane gas. Three LNG projects are under construction at the central Queensland port of Gladstone, involving a total investment of $58.9 billion. First shipments are scheduled for 2014. A fourth project is undergoing approvals processes. Boosted by these projects, business investment in the State rose by 56% in the year to March 30 2012. At that time, projects under construction were valued at about $102 billion, while investments worth a further $59 billion were being considered. This great resources industry has spawned an internationally renowned mining services and technology sector whose products and services are to be found in mines and processing plants throughout the world. The Queensland agriculture industry accounts for nearly one-quarter of our exports. Major commodities are beef, sugar and horticulture. The State Government’s vision is to double food production by 2040 as world demand continues to rise, fuelled by rising living standards, particularly in Asia. Good agriculture is based on innovation, which is fostered by research and technology. The Queensland Government will promote agricultural sciences and invest in infrastructure like dams and water supply, transport and ports. A robust construction sector depends upon the strength of the other three pillars and we are boosting the tourist industry, just as we are facilitating the growth of resources and agriculture. We believe that our tourism industry can achieve higher goals than it has done in recent times. According to Tourism Queensland, it generates about $17 billion a year, directly and indirectly. We will develop and implement a 20 year strategy for the industry, which is underpinned by great natural beauty, a benign climate and friendly, hospitable Queenslanders who come from many different cultures. Delegates to the 2014 G20 Summits will have the opportunity to experience the vast range of possibilities, both tourist attractions and business opportunities that our great State has to offer you will be most welcome at events which, in November 2014, will be an outstanding success and a showcase for Queensland’s excellence in so many fields. On behalf of the people and government of Queensland, I extend the warmest welcome to delegates to the 2014 G20 Summit to be held in the State’s capital, Brisbane. I am delighted that Queensland has been chosen as the destination for these important summit meetings. The Australian economy is expected to be the best performing major advanced economy in the world in the next two years Our customers need to y point-to-point across the globe, and in many instances at short notice. 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  7. 7. 12 I N T R O D U C T I O N WE L C O M E I N T R O D U C T I O N WE L C O M E 13 Since 1999, the G20 has achieved remarkable progress as a platform providing solutions to global challenges. The goal of further establishing a solid framework for a better global governance depends on several factors, most notably the fostering of transparency and increasing participation of the stakeholders of the G20 process within and between nations. As a group consisting of countries with various cultural, historical and economic backgrounds, the implementation and the success of G20 solutions requires a broad consensus between different countries and different communities within the respective countries. With such a inhomogeneous group it is necessary to provide a framework for public debate of the topics attached to G20 agenda. The Outreach Dialogue has proven to have the potential to become a key measure on the way towards better coordination of different stakeholders of the G20 process. The five Outreach groups bring together the main groups of the societies of the G20 countries like businesses, civil society, academia, labor organizations and youth in a structured and transparent communication process to generate cross-sectoral synergies and enhance the public benefit of the G20 process. All Outreach groups have been integrated in the G20 process with participation to Summits and by giving recommendations to the heads of state. A part of these recommendations has been incorporated into the Leaders Declaration of the Summit in Russia 2013. However, the Outreach Dialogue as part of the G20 process has proven valuable but at this young stage is still in development and needs further improvement. To reach a new level of impact for the Outreach format, the efficiency in the communication process needs to be enhanced by a better coordination of all actors. To really build a meaningful consensus, it is crucial to distribute the influence of the single groups more evenly so the contents and recommendations developed by each group find their way into policy actions. It is decisive, that there is also more interaction and exchange between the groups, allowing the representatives to search for common ground and to work hand in hand on innovative solutions to achieve stronger, more sustainable and balanced growth. Another point in this respect is to better exploit the potential for cross-group synergies by a better management of communication between the different groups. By this, the various strengths of the individual groups could be bundled to achieve common goals more efficiently. Besides these measures on the side of the work in the Outreach groups, it is necessary to increase the awareness of decision makers in the G20 process by a stronger presence of the Outreach groups in the preparation and follow up of the summits. By this, the Outreach format could play a more central role with more recommendations ending up making an impact on the G20 policies, contributing to transparency in the overall communication process, creating a broader public consensus for G20 commitments and raising the effectiveness of a governance process. Most importantly, all these improvements are bound to remain inefficient if they are to be managed solely by the respective presidency of each year’s summit. To achieve a sustainable and precisely targeted communication process that provides solutions to challenges in the long-run, an additional facilitation of the process is needed that supports the respective G20 presidencies with a long-run perspective of the Outreach format. This would ensure that the Outreach groups can take a unified and continuous approach in tackling global challenges while adapting to the focus set by the annual G20 agenda. With an independent facilitator managing and monitoring the Outreach Dialogue, an important further step to ensure more transparency and broader public involvement in the Outreach Dialogue would be to establish recurring events in all partner countries. The G20 Foundation supports this evolution by organizing events at the national level to reinforce the post-summit implementation process of selective items decided upon on the G20 level in cooperation with various stakeholders from the member countries. As a non-partisan Think Tank, we stimulate constructive and effective discussions in order to support the implementation of the G20 commitments on a national level. Thereby we foster the development of innovative solutions to global challenges, such as economic stability and sustainable growth. The overriding goal of the Outreach Dialogue has to be an evolution from singular events in the surrounding of the annual G20 Summits to a continuous and coordinated effort working as an addition to the general G20 process. The use of the Outreach format has to be measured by the impact the developed recommendations have on policy making. This means that the highest priority in the near future have to be continuous improvements in the implementability of the Outreach recommendations, with more concise and precise targeting of the recommendations proposed by the individual groups. Only if the Outreach format is able to deliver practical and feasible guidance for the G20 governments it can provide added value and become a keystone of the G20 process. Uncoordinated events under changing management are bound to remain ineffective and focused on short-term solutions, while a well monitored and managed communication process bringing together all major stakeholders of the G20 societies both on a G20 as well as on the local level can truly make a difference by providing targeted long-run policy advices and increasing awareness and transparency in the civil society. With all the challenges we face as a global society it is absolutely essential to establish new approaches for international cooperation by connecting leading personalities from all relevant sectors worldwide on G20 issues. This is an opportunity to unite cultures, countries and people based on shared ideals. By encouraging the world leaders to take on the decisive challenge of sustainable governance innovation and achieving a stronger economical and political integration we have a chance to build a more prosperous, sustainable, inclusive and peaceful world. Outreach Dialogue: a chance to build a better world Victor Philippenko, Chairman of the executive board, G20 Foundation
