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No Old Person Left Behind?

October 1, 2014
by Guest author
"Time is on my side" claims Sir Michael Philip Jagger, 71

“Time is on my side”, explains Sir Michael Philip Jagger, 71

Today is the UN International Day of Older Persons and the theme this year is “Leaving No-One Behind: Promoting a Society for All”. Monika Queisser, head of the Social Policy Division in the OECD’s Employment, Labour and Social Affairs Directorate, argues that the best policy for older people must focus on the young.

What will matter to you in old age? A healthy body and mind, above all. But also a comfortable home in a nice place to live. Family and friends close by. And enough money to benefit from all those good things in life, like travel, books, movies and museums and the other pleasures one never has enough time to enjoy while working and bringing up a family.

Chances are that if you were fortunate enough to get good education and the skills you needed, and if you found and kept a good job, both in terms of pay and working conditions, your life in retirement will be pleasant. Even if you need long-term care and personal help, you are likely to have access to good quality services because you are insured and you can pay for them.

But what about those among us who had a less fortunate start to their working lives, who lost their jobs once or more during their active years, who worked part-time and were paid little, who had physically demanding jobs taking a toll on their health? For all these people, retirement and old age risks being much less enjoyable.

OECD data from Pensions at a Glance 2013 show that today, the majority of pensioners enjoy as good living standards as the average population. Of course, this is not the case for everybody, but at the moment, elderly groups are the least unequal part of the population. This is not surprising: most of today’s retirees, at least men, have worked all their lives in stable jobs. However, a “job for life” and even a “career for life” are rare commodities for people starting out today. These future retirees will be a much more diverse group, some will have experienced long spells of unemployment and low wages, while others continue to enjoy stability and higher earnings. Capital income, such as interest from savings, shares and other investments, is more concentrated and the gap between high earners and low earners is widening.

Poorer people are also less healthy and die younger than rich people. Many of the future elderly may move into older ages with disabilities, in bad health, and a limited ability to keep working and contributing to society. The experience of old age for today’s younger generations could change dramatically compared to their parents, with improved living standards and a longer life for some, and a shorter, sicker and more poverty-ridden life for others.

Society should tackle increasing inequality as populations age. Apart from a moral imperative not to leave older persons by the wayside, there are also hard economic reasons why letting unequal ageing happen is bad policy. A growing divide in the well-being of older people will increase the stress on social protection. And it will jeopardize the effectiveness of recent reforms of labour markets, pension and long-term care systems. Governments could make substantial savings if income, wealth and health inequalities were picked up earlier and tackled as they occur.

Today’s young people are the older people of tomorrow. The best policy for older persons is a policy that addresses problems when they start. Asking social protection and health systems to fix the situation late in life is not the best option – systems are ill-equipped to compensate for everything that went wrong during a working life if they wait until the problems have accumulated. Identifying and tackling risks as they arise will enable governments to design sustainable and cost-effective policy approaches towards demographic ageing.

Youth unemployment is at record levels today in many OECD countries. This could have long-term consequences for young people’s future careers and well-being at all ages, including in old age. We need to give young people the best chances to realise their full potential. We need to rethink our systems of social protection to accompany people throughout their increasingly diverse life courses and thus make retirement a well-earned reward.

Useful links

OECD Action Plan for youth

OECD work on ageing and employment

Chapter 8 of OECD’s Health at a Glance 2013 is on Ageing and Long-term Care

 

 

Combating BEPS and making sure we have fair tax systems: An OECD/G20 Venture

September 29, 2014
by Guest author
Download the OECD/G20 BEPS Explanatory Statement

Download the OECD/G20 BEPS Explanatory Statement

Today’s post is by Pascal Saint Amans Director of the OECD Centre for Tax Policy and Administration and Raffaele Russo, Head of the OECD Base Erosion and Profit Shifting (BEPS) Project

Last weekend, the OECD presented its first BEPS recommendations to the G20 for an international approach to put an end to so-called “stateless income”. Seven “Actions” are being proposed, as part of a 15-point plan.

Ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralise hybrid mismatch arrangements (Action 2).

The basic idea behind hybrids is to have the same entity or transaction treated differently by different countries to avoid paying tax. A typical hybrid instrument would allow a company to treat something as debt in one country and equity in another. Hybrid transfers are arrangements that are treated as transfer of ownership of an asset in one country but as a loan with collateral in another. By playing off one country’s tax system against another, like children sometimes do with their parents when they try to get what they want, the most successful hybrids achieve double non-taxation – the company doesn’t pay tax anywhere.

Realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties (Action 6).

“Treaty shopping” is the most common form of treaty abuse. It generally refers to arrangements through which a person who is not a resident of one of the two States that concluded a tax treaty attempts to obtain benefits that the treaty grants to residents of these States. How? By setting up a shell company in one of the treaty States and routing investments through it. OECD and G20 countries have all agreed to reject treaty-shopping practices. Proposed drafts of a specific anti-abuse rule based on a “limitation-on-benefits” provision and a more general anti-abuse rule based on a “principal purpose test” have been unveiled to ensure that only “true” residents get the benefits of the treaty.

Assure that transfer pricing outcomes are in line with value creation, through actions to address transfer pricing issues in the key area of intangibles (Action 8).

Most world trade actually takes place within multinational enterprises, for example the headquarters in Germany paying a subsidiary in India to carry out research or manufacture components. This payment has to be at arm’s length to ensure that profits (or losses) are allocated among the different parts of the group in a fair and sound manner. How to apply the arm’s length principle in practice is detailed in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Easy in many cases, it may get extremely difficult, and subject to manipulation, when we are talking about intangibles, like famous brands, patents, algorithms or the like. Estimates of annual investment in intangibles in the United States alone are between $800 billion and $1 trillion, with a stock of intangibles of up to $5 trillion. Now, new guidance has been developed to align the transfer pricing rules with modern business.

Improve transparency for tax administrations and increase certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting (Action 13).

Countries have agreed that companies should report on a country-by-country basis certain key information, such as assets, sales and number of employees. This will provided tax administrations with a broad picture of the group structure and where profits are made and allocated for tax purposes. The focus can then be on those that engage in aggressive tax planning that separates the location where profits are made from where they are reported for tax purposes.

Address the challenges of the digital economy (Action 1).

The digital economy does not generate unique BEPS issues, but some of its features can exacerbate BEPS risks, such as the importance of intangibles, the mobility of users, network effects and multi-sided business models. (If you thought certain things, like an e-mail address, an app, a videogame, an Internet search, were “free”, look at how much money Internet advertising generates). It’s hard to say where certain activities or assets “are” for tax (and other) purposes. Depending on how you look at it, it could be on the computer of the user watching an ad, the firm paying for that ad, the server streaming it, the head office of the owner itself… Or take an off-line delivery service (pick your favourite): despite its considerable sales in a country like France, in theory, its French operation is only a delivery company processing orders for a firm based in (pick your favourite again). This ability to centralise infrastructure at a distance from the market and sell into that market from a remote location, generates potential opportunities to achieve BEPS. It does so by fragmenting physical operations to avoid taxation, especially when combined with the increasing ability to conduct substantial activity with very few personnel. One year from now, an agreement will be reached so that this will not be possible anymore.

Facilitate swift implementation of the BEPS actions through a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties (Action 15).

Even in the old economy, governments took steps to ensure that international taxation didn’t harm firms operating across borders. Many domestic and international rules to address double taxation of individuals and companies originated from principles developed by the League of Nations in the 1920s. The OECD has been working for years to help tax administrations and policy makers cooperate across borders. The OECD Model Tax Convention serves as the basis for the negotiation, application, and interpretation of over 3000 bilateral tax treaties in force around the world. Its Commentaries have been cited by courts in virtually every OECD member country, as well as in many non-OECD countries. Now change is coming in several key areas. But without a mechanism for swift implementation, changes to model tax conventions will only widen the gap between these models and the content of actual tax treaties. Such an implementation mechanism does exist, and it is a multilateral instrument. Difficult? Yes, but it is feasible, and developing it is necessary not only to tackle BEPS, but also to ensure the sustainability of the consensual framework to eliminate double taxation. So not only feasible, also desirable (at least by those like us who think change is needed).

Counter harmful tax practices (Action 5).

