Importance of the G20: Not What You Think

Marc To Market's picture

There was something important coming from the G20 meeting, but it is not the currency wars that have captured so many imaginations in the media and blogosphere. It was about corporate taxes, but before turning to it, let's try to put the currency statement in perspective.

As many recognize, the currency market is prone to being used to pursue beggar-thy-neighbor policies of competitive devaluations.  The danger is that it leads to trade wars and then shooting wars.  The rules of engagement, as they have evolved over the last quarter of a century or so, are essentially three-fold.

First, exchange rates are not proper goals of policy.  Economic growth and price stability are the proper goals of policy.  Second, foreign exchange prices are best set by the market in a flexible way to help foster the adjustment process and a reduction of global disequilibrium in terms of trade and capital flows.  Third, while avoiding excess volatility, currency prices ought to reflect underlying economic fundamentals and avoid chronic exchange rate misalignments.   On those rare occasions when action, is needed, it should be coordinated and not unilateral.  

The G20 statement, like the G7 statement earlier in the week, restated these longstanding principles.  That members agree not to target exchange rates for competitive purposes was a pointed reminder to Japanese officials to refrain from talking about bilateral exchange rate targets.  And indeed, over the past couple of weeks, Japanese officials have changed their rhetoric and have not talked about specific dollar-yen rates.  

Rarely in stories about currency wars has China been cited.  Yet, it is an indicated co-conspirator, as it were.  The G20 reference to moving more rapidly toward market determined exchange rates  and the importance of avoiding persistent misalignments was clearly addressed to China, and some other East Asian and Middle East countries. 

The rules of engagement allow and encourage countries to pursue monetary and fiscal policies directed at domestic goals.  For several years Japan has been encouraged to reflate its economy.  That it appears to be doing so is not problem.  No one in the G7 or the G20 have objected to that.  The criticism levied against Japanese officials is when they try to manage the currency, suggesting certain targets, and/or overt attempts by the6 government to undermine what is seen as the independence of the central bank.

It also means that the (unconventional) easing of monetary policy by the Federal Reserve is also not an act of (currency) war.  Leaving aside the occasional comment by Brazil's finance minister and a rare comment by a Chinese official, few in positions of responsibility accuse the US of engaging in a competitive devaluation.  

The referees of the rules of engagement as it were, like the IMF, the G20 and the G7 generally agree that although the risks may be there, the conditions and practices now do not meet the threshold of competitive devaluations, a currency war or trade war.  We expect the rhetoric in the traditional and social media about currency wars will die down in the coming period. 


The focus on currency wars distracts from other and arguably more important issues.  Much of coverage of the G20 statement focused on the foreign exchange market, but has missed what is likely an even more important story.

The G20 have begun a process that could lead to the largest overhaul of international corporate tax practices since the 1920s.  The combination of the fiscal pressures at home and the increased importance of intellectual property (e.g., royalties, licensing fees) and questionable transfer pricing corporate practices has elicited a response.  

The official goal is to develop measures to stop tax arbitrage--the shifting of profits from home countries in order to pay lower taxes elsewhere.  A recent OECD study found multinational companies were increasingly booking profits in different countries from where they were generated in order to avoid taxes.

The role of intangibles, like intellectual property rights, services and brands have grown in importance but are difficult to value.  International royalty and license fee payments paid to different subsidiaries within the same business group have soared.  The growing volume of e-commerce also raises issues of the proper tax jurisdiction that are not handled well by the current tax rules.  

This comes even as OECD government have cut statutory corporate tax rates from an average of 32.6% in 2000 to 25.4% in 2011.  The effective tax rate, which is what corporations actually pay, is often much lower due to assorted deductions and allowances.

Recent reports showing that a number of large well-known global companies, such as Starbucks, Apple, Google, Amazon used complicated inter-company transaction to reduce their tax liabilities has helped spur official action.   The big accounting firms are also being called out for the assistance they provide in helping businesses avoid taxes.  

Essentially, the OECD has called for, and the G20 appears to have signed off on, a new effort to modernize the international tax architecture, which could be ready in the next couple of years.  Three committees have been established and more from them will likely be heard around the July G20 meeting.  