  8. 8. 14 T R A D E F I N A N C E T R A D E F I N A N C E 15 Improving the The major components of the regulatory reforms focus on enhancing banks’ management of capital and quality of banking liquidity risk. The Basel III capital standards introduced stronger minimum requirements for regulatory capital, by increasing the quantity, supervision quality and risk coverage of capital standards. These measures are complemented by a simpler leverage ratio, which serves as a backstop to the worldwide in the risk-weighted measures. post-reform world While the Committee has long discussed liquidity risk, the sudden drying up of liquidity during the crisis brought greater impetus to establish globally harmonised standards. Basel III introduces, for the first time, two minimum standards to manage liquidity risk. In early 2014, we finalised the Liquidity Coverage Ratio and just published the final Net Stable Funding Ratio. In addition to enhancing the resilience of individual banks, the Basel III framework incorporates broader macroprudential elements. The countercyclical capital buffer regime has been introduced to increase the resilience of banks to the build-up of system-wide risks. Higher loss absorbency requirements have been imposed on systemically important banks perceived to be too-big-to-fail. In addition, the Committee’s revised global framework for measuring and controlling large exposures helps address the negative externalities such banks create and the risks associated with their interconnectedness. Pillar 2: strengthening supervision While much of the attention has been on minimum regulatory standards, the Committee has published important guidance to strengthen supervisory practices. In 2012, the Committee updated the Core Principles for Effective Banking Supervision. The revised Principles emphasise the need for greater supervisory intensity for systemically important banks. By applying a system-wide perspective, the Principles increase focus on effective crisis management and recovery and resolution measures, and place greater emphasis on corporate governance. The Core Principles are complemented by a series of other initiatives to improve supervision. This includes guidance on identifying and dealing with weak banks; principles for sound stress testing practices and supervision; fundamental elements of a sound capital planning process; and internal audit practices. Finally, the global community has heightened expectations for cross-border cooperation and information sharing. The Committee has highlighted this through our revised principles for supervisory colleges and ongoing efforts to foster dialogue among supervisors. While standards and guidance are essential tools of supervision, we should bear in mind that effective supervision ultimately rests on the ability and willingness of supervises to intervene. Pillar 3: fostering market discipline It is critical that these improvements in risk management and supervision are understandable and comparable to stakeholders. Thus, the Committee has placed great emphasis on disclosure and transparency, both from banks and from supervisors. This includes comprehensive, standardised disclosure requirements for all the major Basel III standards, along with a broader review of Pillar 3 disclosure requirements. Greater consistency and comparability in bank disclosures will enable investors to better assess bank risk and thereby strengthen market discipline. Conclusion The new minimum requirements for capital, liquidity and disclosure have raised the bar, requiring banks to take greater responsibility to safeguard financial stability. Supervisors, too, are stepping up their efforts to ensure implementation of the Basel III framework into domestic frameworks, and to more effectively – and more intrusively – supervise banks for which they are responsible. A sound and stable financial system is crucial; only strong banks can help the G20 achieve its promise by facilitating strong, sustainable economic growth. Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank The Basel framework comprises three Pillars. Pillar 1 sets minimum capital (and now liquidity) requirements. Pillar 2 is the supervisory review process. And Pillar 3 promotes market discipline through public disclosure. All three pillars have been strengthened significantly through a variety of measures. With the reform agenda largely completed, it is tempting to think that the hard work is over. But, in fact, it is only beginning. First, we must ensure that the reforms are implemented by both authorities and banks as they were intended, which the Committee is doing through its Regulatory Consistency Assessment Programme. Second, we must continue to strengthen our oversight and supervision as banks incorporate the new regulatory requirements into their risk management frameworks. In this respect, banks and supervisors both have a role to play. Pillar 1: stronger minimum requirements for regulatory capital and liquidity Basel III responds to the risk management and supervisory challenges observed during the crisis. The framework seeks to improve banks’ resilience to a range of shocks. It also provides supervisors with the necessary tools to address weaknesses identified in individual banks and oversee the health of the broader financial system. Since the onset of the global financial crisis, the regulatory community have initiated a series of significant reforms. The Basel III framework constitutes a central component of the G20 regulatory reforms that have followed. The aim has been to develop a regulatory framework that increases the resilience of the banking system. In turn, this will reduce the probability and mitigate the impact of future financial crises, setting the stage for strong, sustainable and balanced growth.
  9. 9. Recent years have witnessed considerable public anger over apparently low tax bills paid by certain companies. As a result the OECD plan was drawn up to tackle this perceived tax avoidance by multinationals (Base Erosion and Profit Shifting (“BEPS”)). Existing principles of international taxation were designed before the globalization of business and the digital economy. Policy makers are now recognizing these wider issues, and recognize that maintaining the status quo is not an option. Tax is no longer something limited to business and tax authority relationships—it has become a significant strategic business issue, and there are also growing demands for tax information from many non-traditional sources. The issue of tax transparency continues to be part of the global political and media agenda. It is too early to assess the impact of all the changes in the marketplace; however it is highly likely that most multinationals will be affected. Identifying risks and opportunities that current developments bring is critical and requires regular monitoring and review of an organization’s position and options. As the strategic goals and operations of a business change over time, so should the tax strategies adopted to support them. As part of this global tax [r]Evolution, there is a perception multinational businesses are not paying their fair share of taxes. Responsible tax (e.g. reputational risk) is now an important component of international tax matters. There are three components to this [r]Evolution: the administration of tax laws and treaties by jurisdictions (we see a growing number of instances of potential double tax where more than one country is seeking to tax the same income); unilateral tax law and treaty changes (we see a growing list of countries that are enacting or proposing uncoordinated legislative changes to protect their tax base, which can lead to double tax situations); and the OECD BEPS project. A survey The purpose of Deloitte’s “Base Erosion and Profit Shifting (BEPS) Responsible Tax survey,” completed in March 2014, was to gauge contacts’ views regarding the increased media, political and activist group interest in “responsible tax” and BEPS, and the resulting impact on their organizations. Nearly 600 Deloitte contacts responded to the survey. Albert Baker, FCPA, FCA Deloitte Global Leader Tax Policy Tax has become a significant strategic business issue. It can impact an organization’s competitiveness but can also impact an organization’s brand and its broader approach to corporate social responsibility. Ninety-three percent of survey respondents agreed or strongly agreed that there has been an increased media and political interest in tax in their country. Overall, 74% agreed or strongly agreed that their organization is concerned about the increased media, political and activist group interest in tax and 60% have received questions from their C-Suite and/or Board of Directors about the increased interest. Challenges and aspirations Companies need the certainty of conducting tax affairs based on laws that are clear and reduce the risk for tax disputes. This is a rare opportunity for governments to achieve this on a multi-lateral basis and in the spirit of cooperation. Of course, society should not underestimate the challenge of this given that at least on a short term basis it is unlikely that all governments will see the same proportionate increases or decreases in corporate tax revenues as a result of the BEPS initiative. Adding to the complexity is that, even in a post-BEPS world, governments can be expected to continue to provide economic and tax incentives in their domestic laws. Many of these incentives are designed to encourage investment and increase employment. Also, governments want to ensure that the tax rules applicable to their headquartered companies do not put those companies at a competitive disadvantage relative to their foreign peers. Tax has become a significant strategic business issue. It can impact an organization’s competitiveness but can also impact an organization’s brand and its broader approach to corporate social responsibility. The global landscape of BEPS, unilateral action by countries and increased international tax audits, is resulting in in a global tax [r]Evolution. As such, it needs to be managed strategically. Deloitte will continue to contribute to this process, including continuing to discuss with and make submissions to the OECD, as well as continuing the discussion in global and domestic forums. In our submissions Deloitte strives to represent the range of businesses we provide services to and the aim is to shape legislation in a practical and sustainable way. We will also continue to advise clients and contacts on developments. We recommend that multinationals assess the potential impact of the OECD’s recommendations on their business. Information and contacts For further information, please visit the BEPS page on Deloitte.com or contact Albert Baker, Deloitte Global Leader—Tax Policy. A global tax [r]Evolution The changing world of tax Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 200,000 professionals are committed to becoming the standard of excellence. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. © 2014. For information, contact Deloitte Touche Tohmatsu Limited.