The OECD published a report on Harmful Tax Competition: An Emerging Global Issue in 1998, but 15 years later, concerns about the “race to the bottom” on the mobile tax base are as relevant as ever. The focus has shifted though. In 1998 a major concern was regimes partially or fully isolated from the domestic economy (“ring-fencing”). For example, this could take the form of giving firms resident status to avoid paying taxes in another country, but not allowing them access to local markets where they would compete with national firms. Today, across the board corporate tax rate reductions on particular types of income are of growing concern. To counter harmful tax practices more effectively, Action 5 commits the Forum on Harmful Tax Practices (FHTP) to revamp the work on harmful tax practices. Priority has been given to improving transparency, with the obligation to exchange information on rulings related to preferential regimes. The focus is now on requiring substantial activity for any preferential regime with a special focus on the “patent boxes” which are mushrooming these days. – regimes that subject certain IP income to a preferential rate of tax. Going further, the work will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.

Useful links

OECD Policy Briefs on BEPS

The OECD Action Plan on Base Erosion and Profit Shifting: A summary (OECD Observer)

You can contact the BEPS team at CTP.BEPS at oecd.org (replace ” at ” by @)

Pascal Saint Amans on fighting tax avoidance by multinationals

The climate is changing, so should we

September 23, 2014
by Patrick Love

UN climate summitThe UN Climate Summit opens today at UN headquarters in New York. The OECD’s Secretary-General, Angel Gurría, will be chairing the session on “The Economic Case for Climate Action,” where global leaders and world renowned experts, from China, India, Mexico and the United States will be discussing The New Climate Economy Report: Better Growth, Better Climate, by the Global Commission on the Economy and Climate.

The OECD Environment Directorate has produced two videos to explain key issues.

In this first one, Simon Upton, head of the Environment Directorate, discusses three things you need to know about climate change.

 

And this one looks at how to finance climate change action.

Useful links

OECD participation in the UN Climate Summit

OECD work on climate change

The lost decade: in search of “Social Europe”

September 22, 2014
by Guest author

EU social jsutice reportToday’s post was written by Craig J. Willy for the Bertelsmann Foundation which will also be publishing it.

The Bertelsmann Stiftung’s new EU Social Justice Index is unequivocal: social conditions, notably in terms of poverty and unemployment, have worsened in most EU countries since 2009, often significantly so. This reflects the financial and economic crisis, but also the eurozone’s response to it, as “the rigid austerity policies pursued during the crisis and the structural reforms aimed at economic and budgetary stabilization have had, in most countries, negative effects with regard to social justice.” The Index adds: “the cuts induced by the crisis are not administered in a balanced way throughout the population.” Only three countries – Luxembourg, Germany and Poland – have seen significant improvement in recent years.

Much of Europe appears to be settling into a “lost decade” characterized by high long-term unemployment and underemployment, and weak or no economic growth (indeed the eurozone experienced zero percent growth in the second quarter of 2014, while Italy and Germany shrank 0.2 percent). The poverty rate has risen 1.7 points to 25.4 percent, including 28 percent of children in the EU. Unemployment has reached notoriously high levels in many countries.

The Social Justice Index notes that even where there is low unemployment “the emergence of a dual labour market has been increasingly evident, with poor vertical permeability from ‘atypical’ employment relationships (enlarged low-wage sector, temporary employment) to ‘normal working conditions’.” Just as Western Europe’s unionized working class has shrunk enormously, its postwar middle class appears to also be declining.

The challenges of a multinational union

The EU has been attempting to address these problems and has had some success in stabilizing the eurozone, but European officials are painfully aware of the challenges in creating a genuine “social Europe” and addressing the flaws of the common currency.

The first problem is the difficulty in managing a multinational union: it is far easier to have public support for solidarity (risk-sharing, wealth transfers) and shared government (respect for common rules) within a country than between them. As European Central Bank (ECB) President Mario Draghi laconically noted: “The Dutch have a problem with paying for the Greeks, but not with paying for other Dutch.”

The second problem is institutional: the EU and eurozone are not a federal state or a genuine government which might decisively tackle issues one way or the other. Instead, one has to work with rules laid out in the European Treaties, with any necessary changes to account for new problems requiring unanimity among national governments and legal creativity. This leads to a lot of procrastination on the road to consensus and brinkmanship as each government extracts maximum concessions for its agreement.

Putting aside the eurozone, the social challenges of the EU as such are probably manageable. Broadly speaking, inequality in EU countries is low by global standards, certainly much lower than in the United States or the BRICS, and Europeans are attached to social models which are diverse in implementation but similar in their concern for social equity and balance between solidarity and liberty.