The UK will head up a committee to look at transfer prices and the sales to subsidiaries to shift profits from high to low tax jurisdictions.  It is illegal, for example, to structure a particular transaction for the purpose of skirting the law (it is sometimes referred to as "kiting").  For example, it is unlawful for one to withdraw $5000 twice instead of withdrawing $10,000 once in order to avoid reporting requirements.  Can the same principle apply to businesses? 

Germany will head up a committee that investigates way in which companies have reduced the tax base in the accounting of income and assets.  France and the US will lead the third committee, looking at e-commerce in particular, and the proper tax jurisdictions. 

The Obama Administration has been wrestling with the same issue.  Once we get past the sequester and the continuing resolution (authorizes government spending even without a budget), look for corporate tax reform to become more salient.  The fact that it will come after the other events, gives Obama some leverage with the business community, even when it came to the fiscal cliff.  

It is ironic that Obama, who has been accused of being a socialist, is on record of favoring corporate tax reform that include a cut in the top corporate rate to 28% from 35%.  More important than the loopholes he wants to close to pay for the tax cut, is how overseas earnings should be taxed. 

Currently, the US taxes corporate profits earned abroad only when it is repatriated--brought back to the US.  Last month, the nonpartisan Congressional Research Service reported that US-based companies are increasingly shifting profits to tax havens such as Bermuda and Switzerland.  Senator Sanders (VT) has introduced legislation to end the current tax deferral and force companies to pay taxes on their foreign earnings.  Some studies suggest that the higher levels of cash  US corporations are holding is partly a function of these tax avoidance efforts.

At the end of last year, Obama expressed some sympathy for some form of territorial system, which taxes domestic not foreign income.  It could exempt offshore corporate profits from US taxes, seemingly shifting the stance of the 2012 election campaign.  Currently, France, the Netherlands, Belgium and Hong Kong employ a territorial tax system. 

The currency wars have been over-hyped.  There is less there than meets the eye.  The rules of engagement allow for countries to use monetary and fiscal policy for domestic goals.  It does not sanction foreign exchange targeting.  The real news from the G20 meeting is the formal beginning of a process that could very well lead the largest substantial change in international corporate tax system in almost a century.  

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tony bonn's picture

"...First, exchange rates are not proper goals of policy. Economic growth and price stability are the proper goals of policy..."

no, price stability is not a proper or worthy goal.....prices should be established by free markets.....a government would do well to protect the value of its money.....failure to do so makes a government derelict at best and criminal at worst. our government falls in the latter category.

dunce's picture

The statement that "currency misalignments should be coordinated" is headed down the path of global government control. It would require force to get all the countries in step( coordinated ) and the bigger the government the bigger the blunders. There are no philosopher kings or brilliant bureaucrats. People that seek careers in government are seriously flawed personalities, and few bureaucrats reach the level of mediocrity. The examples of the United Nations and The Euro zone should be enough to give one to pause and shudder at any grant of further power.

lindaamick's picture

Stop thinking that the Nation States have any powers over transnational corporations.

Nation State leaders ONLY control state citizens.

Transnational Corporations are the lords of the globe.  They flagrantly violate all local rules and regulations and try and keep local Government officials paid off to do their bidding.

Their bidding is to make as much money and profit as possible with as little cost as possible.  This includes total exploitation of people, total exploitation and destruction of the environments and no loyalty to any locale.

People should wake up to this fact.  

The G20, G7, G-whatever, is the Nation State leaders trying to get their best deal out the corporate oligarchs.

Stuck on Zero's picture

I will say it again.  Devaluing a currency by printing is nothing but theft by counterfeiting.  Quantitative easing, price supports, value targeting, currency issuing, or whatever you want to call it is still theft.


AnAnonymous's picture

I hear ya, bro. If something we, Americans, abhor above all, that is theft.

Theft is bad by our American values. So is debt.
Signed: an American.

TheFourthStooge-ing's picture

I hear ya, Chinese citizenism follower of Mao. If something we, Chinese citizenism citizens abhor above all, that is self indiction.

Self indiction is bad by our Chinese citizenism values. So better to practicing denial and push all blame onto convenient exterior scapegoat of Americans.