  10. 10. 18 T R A D E F I N A N C E T R A D E F I N A N C E 19 Taxation creates an essential element of trust between governments and the societies and citizens they serve. Moreover, fair and efficient tax systems underpin the social contract When used appropriately, taxation can be a powerful instrument to reduce inequality, and create opportunities for all citizens and companies to prosper in an increasingly competitive environment. However, when left unchecked, tax evasion and avoidance raise questions of economic fairness and efficiency, which are especially relevant in an environment plagued by fiscal consolidation, rising unemployment and social hardship. The problem has been getting worse over the years, as individuals and companies have honed their skills to exploit loopholes and inconsistencies in tax rules across countries. Led by G20 Leaders and supported by the OECD, the international tax agenda has advanced in two key policy areas: tax evasion, by improving the transparency of financial flows through the exchange of tax information on; and tax avoidance, by taking comprehensive action to address the gaps and mismatches in tax rules that can cause profits to ‘disappear’ for tax purposes or allow profits to be shifted to low tax jurisdictions where little or no company activities occur – shifting the tax burden to individual taxpayers and small domestic companies. Once, the Reforming the international tax rules: the importance of a global approach Gabriela Ramos, OECD Chief of Staff and G20 Sherpa objective of tax authorities was to avoid double taxation. It is time now to avoid double non-taxation. Tackling tax evasion through tax transparency In 2009, the G20 committed to eliminating bank secrecy, and in only 5 short years we have seen a quantum leap in the efforts to improve transparency. Developed and developing countries, including financial centres, have demonstrated how they can work hand in hand to effectively fight against a lack of transparency that can enable tax evasion. The first steps began with the reform of the Global Forum on Transparency and Exchange of Information for Tax Purposes, at the end of 2009. As a result, today the Global Forum has 122 members, including all financial centres and more than 60 developing countries, each of whom have committed to the international standard, exchange of information “on request”. The Global Forum is the largest existing Peer Review monitoring system which ensures that members have the appropriate legal and practical framework in place to effectively carry out their commitment to the standard. Again responding to a call from the G20 in 2013, the OECD delivered the “next generation” tool for effective cooperation between jurisdictions on tax transparency: a single common global standard for the automatic exchange of information (AEOI). The AEOI standard was endorsed at the February 2014 meeting of Finance Ministers and Central Bank Governors. At the Brisbane Summit, the OECD will deliver the full AEOI package, including all the technical guidance which will allow countries to take the next step and move towards effective implementation. The G20 and the OECD also recognise that developing countries face specific challenges to ensure AEOI, namely varying capacities to implement it in an effective and timely way. In February 2014, the G20 called on all financial centres to match G20 commitments to implement the AEOI standard in the short term, while noting that the timeline for other developing countries will depend on their ability to do so. The Global Forum is currently developing a roadmap to assist developing countries in overcoming obstacles to participation, allowing them to meet the standard and thereby accessing the benefits of improved global transparency. Already over 60 countries, including all OECD and G20 members, have committed to implement the AEOI standard. A large and growing number of jurisdictions have further agreed to a detailed implementation timeline which will see the first exchanges taking place by September 2017. Further, as one of the main instruments to provide a legal framework for countries to participate in AEOI, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters has to date been signed by 66 countries, including more than 10 developing countries, with another 15 jurisdictions covered by way of territorial extension. If we are to be effective in tackling tax evasion, there must be no place left to hide. It is therefore critical that all countries, and in particular all financial centres, quickly commit and effectively implement the single global standard on AEOI. Ensuring a level playing field amongst countries is important, and the Global Forum, with its broad-reaching membership, has been mandated by the G20 to establish a mechanism to monitor and review the implementation of the new standard on automatic exchange of information. Tackling tax avoidance through modification of tax rules Tax transparency is not the only tax issue of international concern since the crisis. In recent years, there has been an unprecedented focus from both political leaders and the public about cross-border tax planning strategies that enable corporate profits to go untaxed. Tax policy is at the core of national sovereignty and yet in a globalised world with integrated economies, domestic tax systems designed in isolation are often not aligned, causing devastating and unintended effects on tax revenue. The impact is felt by both developed and developing countries, although the challenges to address these risks may be different across countries, both in their nature and scale. For instance, developing countries are more reliant on corporate income tax, which contribute on average 20% of tax revenues, compared to 8-10% in advanced economies. G20 Leaders first identified the need to address Base Erosion and Profit Shifting as a priority for their tax agenda at the Los Cabos Summit. In 2013, the OECD presented the BEPS Action Plan, and the G20/OECD BEPS Project was born. Leaders called on member countries to examine how their domestic laws contribute to BEPS and to work together to ensure that international and national tax rules do not allow or encourage multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions. To ensure that the full range of BEPS challenges are identified and discussed, the G20/OECD BEPS Project builds on a broad engagement process, drawing on experience and perspectives beyond our member governments. Working through a number of avenues, including the G20 Development Working Group, there is in place a comprehensive program of targeted engagements with senior policy makers in developing countries to discuss their specific BEPS challenges and how they can best be addressed. We have held several major international meetings to engage with developing countries on BEPS over the last 18 months. In addition, the first in a series of regional consultations was attended by more than 100 countries and over 300 delegates, and the next round of dedicated regional consultations will commence in the second half of 2014. We also are engaging in an ongoing dialogue to exchange ideas on BEPS issues with global business leaders, civil society groups, and labour representatives. The OECD is also working together with the United Nations, the World Bank and the International Monetary Fund to avoid a duplication of efforts and ensure complementarity of work streams. We are working closely with all stakeholders and have put in place a number of mechanisms to ensure a transparent process by undertaking a large number of public consultations, and providing access to discussion draft papers and webcasts. The first elements of the 15-point OECD BEPS Action Plan will be delivered in 2014, with the remaining Actions to be completed by the end of 2015. In 2014 we have already seen significant progress on a number of areas including: identifying the tax challenges raised by the digital economy, developing revised standards for transfer pricing documentation, establishing country-by-country reporting that will ensure Multi- National Enterprises will use a standardised report format to provide information on their allocation of income, taxes and business activity on a country by country basis, as well as providing a report outlining options to more effectively address tax treaty abuse. A global commitment Today, the OECD and G20 are working in partnership alongside dedicated engagement with all stakeholders, to ensure that momentum is maintained to achieve the goal of an international tax system which can face the challenges of the 21st century economy. However, global commitment to this objective is required; and in the area of tax transparency in particular, the engagement of all financial centres is vital. G20 Leaders will continue drawing attention to the need to take collective action to deliver on these two important initiatives. Swift action and smart leadership at the domestic level will also be needed, to undertake the requisite national reforms. Better tax policies for better lives for our citizens! Individuals and companies have honed their skills to exploit loopholes and inconsistencies in tax rules across countries