True, low-wage competition from Central-Eastern Europe, either in the form of delocalization or immigration, may put downward pressure on wages in certain areas and sectors. This pressure will diminish as these nations develop, and indeed some Central-Eastern European countries – notably the Czech Republic, Slovenia, and Estonia – already score higher than many Western European countries on the Social Justice Index. There is also evidence that EU migration is a net positive for national coffers of the recipient country. The gradual increase in EU-wide social standards through legislation, already seen in the Social Charter and the Working Time Directive, is plausible.

“The Delors Paradox”

Things are more challenging for the eurozone. European Commissioner for Social Affairs László Andor has argued that any effect of the EU’s social standards legislation have tended to be counteracted by the existing deficiencies of the common currency, terming this “the Delors Paradox”: “On the one hand, we introduce social legislation to improve labour standards and create fair competition in the EU. On the other hand, we settle with a monetary union which, in the long run, deepens asymmetries in the community and erodes the fiscal base for national welfare states.”

The eurozone then needs reform and policy coherence. But the currency union’s management is notoriously complex – monetary policy run by the ECB, bailouts by national ministers by unanimity, the bulk of government spending at national level, but with deficit limits enforced by the European Commission and national judges – becoming confusing even for European political leaders. French President François Hollande for example, after the EU parliamentary elections in May, seemed to confess even he was at a loss with the euro-regime: “Europe has become unreadable, I’m aware of this, distant and to be frank incomprehensible, even for the States.”

There is consensus that significant reform is necessary. Europe’s Socialist and Social-Democratic parties have said that the elitist management of the eurozone’s “Troika” bailout/reform programs – headed by the European Commission, the ECB and the International Monetary Fund – should be replaced by something more democratically accountable. The new president of the European Commission, Jean-Claude Juncker, said in his political priorities: “We have to re-balance the relationship between elected politicians and the European Central Bank in the daily management of the Eurozone,” including a permanent president of the Euro Group of eurozone finance ministers.

In the long-term, many seem to want something like a fully-fledged government for the currency area. French economist Thomas Piketty, who has attracted global attention for his work on inequality, has taken the view that at least a “Eurozone Parliament” is necessary, collectively keeping the government accountable and deciding deficit levels and the amount of common debt issued by a European Treasury. And Jörg Asmussen, state secretary in the German Ministry of Labor and Social Affairs recently wrote: “And in my view the core of integration is the Eurozone with its own parliament and its own budget provided from its own revenue sources – with Germany and France in a position of special responsibility for integration.”

The Bertelsmann Stiftung has further studied the possibility of a substantial eurozone budget through an EU unemployment benefits scheme, which would both stabilize the currency area during economic shocks and help to address social concerns.

No conceptually cohesive strategy targeting social justice across the EU

Unfortunately, agreeing that reform is needed is not the same as agreeing what those reforms should be. In many countries there is little appetite for the laborious process of Treaty change, which would entail a major continent-wide debate and unanimous ratification by the 28 member nations, including possible referenda. With eurosceptic sentiment at an all-time high in many countries, transferring even more power to European institutions may be difficult to justify to voters.

EU and national leaders will then likely have to “muddle through” in the current framework for the time being and address citizens’ economic and social demands as best they can. Time is of the essence, as the Social Justice Index notes: “Should these social divisions persist for some time, or even worsen further, this will endanger the future viability of the entire European integration project”. But so far “a conceptually cohesive strategy explicitly targeting social justice across the EU has yet to be formulated.”

Useful links

OECD work on inequality

 

Eradicating Ebola is a political challenge too

September 20, 2014
by Guest author
WHO supplies protective clothing to health workers

WHO supplies protective clothing to health workers

Today’s post is from Juana de Catheu, founder of Development Results and Donata Garrasi, Peace-building Adviser in the OECD Development Co-operation Directorate

On 18 September, the UN Security Council, in its first ever emergency meeting on a public health crisis, declared that “the ‘unprecedented extent’ of the Ebola outbreak in Africa constituted a threat to international peace and security”. NGOs have been sounding the alarm for some time. Médecins Sans Frontières’s international President Joanne Liu, said that “six months into the worst Ebola epidemic in history, the world is losing the battle to contain it.” The World Health Organization warns that things are going to get worse before they get better.

We are talking about a very complex situation in which preventive and curative responses need to be implemented quickly and simultaneously, but where the policies, capacities, resources and political factors that need to be coordinated to stop thousands more people dying or falling seriously ill are mainly absent.