  11. 11. 20 T R A D E F I N A N C E T R A D E F I N A N C E 21 early actions could also threaten to undermine the basic principles already set out in the announcements so far, even if directionally consistent with the BEPS project. This could create more uncertainty, greater risk and an erosion of trust between tax authorities and taxpayers. Each unilateral change also increases the risk of double taxation and the risk that there will need to be an “unpicking” when the final recommendations are delivered. One way to address this is for governments to commit to reviewing their recent changes and to “align” once the final outcomes are known. Again, this is a process that needs the input of business. Planning for implementation Following the finalization of the BEPS project next year, the focus is likely to shift to the countries themselves. There is an opportunity now to plan for that period, to maximize the benefits to all. These plans should include two key focal points: Greater investment into tax administration: The focus on the international tax regime is going to result in more situations where countries initially disagree with how profits are allocated cross-border. From a business perspective, it will be important that these disagreements be resolved quickly, so that focus can remain on the business rather than dealing with disagreements between governments. To this extent, the BEPS project needs to be followed with greater investment in resources for tax administrations to support the Mutual Agreement Procedure and arbitration. Commitments to consistent implementation: Inconsistent implementation is also a key source of risk. Published plans for implementation will help ensure that changes are clearly communicated. In conclusion, much effort and hard work has gone into the BEPS project to date. The next stage, however, is the most difficult one, where principles are converted into practical change. In these times, more than ever, we all need to be working closely together if we are to create a better working world for all stakeholders. Engaging First, it is in everybody’s interest, taxpayers, tax advisors, tax authorities and other interested parties, that all these stakeholders work together. One stated aim of the project is to produce a more coherent cross-border tax architecture, reducing the scope for both double taxation and double non-taxation. While the need to maintain fiscal sovereignty means that any international tax system will necessarily remain a patchwork of the systems of the individual countries, the project aims to strengthen the “stitches” that connect the fabric. The resulting proposals and tax architecture should recognise the needs of all parties. To date, there has been extensive consultation and the BEPS papers have been amended in response to some of businesses’ concerns. This engagement needs to continue as, whatever the final conclusion of the governments, the proposals need to be able to work in practice and therefore how these would, or could, work when translated into national legislation needs to be fully considered. Businesses, and those advising them, need to work closely with policymakers to reconcile the BEPS project’s aspirations with the practicalities of businesses operating across borders. Risk of disputes rising Second, there are significant risks in implementing changes of this nature. As highlighted by EY’s 2014 Tax Risk and Controversy Survey, many businesses as well as legislators are expecting many more disputes to arise as a result of the changes being contemplated. This is perhaps not surprising, as any tax change will create uncertainty when first implemented. But the work undertaken on BEPS offers an opportunity to get potential areas of dispute addressed earlier, not later. Resources, focus and prioritization all need to be put in place to head off, or at least reduce, the impact of major disputes. Failure to do so risks undermining the intended aims of the project, to both business and governments. Beyond BEPS Beyond the BEPS discussions themselves, there are a number of other expectations and concerns that need to be managed, both at a global level and by the individual governments. Not everyone, for example, is waiting for the OECD to complete its multilateral BEPS work, and the work so far has been a catalyst for change in both tax policy and its administration by some countries. These changes include policy revisions in the areas of interest deductibility, hybrid instruments, transfer pricing documentation and controlled foreign company rules, while on the administration side many companies report that some countries are applying future BEPS concepts to previously executed transactions. While countries might justify their actions on a case-by-case basis, these Delivering the international tax system of the future, together The tax world has been actively following the G20/ OECD Base Erosion and Profit Shifting (BEPS) project since it was first suggested. As the project moves forward, all stakeholders need to keep in mind a number of crucial points. Chris Sanger, Global Head of Tax Policy, EY, Ernst Young LLP Disclaimer - The views refl ected in this article are the views of the author and do not necessarily refl ect the views of the global EY organization or its member fi rms. OECD Secretary General Angel Gurría and Pascal Saint-Amans, director of the Centre for Tax Policy and Administration present the fi rst recommendations under the OECD/G20 Base Erosion and Profi t Shifting Project IMF Managing Director Christine Lagarde with South Africa's Finance Minister Nhlanhla Nene at the G20 Finance Ministers and Central Bank Governors meeting in Washington DC
  12. 12. Restoring integrity of tax systems – a taxing crossroad Restoring integrity of tax systems – a taxing crossroad It may be argued that the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) has two main complementary objectives: The first main objective is the elimination of international tax avoidance and evasion schemes (specifically those labelled BEPS and integrity of tax systems Restoring integrity in tax systems will be difficult to achieve. Extensive as the Action Plan on BEPS may be, it is unlikely that it will result in tax systems that the public, media and civil society will accept as being truly proportionate, equal, neutral and impartial (and thereby that companies are paying their fair share of taxes). This is more so because (aggressive) tax planning cannot be entirely eliminated as countries continue to design their tax rules with competition in mind, and what is a “fair share of taxes” will remain subjective and a matter of perception. Some stakeholders appear to have rejected, for example, the long-standing legal notion in tax law that “anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes”. There is now a clear public demand for companies not as “aggressive”) that thrive on identifying and exploiting the legal opportunities available to multinational enterprises. This objective, apart from its multilateral scale and scope, is not completely new. Countries have always been quick to close tax loopholes whenever they have been identified, just as tax advisers and taxpayers have been quick at only to pay their taxes, but to increase the amounts payable. To satisfy this demand will be a tall order, however, mainly for the proliferation of legal bases that allow companies to do exactly the opposite. Integrity of tax systems and developing countries The G20’s tax agenda includes a commitment to international tax cooperation to protect the integrity of national tax systems by: (1) addressing tax avoidance, particularly BEPS, to ensure profits are taxed in the location where the economic activity takes place; (2) promoting international tax transparency and the global sharing of information; and (3) ensuring that developing countries benefit from the agenda, “particularly in relation to information sharing”. One wonders why developing countries should only “particularly” benefit in relation to information sharing. In a global economy, a more active involvement also of developing countries ought to be critical to the success of the Action Plan. Emphasizing tax information exchange with developing countries alone may not sufficiently address international tax avoidance and create integrity in tax systems globally. It is mainly due to globalization that most of the tax avoidance schemes that the Action Plan identifying and exploiting them. The second main objective of the Action Plan on BEPS is to restore integrity in tax systems. According to the Action Plan, base erosion and profit shifting undermines the integrity of the tax system because “the public, the media and some taxpayers deem reported low corporate taxes to be unfair”. on BEPS seeks to address are possible and leaving out developing countries would undermine the effectiveness of proposed solutions under the Action Plan. Murky waters ahead Achieving a level of integrity in global tax systems that is acceptable to all stakeholders will be challenging. We are not dealing with an exact science. Indeed, restoring integrity of tax systems will in most cases mean ensuring that companies pay their “fair share of taxes” by curbing international tax avoidance and evasion. But in some cases it may simply require that authorities walk a tightrope and address the public, media and civil society’s perception of what is a “fair share of taxes”. In wading the murky waters ahead, the International Bureau of Fiscal Documentation will be there to provide its independent tax expertise and also document this unprecedented transition. Kennedy Munyandi Team Manager Afr-ME-Latam, IBFD Rietlandpark 301 1019 DW Amsterdam P.O. Box 20237 1000 HE Amsterdam, The Netherlands Tel.: +31-20-554 0100 (GMT+1) Email: info@ibfd.org IBFD, Your Portal to Cross-Border Tax Expertise Some stakeholders appear to have rejected, for example, the long-standing legal notion in tax law that “anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes”. (Billings Learned Hand) Restoring integrity of tax systems - a taxing crossroad
  13. 13. 24 T R A D E F I N A N C E T R A D E F I N A N C E 25 “If you are looking for a safe environment to retire and or to start up a business offshore in a more relaxed, safe and highly modern business environment then Vanuatu is the country that you should consider” Brief country background Vanuatu consists of a“Y-shaped” chain of more than 80 islands that is located about 1,750 km east of Australia, 500 km north east of New Caledonia and west of Fiji and south of Solomon Islands. The country’s total land area is approximately 12,200 square kilometers and the territorial waters cover 450,000 square kilometers. Despite its small size (population and land mass), it is a developing nation with great investment opportunities. The country gained its Independence from Britain and French in 1980 and self-governed itself under a Parliamentary democracy political system headed by a President, a Prime Minister (the head of the government) and 52 elected members of parliament. Vanuatu is ranked amongst the top tourist destinations in the Pacific island region. Recently it was voted twice as the happiest place on earth by the Lonely Planet Index. Vanuatu has a positive economic environment and outlook Vanuatu’s economy is sound amidst the current challenging global economic conditions, thanks to the strong macroeconomic and policy buffers of the authorities. The IMF’s latest assessment of the country’s performance (2013 Article IV Consultation Review ) showed that despite the lower level of aid and public investments, the country’s per capita growth is higher compared to the other Pacific Islands. Inflation level is maintained within a 0-4% range of annual growth of the CPI, country reserves are maintained well above the four months of import cover and the country’s public Debt to GDP ratio is low compared to the region and by international standards. 2014 real GDP growth is projected at 3.6 percent and is expected to gradually pick up in the years ahead, supported by the large donor infrastructure funded projects. Government policy fully supports domestic investments and growth There are a lot of untapped investment opportunities in the country’s agriculture sector, tourism industry, ICT and telecom sector and more. IMF in the same assessment above stressed that critical infrastructure investments both from the government and private sector are needed to enable the country develop these sectors to allow the country realize its full potential. The Government recognises this critical area and has taken steps in recent years through the close cooperation and support from the donor communities to address them though its Policy Action Agenda. Earlier deregulation in the telecom and aviation sectors has boosted growth and improve the business environment but more remains to be done. A number of donor/ government large infrastructure projects will kick off in 2015 and onwards that will improve the investment climate of the country . Vanuatu is currently ranked 59 in the ease of doing business ranking, way higher compared to some of its peers in the region. The Vanuatu government recognizes the need to enhance and sustain private sector led economic growth with its benefits distributed equitably within Vanuatu. Stable financial system Vanuatu’s financial system is stable and sound. Fiscal finances are strong, the domestic financial sector players mainly the four commercial banks (consisting of the subsidiaries and branches of the big names in the South Pacific region and Europe) operate under a competitive and well regulated environment. The country presents one of the well-known offshore centers in the region that continue to attract legitimate and genuine investors. The Vanuatu government continues to cooperate and take important steps in ensuring that the Vanuatu Offshore center continues to fully comply with the international requirements on AML issues and other supervisory standards. Banking sector offers many of the modern facilities that are comparable to many modern economies around the globe. The benefits that Vanuatu offer as a Tax Heaven are (i) Tax-friendly environment (ii) no income or company tax (iii) no capital gains tax (iv) no estate or death duties and (V) no foreign exchange controls. Vanuatu has a strong supervisory regime The Reserve Bank of Vanuatu (RBV) plays a very critical role in the safe and sound operation of the financial system of the country. The Bank regulates and supervises the business of the domestic banks and offshore banks under the provision of the RBV Act , the Financial Institution Act, International Banking Act and a number of other legislative requirements. In carrying out this important role, the Bank follows internationally recognized supervisory methods and standards (licensing, offsite and on-site supervision). Failure measures by banks and insurance companies declaring bankruptcy in Vanuatu is zero or near nothing because of this stringent approach. Vanuatu is a member of the Asia/Pacific Group on money laundering and counter terrorist financing in the Asia/Pacific region and is committed to continue to improve its measures to combat money laundering and terrorist financing. Vanuatu is committed to its international obligations and has enter into 14 Tax information Exchange Agreement with other jurisdictions. Financial institutions are taking a active role in addressing inequality and poverty Vanuatu is embracing financial inclusion to address inequality and poverty, and simultaneously promote financial stability and inclusive economic growth. The Authorities are increasingly conscious of the importance of improving access to finance the unbanked population, including for the low income households so as to improve their welfare and enable them to engage in activities that will support economic growth. However, achieving financial inclusion in an island country like Vanuatu is a huge task given geographical challenges, underdeveloped infrastructures and low financial literacy levels but positive outcomes are already showing and the government is fully committed to this. Vanuatu has modernized its Vatu currency note series Reserve Bank of Vanuatu issued in June 2014 three new banknotes in polymer (200, 1000 and 2000 Vatu banknotes). This modernized the currency family series of the country after 30 years in paper note substrate – placing the country amongst the latest in the world to modernize its currency and improved its image globally. The design style of these latest releases follows the 10,000 Vatu denomination that was issued in polymer in 2010. The two last denominations that remain to be issued and complete the series in polymer are 5000 and 500 Vatu notes. Vanuatu: discover what matters Simeon Athy, Governor, Reserve Bank of Vanuatu 1Vanuatu and Fiji successfully linked the submarine optical fi bre cable (1,250KM) investment (US$ 30 million) between the two countries and Vanuatu to the world in January 2014. The high speed internet connection opened the door for e-commerce, e-education, e-government etc improving the investment climate of the country. 2Construction of the main wharf to accommodate the high infl ux of tourist cruise ships arrivals and wharfs around the islands for trading, the inter-island shipping, Port Vila roads, drainage and sanitation, Port Vila sea front face lift /beatifi cation, international airport upgrades, Malekula and Tanna Islands roads and more.