The scale of this crisis and the potential destructiveness are massive. Apart from human suffering, the World Bank has warned that if the virus continues to surge in the three worst-affected countries, Guinea’s economic growth could be reduced by 2 percentage points in 2015, Sierra Leone’s by 8 percentage points and Liberia’s by 11 percentage points. But complex situations where multiple stresses act at the same time are not that uncommon, particularly in countries with a history of conflict and weak institutions. In theory there should be a lot of international experience in dealing with situations of fragility and crisis of different natures.

The issues in the current crisis are resources, capacity and trust.

Let’s start with resources. The UN has asked for $1 billion to combat Ebola. Over $50 billion in Official Development Assistance (ODA) is spent each year in the 51 so-called “conflict affected and fragile states” according to the OECD’s 2014 Fragile States Report, 2014). Some low-income fragile states, including Liberia and Sierra Leone, are among the most aid-dependent countries in the world. Maybe the ODA provided was not effective, or not enough, or not allocated to building the capacities needed to face such an epidemic. Both more and different funding is needed.

There is plenty of experience out there is setting up Multi-Partner Trust Funds to respond to particularly challenging situations. Such funds have been established in most recent crisis affected situations, from Afghanistan, to Iraq, to South Sudan. Sometimes they were slow to be set up and did not work well, in others they provided the resources needed by key actors in country to focus on their priorities. This option could, perhaps be considered for the region.

There is also a need to tap into private money and expertise, and encourage the private sector to follow the example of the Gates Foundation, that has pledged $50 million to the fight against Ebola. In some contexts, private sector operators provided basic services to the population, given the lack of state capacities or willingness (e.g. Somalia). The policy response can rest with the specialised agencies and the government of the concerned countries, but can private sector actors be brought in with funds and expertise, not only to research a vaccine, but also to help manage the response on the ground?

On the capacity issue, not only doctors and nurses who are needed, but also people who can boost the government and local civil society organisations’ capacities to manage the crisis, but also keep everything else going. A sort of a “capacity surge” to prevent weak institutions collapsing and the gains achieved in other sectors to disappear as the Ebola epidemic takes centre stage and sucks up all the resources and capacities. Maybe this could be done quickly with the help of the African Development Bank, the World Bank and the UN?

What about the governments and people in West Africa themselves? The current response, focused on the emergency health response and fundraising, has to factor in the need for a much-missing commodity: trust. Sierra Leone, Liberia and Guinea are grappling with a history of violence, mistrust of government and of others, and extreme poverty. Although things were looking up before the disease struck, these factors go a long way to explaining why the perfectly reasonable health and security messages being spread are being actively being ignored by the population. To the outside world it is baffling that they would ignore calls to check in for treatment; throw stones at doctors and burial boys; destroy treatment centres. The World Bank emphasises the urgency of combating “aversion behaviour” – a fear factor resulting from peoples’ concerns about contagion, which is fuelling the economic impact. But these countries’ history has also produced fear and mistrust of the government and authorities.

In Liberia, the West Point slum in Monrovia (also the opposition’s stronghold) was reportedly quarantined without prior consultation. It led to widespread rioting. The slum’s 50,000 to 120,000 dwellers had to suddenly pay more for increasingly scarce water, food and basic necessities. The effectiveness of the quarantine is disputable given that it took only four dollars to bribe one’s way out. Working with Paramount Chiefs, women’s associations and imams, as in some districts of Sierra Leone, is time consuming, but it is the only way populations can understand, buy into and participate in the fight against Ebola.

The risk of compounding the health crisis with a humanitarian crisis by quarantining the whole region is real. Shutting off the region entirely will be like replicating the West Point experience on a grander and more dramatic scale. It will cause rioting and will not be effective. Just as people escaped from West Point, people can escape from larger quarantine zones.

How can the international community respond effectively, now?

Don’t ignore the big political and social elephants in the room. The WHO roadmap and the Word Bank’s plans will only change behaviours if issues of trust and mistrust are factored in.

Help the region’s new generation of leaders identify priorities. These leaders should be engaging with and communicating with their citizens. No one can do it in their place.

Transparency and accountability are not a luxury. They are needed to build trust and get people on board. There are many promising big data initiatives in this area, a must given the lack of data or reliable statistical systems. What is missing is an aggregation of this emerging data and access to it.

In short the fight against Ebola can only be won with the people concerned – not without or, even worse, against them.

Useful links

The WHO Ebola virus page

The Sahel and West Africa Club

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