  14. 14. 26 T R A D E F I N A N C E T R A D E F I N A N C E 27 competition to carry out these low-skilled tasks is often intense. Upgrading to higher value-added tasks can enable developing countries to capture more benefits but can be difficult and costly to achieve. In addition, when competing for the investments that many countries require in order to participate, developing countries can risk being drawn into a race to the bottom on regulatory standards. Third: the surge in agricultural and natural resource prices over the last decade, and the growing importance of commodity exports. This shift has bestowed significant gains on those developing countries that are in a position to export commodities. Although the risk of a reversal cannot be ruled out, the state of global demand — and especially the strong demand from emerging economies — suggests that prices of agricultural goods and natural resources will remain robust in the foreseeable future. This means that the agricultural sector, which employs more than half of the labour force in developing countries, can continue to play a critical role in lifting people out of poverty. This role could be strengthened if remaining obstacles to agricultural exports were reduced, including lowering tariff barriers and distortive subsidies globally. Fourth: the increasingly global nature of macroeconomic shocks. While the crisis of 2008-2009 had its roots in the financial markets of a number of developed countries, the impacts were felt globally. A sharp reduction in trade and investment flows, exacerbated by a fall in aggregate demand and the drying up of trade finance, helped transmit the economic shocks to producers and traders in developing economies. However, the fact that we did not see an outbreak of protectionism on the scale experienced in previous crises meant that a significantly worse fall in international trade was averted. Some trade restrictions were put in place during the crisis, but neither developing nor developed countries systematically raised trade barriers. The WTO’s rules-based system and its monitoring of members’ trade policies played a crucial role in keeping protectionist responses under control. Ultimately, the coordinated response combining macroeconomic stimulus with a commitment not to introduce protectionist measures was critical in pointing the way back to growth and in safeguarding the development gains that were made in the period before the crisis hit. In considering how the system should respond to these trends, it is useful to note how both trade and the WTO have been contributing to economic development during this period. Foremost, the WTO provides a trading environment with clearly defined rules. At the same time, it allows developing countries to take advantage of flexibilities in implementing their commitments. As a result, it has supported wider integration into global value chains, allowed developing countries to take advantage of rising commodity prices, and helped resist the adoption of protectionist measures during the global crisis. The changes we have seen during this period underline the fact that an open, predictable, non-discriminatory, rules-based multilateral trading system will be a necessary tool to make trade work more effectively for development in the future. However, while some developing economies have made significant progress in recent years, much still needs to be done to close the gap for many poor economies. In this sense the WTO’s work is even more crucial. In December 2013, WTO members took a series of decisions in Bali that will help poor countries realize their export potential and sustain the development momentum created in the past decade. This was an important moment, but of course we need to properly implement those results and conclude other negotiating endeavours before us. Indeed, the scale of the changes in the relationship between trade and development since the millennium underlines the importance of further updating the WTO’s rules, disciplines and flexibilities. It will be essential that we do so if we are to ensure that all countries are able to participate fully in the global economy in the years to come, and that people all over the world are able to feel the benefits of trade in improving their lives and the prospects of their families and communities. In this context the role of the G20 in promoting trade and strengthening the multilateral trading system is more important than ever. Since then we have seen strong evidence of how trade, as a critical component of economic growth and development, can make a positive difference in people’s lives. Rapid economic growth in many developing economies has been combined with deeper integration in the global trading system, helping to boost per capita incomes and set the stage for future growth. It is essential that trade, through the multilateral system, should continue to play this role. However, the period since the millennium has also seen an evolution in the challenges of development and the emergence of new trading patterns and practices. If trade, and the multilateral trading system, is to continue playing this positive role it is important to consider how the interplay between trade and development has changed – and how the system needs to respond. There are a number of trends which have altered the way that trade affects development outcomes. First: the accelerated economic growth in developing countries since the start of the millennium. Average rates of The role of the G20 in promoting trade is more important than ever Roberto Azevedo, Director-General, WTO economic growth have tripled compared to the 1990s, although there is marked variation from country to country. The growth trajectory seems to be in line with long-term historical experience, including that of Japan and the newly-industrialized economies in East Asia, suggesting that once a catch-up process commences, rapid development is possible and has the potential to push incomes toward developed country levels. In each of these cases, rapid growth has been accompanied by increasing trade flows, which in many instances were preceded by the lowering of tariff barriers. This gives rise to a number of development challenges, such as how to initiate catch-up processes in those countries still left behind, or how to ensure, once growth begins to accelerate, that it is inclusive and sustainable. Recent experience has shown that while growth can lead to improvement in human development indicators, better environmental outcomes or a more equitable distribution of income do not automatically follow. Second: the expansion of global value chains. Global value chains are not a new phenomenon, but they have expanded and deepened significantly in recent years, offering greater opportunities for developing countries to integrate into the global economy at lower costs. Tasks that were once performed in a single factory or country are increasingly divided up between different countries to take advantage of their different skills and cost advantages. This allows countries to export by mastering certain specific tasks or manufacturing certain components instead of the entire final product. Over the last decade developing countries have increased their involvement in global value chains and South-South chains have become more important. However, access to global value chains is not automatic, and unlocking their development potential can pose a series of challenges for developing countries. A country wanting to integrate into these production chains needs already to be at the cusp of producing at globally competitive levels of quality and efficiency. In practice this has meant that some are not able to participate meaningfully in global value chains, with many least-developed countries being left behind. While initial integration into the lower end of value chains typically triggers productivity improvements, The G20 first met in 1999, on the eve of the millennium. Its creation anticipated a great shift in the global economy – a shift in which trade would play a major role
  15. 15. 28 T R A D E F I N A N C E T R A D E F I N A N C E 29 The financial crisis has disillusioned investors in many ways. One painful experience was that some institutions that were once trusted, now no longer have investors’ trust. For example, commonly used benchmarks, such as money market rates for the euro - Euribor - and the British Pound – Libor - lost their reputation as an accurate measure of short-term interest rates when they were manipulated. However, neutral index providers have developed solutions that address these lessons learned from the financial crisis. One of them is the secured money market that has been growing dynamically since the financial crisis, and provides an alternative to interbank trading. Based on this market, sound and objective benchmarks have been developed that provide a new, accurate and objective metric for the money market. The suspected manipulation of key money market benchmarks during the financial crisis triggered regulators to define criteria for the calculation of all indices independent of the asset class and markets they replicate. The proposals by the European Securities and Markets Authorities (ESMA), the European Banking Authority (EBA), the European Commission and the International Organization of Securities Commissions (IOSCO) include a wide range of considerations, among them the scope and definition of benchmarks, the establishment of control and oversight as well as rules for the administration and reporting of benchmarks. Of course, the key focus should be the avoidance of any conflicts of interest, as this is the main driver for all manipulations. Neutral index providers are by nature best positioned in this respect, as they, by definition, are not subject to conflicts of interest – they are not a user of the index. Needless to say, well-established indices from neutral index providers for equity markets have never been subject to manipulations. Regulators however do not differentiate between subjective and objective benchmarks but also apply the same rules to strictly rules-based indices that are created based on transaction data from exchanges (“objective indices”). Subjective benchmarks, such as money market rates, are typically not based on market data but on contributions from a panel or other non-market data. Thus they are less transparent and more likely to be manipulated. In contrast, objective indices usually already provide the key characteristics essential for stable and reliable benchmarks in the interest of all market participants. Firstly, the indices are calculated in a reliable and transparent manner as the index methodology is disclosed. In addition, their sources are publicly available and transparent as these indices are based on market data. Secondly, conflicts of interest are prevented, since neither the data provider nor the index provider benefits in any way from the index. As a result, independent index providers have no incentive for any manipulation, which would put their business model – which is based on reliable data and the trust of market participants – at stake. Finally, many innovative benchmarks are based on such objective and strictly rules-based indices and help improve the efficiency of financial markets and support investors in many of their key challenges. One of the most recent examples of such innovative benchmarks is the STOXX GC Pooling index family that provides investors with a money market rate based on reliable market data and addresses the key requirements regulators have outlined for sound indices. The newly introduced STOXX GC Pooling index family is independently calculated based on an objective and transparent methodology. Moreover, the indices reflect the development of a very liquid market and thus provide an accurate metric for the overall money market. The underlying GC Pooling market has One of the most recent examples of innovative benchmarks is the STOXX GC Pooling index family that provides investors with a money market rate based on reliable market data grown in recent years to a volume of up to 180 billion euros with on average 3,000 transactions on the platform. More than 120 market participants from 14 countries are connected to the platform. The secured money market is attracting volume from the unsecured money market as it addresses key concerns raised during the financial crisis. Firstly, trading on the GC Pooling market takes place via a central counterparty (CCP), i.e. each participant is only trading with the CCP, and thus counterparty risks that were one reason for the breakdown of interbank trading during the financial crisis are mitigated. Moreover, the CCP nets all positions in the settlement process and thus helps reduce transaction costs. The obligatory collateralization of each position that is centrally and automatically managed also reduces credit risks. There are three different baskets of securities eligible for collateralization, two of them reflecting requirements of the European Central Bank (ECB), which can also be used for refinancing directly with the central bank. In late 2014, the first financial instruments based on the STOXX® GC Pooling EUR Deferred Funding Rate will become available. A new futures contract listed on Eurex will support the risk management of banks and other market participants. This is a good example of how independent index providers can create innovative solutions, which meet high regulatory standards and investors needs in a business environment altered forever by the financial crisis. An objective benchmark for the money market Dr. Hartmut Graf, CEO, STOXX Ltd
  16. 16. 30 T R A D E F I N A N C E T R A D E F I N A N C E 31 Why should sustainable investing be a priority in 2014? Climate change, resource constraints, environmental degradation and social and economic inequality are just some of the challenges that we now face. Simple acknowledgement of these challenges demonstrates that prevalent economic growth models are not working. We stand at a point in time when investors can be a force for positive change. Investing approaches are integral to economic growth, with investors having immense influence as the decision-makers over how much of our capital is employed. Creating a transformative shift… However in order to achieve this, investors must think beyond financial return and to the broader impacts that economic activity can have. Today’s economic circumstances necessitate such a shift. The Global Financial Crisis of 2008 bore witness to the challenge at hand – imploding asset bubbles, accounting scandals and serious governance lapses have drawn attention to the fact that financial market actors are often driven by short-term goals and fail to maintain a long-term perspective that looks beyond the next financial year. We need investors to think in terms of 10, 20, 30 years and beyond – and this shift in mindset needs to be mainstream. What happens next – leveraging the power of sustainable investing? One of the central challenges to be addressed is the need for existing capital market structures to be reformed, to facilitate better capital allocation and better understanding of risks. Through financial market reform – on a national, regional and international level - the concepts of prudent financial risk management and long-termism can be defined in the language of investment professionals and embedded in the governing regulatory frameworks. With greater policy certainty and regulatory structure, the investment industry can be incentivized to develop the appropriate tools and techniques required to quantify and manage the risks we face: risks associated with climate change, social dynamics, sustainability issues, risks that have often been ignored and deemed too difficult to define. Our markets require a framework through which to adequately price these risks – and this must begin with pricing externalities and valuing natural capital. Basic economics tells us that our markets have been operating inefficiently, with our insatiable demand for ‘free’ public goods, without acknowledgement of the real costs that this incurs to society. Governments should send the right policy signals by putting a price on carbon and removing fossil fuel subsidies. Emerging trends – positive developments are occurring… In 2012, the Global Sustainable Investment Review (published by the Global Sustainable Investment Alliance, of which ASrIA is a founding member) found that globally at least US$ 13.6 trillion worth of professionally managed assets incorporate environmental, social and governance concerns into their investment selection and management. This represents 21.8 percent of the total assets managed professionally, indicating that sustainable investing is becoming a viable force for change. Geographically, this is highly varied – with greatest traction in the North American and European markets – but with the greatest opportunity in emerging markets, and Asia in particular. Positive trends are emerging. For example, increasing pressure from all corners on disclosure, reporting and transparency is facilitating financial market reform. Better information will allow investors to make smarter investment decisions. Debate on key issues such as fossil fuel investment is becoming increasingly heated and finally investors and policy-makers are beginning to take note. Sustainable investing – steps to support the vision for the future? There is a long way to go – but, through leveraging sustainable investing as a driver for positive change, much can be achieved. In order to create this vision for the future, leadership is required. So what steps can be taken to support this? Policy-makers should focus on aligning the financial system with the needs of the ‘real economy’ – in particular, to ensure that investors and other market actors look ahead to the next 20 to 50 years; Greater emphasis should be given to educating investors – whether institutional or retail – on the types of investment opportunities that exist; Focus should be given to scaling up investor holding of long-term assets, particularly infrastructure investments, by lowering cost of capital and facilitating longer term debt; Investors should be encouraged to facilitate corporate change through mechanisms such as shareholder engagement, asset allocation and credit policy; and Policy reform should reflect changing societal values, facilitating long-term objective setting with policy practices and financial instruments that underpin this. Sustainable investing requires a re-setting of market mechanisms to recalibrate the decision-making process governing the use of economic capital. Sustainable investing is about sound risk management – but more than simply improving risk-adjusted performance, sustainable investing can provide a response to the unsustainable economic and industry trends of recent years, to result in a better tomorrow. Jessica Robinson, Chief Executive Officer, Association for Sustainable and Responsible Investment in Asia (ASrIA) Creating lasting societal change – change that dramatically improves the lives of the majority – requires rapid and transformative action in the way in which we use economic capital. Capital can and should be put to efficient and effective use in reshaping the way we do business, the way we grow, the way we live our lives. Sustainable investing must be at the heart of this. What is sustainable investing? With roots in ethical investing approaches, sustainable investing requires economic and investment decisions to be made on a set of values that reflect long-term priorities and sustainability concerns. Historically, sustainable investors have been a force for positive change through developing inclusive mandates that, whilst seeking to invest for a financial return, include explicit consideration of non-financial returns. Where sustainable investing has gained the most traction – largely in North America and Europe – sustainable investors have helped improve the environmental, social and governance practices of many companies. The role of sustainable investing as a driver for change
  17. 17. 32 T R A D E F I N A N C E T R A D E F I N A N C E 33 ILO Director General’s address on G20 labour markets The Director-General of the ILO, Guy Ryder, joined the G20 Labour and Employment Ministerial Meeting held in Melbourne in September 2014, during which the ILO presented a number of reports on employment issues that have been prepared to inform the Ministerial discussions Thank you for the floor, Minister Abetz, and thank you for the opportunity to present the joint work that the ILO, OECD and World Bank have been undertaking together over the course of this year at your request and in response to the call by G20 Leaders last year for each G20 country to develop growth strategies and employment action plans. It won’t come as a big surprise to any of the Ministers here that despite the efforts made, current employment challenges remain substantial for all G20 countries. Looking at the slide (below), you can see that large employment gaps opened as a result of the financial crisis that broke in 2007 and remain significant in most G20 countries. Jobs gaps in G20 compared to pre-2007 trend Our projections of the future trend, based on IMF growth projections, is that the gaps will remain large in advanced G20 countries at least to 2018 and indeed may even widen. That said, in the last 12 months, the majority of the G20 countries have witnessed a modest reduction in the unemployment rate. These positive developments were largely due to welcome net job creation, especially in the United States, but in some cases they resulted at least in part from declines in the labour force participation rate. This has to be noted while recalling that the rate of youth unemployment declined in many countries but still remains at historically high levels in others. In the emerging G20 countries, jobs gaps are not as wide as an industrialized countries but the prospect of closing the gaps in the next five years is not very promising under current growth trends. Jobs gaps in G20 compared to pre-2007 trend And those overall growth trends do not give much cause for optimism at the moment. Despite a modest economic recovery in 2013-4, economic growth is expected to remain below trend over the foreseeable future. The G20 jobs gap in 2012 was about 55 million. The ILO estimates that the gap will continue to widen until 2018, reaching 63 million that year. “Jobless growth” Furthermore, the employment intensity of growth has also been weakened in many countries. This figure shows that even very high growth rates in China, India and Indonesia have not produced comparable growth in employment. Except for Turkey, Mexico and Germany, all of the other G20 countries that did grow saw lower rates of job growth than economic growth. In addition to the sheer size of the jobs gap, then, there are clearly specific employment problems facing G20 economies. Long-term unemployment has grown in many countries *Selected urban areas. Q3 2007-Q3 2013 for the Russian Federation; and Q1 2008-Q1 2014 for South Africa In over half of the G20, the share of long-term unemployed has increased as a share of total unemployment, in some cases dramatically. These unemployed face daunting re-employment odds. Particularly sharp increases took place in Spain as well as in the United States, and countries such as Italy and South Africa have seen further increases in already high long-term unemployment rates. However, some declines were recorded in Brazil and the Russian Federation and to a lesser extent Turkey and, although from a high base, also in Germany. The median value of long-term unemployment as a share of total unemployment had risen to 30.2 per cent by the first quarter of 2014, up from 24.6 per cent at the end of 2007. In several countries, the challenge of long-term unemployment, and unemployment more generally, is particularly acute among youth. The next slide addresses one element of the quality of employment, that is the issue of informality. Informal employment is high in emerging economies 1. Corresponds only to persons employed in the informal sector 2. Six cities only In a number of emerging G20 economies, the biggest challenge lies in moving the labour force out of low productivity, low wage informal employment and underemployment. This slide shows, disaggregated by gender, the high levels of informality in many emerging G20 countries. In addition, we have observed an emergence of informal working relationships even in the formal sector in some advanced G20 economies. Coinciding with the sizeable jobs gap we looked at is a deterioration in job quality in a number of G20 countries, and here we look at the behaviour of real wage rates. Real wages have stagnated across many advanced G20 economies and even fallen in some. Weak economic recovery has led to weak wage growth, especially in advanced economies
  18. 18. 34 T R A D E F I N A N C E T R A D E F I N A N C E 35 wage growth policies, such as minimum wage increases and collective bargaining, in order to rebalance their sources of growth toward more domestic consumption and to address inequality and working poverty. The lower of the two tables shows that in twelve G20 countries the ratio of the minimum wage relative to the average wage has increased, reflecting recognition of its role in alleviating working poverty and boosting household income and consumption. The US, Germany and Saudi Arabia, among others, have also launched initiatives to establish or increase minimum wages in order to address working poverty and inequality. Japan has encouraged significant wage increases through collective bargaining and other wage setting processes as a key component of its effort to fight deflation. Ministers, many G20 governments have also addressed the crisis through increased spending and coverage of social protection. Income-led strategies (II): social protection On the left side of the graphic are emerging countries. Notable expansions occurred in Argentina, Brazil, China, Indonesia and Mexico, for example through non-contributory “social” pensions for low-income households and cash transfer programmes. India established a highly successful national rural employment guarantee that directly provides job opportunities in rural areas to build infrastructure and an income floor for vulnerable households. And South Africa created a public employment programme to address high unemployment and poverty. Such programmes also helped to prevent declines in household consumption and thus helped to sustain aggregate demand and prevent further declines in economic growth and employment. There is also evidence that well-designed systems of income support can help the unemployed search for jobs and ensure a better match with their skills, resulting in more productive and sustainable employment. In advanced G20 countries, shown on the right, total income support to the unemployed generally rose in line with the number of jobseekers. Expenditures on unemployment benefits thus acted as an important stabiliser by limiting the negative impact of the crisis on household incomes. Somewhat by contrast, and I would say unfortunately, expenditure on active labour market programmes failed to keep pace with the rise in unemployment in many countries following the start of the crisis, despite their potential benefits in re-integrating job seekers into employment. But support for active labour market programmes has declined in advanced G20 For the EU and for the OECD area as a whole, real expenditure on such policies per unemployed person fell by 20% and 18%, respectively, over the period from 2007 to2011. Colleagues, finally let me just say a word in response to the wise exhortation from our Australian hosts this year to look in particular for policies that generate positive spillovers. And in terms of the policies I have been discussing, there are potentially strong spillovers from increasing incomes and household consumption in many G20 countries at the same time. This can be achieved through policies for higher wages -including minimum wages and collective bargaining - and through social protection systems that act as automatic stabilizers and discourage excessive precautionary saving. It is also important to recognize that coordinated policy to lift incomes avoids the trap of a low-wage competition rather than competition through comparative advantage, specialization and increased productivity. The demographic transition can also generate positive spillovers, provided that labour mobility is facilitated through rational, balanced and fair migration policies and appropriate skills development in sending countries. Colleagues, Ministers, Certainly there is no room for complacency, but there are I hope some reasons for optimism at this fifth G20 meeting of Labour and Employment Ministers. I look forward to our debates and conversations. Thank you. On average, the crisis brought down the growth rate of average real wages to about 1 to 2 per cent. That modest growth was attributable almost entirely to emerging economies, particularly China, while wage growth in advanced economies has been fluctuating around the zero mark since 2008 and has been negative in some countries. The reflection of that is the decline in the labour share of income observed in most G20 countries over recent decades, which has continued in some while in others it has stagnated. The share of GDP going to labour continues to decline in almost all G20 countries This is a long-term structural problem, a “legacy vulnerability” which was revealed by the crisis but has been decades in the making. Its persistence over recent decades demonstrates that it is a problem that won’t go away on its own; it must be addressed by specific policies. And it is a problem affecting nearly all G20 economies, both current account surplus and deficit countries. The next graphic shows that the declining labour share cannot be attributed to lack of productivity growth. Wage growth has significantly lagged behind labour productivity growth in most G20 countries, and particularly in the advanced G20 countries. Labour productivity has grown faster than wages, especially in advanced G20 In the light of this rather negative news, it’s encouraging to look at one very positive note in recent developments which is that working poverty has declined in many emerging G20 countries, most notably China. Some good news: working poverty has continued to decline in the emerging G20 The aqua coloured band on the bottom shows the decline in extreme working poverty (less than $1.25 per day) and the grey band above it shows the decline in moderate working poverty, and so on. The question is can this trend be maintained and improved, in current circumstances? Colleagues, I would like to turn now from the main trends and outlook for the G20 labour markets the policy responses we have observed. And indeed policy efforts in many G20 countries, particularly emerging ones, have sought to address wage stagnation, income inequality and the vulnerability of low income households, through measures such as minimum wages and social protection. Income-led growth strategies (I): labour income This slide illustrates developments based in part on wage policies, including minimum wages. China has significantly raised minimum wages. Russia, South Africa, Brazil, Argentina, Indonesia and Turkey have pursued a range of

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