Signed: AnAnonymous

chump666's picture

*Market sees G20 result as green light to continue selling JPY

All the power to the ones that made cash on this.  Ride them money printers



Orly's picture

EJ to 139, Chump.  It's on like Donkey Kong.


chump666's picture

FX wars moving into trade wars.  The money printers need a risk on forever now, we get a nasty correction it will widen their money printing spreads and make them look like a bunch of fools.  Meantime that are adding to trade tensions.:

MADRID--Telefonica SA (TEF.MC, TEF) will take a 438 million euro ($585.37 million) charge against its 2012 earnings to reflect the impact of Venezuela's recent currency devaluation, the Spanish telecommunications company said in a regulatory filing late Friday.
Telefonica added that Venezuela's decision earlier this month to devalue its currency by 32% to 6.30 bolivars to the dollar from VEF4.30 will result in a EUR1 billion reduction in the value of the company's net assets there.
Telefonica will report 2012 earnings Feb. 28.
The Spanish telecommunications company is the latest foreign multinational operating in Venezuela to disclose the financial impact of the currency devaluation. U.S. consumer-products maker Colgate-Palmolive Co. (CL) has said it will which take a one-time loss of $120 million, while oilfield-services provider Halliburton Co. (HAL) has said it will incur a $30 million foreign-currency loss in the first quarter.


chump666's picture

What's lurking beneath is the smashed gold price and the AUD correction.  Note the DXY bids again coming in from Asia and South America.

trendybull459's picture

its all is bullshits,in russia the result of their puking was like:agreed to toughen futher the citizens it was clear from the beginning from where the fish smear,we got new Forum in russia and in russian,but you can talk english(as most russians speaking it),to leave comments in translite or russian,what is good is that Russia absolutly free country if it apply to critics of their enemies,it takes some few minutes to be free from Big Brother watching being registred in

Mr Lennon Hendrix's picture

The first part of the article was correct that the G-20 have set a rhetoric of wrist slapping those who devalue their currency too quickly.  But this a smokescreen. 

Not only have them been devaluing, but they will continue.  Sure, they want to do it in a manner so not to overexpose any one fiat, but they will continue, for it is the only way to "support" prices while the world goes bankrupt.

And as far as corporate taxes go, corporations run the G-20.  The corporations tell the governments what to do, not the other way around.

So although this article is correct about what the G-20 said, it is not accurate about what they will do.

supermaxedout's picture

Recent reports showing that a number of large well-known global companies, such as Starbucks, Apple, Google, Amazon used complicated inter-company transaction to reduce their tax liabilities has helped spur official action.   The big accounting firms are also being called out for the assistance they provide in helping businesses avoid taxes.

Yes, the big accounting firms do sell their expertise in legal tax cheating since many years to all big multinational companies. The name of the game is: "Transfer Price Agreements". These agreements define the price for services rendered (and goods supplied) among units of an international operating company.  A very popular position are also the so called "stewardship fees" often for imaginary managing services. Its all worthless paper crap breeded and promoted by the "big four" in accounting and auditing. But is legal. This makes it for example possible, that Big Oil is making only marginal or no profits in Germany. The German subsidiaries have to pay a transfer price which sucks all profits out of the country.

As a matter of fact its big business and in many cases the tax savings for the companies are offset by the bills which have to be paid to the advisers (the big four). These agreements need permanent supervision and updating since tax codes and laws do change often radically.  What is today a good scheme has the potential to ruin a company tomorrow. It might happen, that the same income is taxed twice in different jurisdictions.

The solution is simple but there is no money to be made for the big four. Just do this, plain old good authenthic bookkeeping.  Strict and open cost accounting between the different business units so that the books of a company do really reflect the true status  and shows clearly in which jurisdiction how much money was made.

But that would be to easy and simple and no fraud could be hidden. The big four are the number one accomplice in international tax fraud but they are to clever and to connected to be caught.

Winston Churchill's picture

Just  what Authur Anderson thought.

Everyone is far too clever for their own good.

The frauds will be punished,whether by Govts or at the end of ropes dangling from  lamposts.

Govt.(politicos) by their inactions ,have merely reserved a pace of the those gallows steps.


suteibu's picture

Big surprise that its okay for the US to manipulate its currency but not China, whose attempts to maintain a protective soft peg on the dollar are little different from the SNB/EU situation. 

But, the fact that all of this is couched in the legitimacy of private central banks creating money shows the fallacy of the whole thing and the extent to which people have accepted the dominance of the banks.  Taxes are next, of course.  How else are these banks going to get their hard-earned interest payments if companies and people continue to find safe havens for their own money. 

Except for the very rich, there is no place to hide in this world.  No new frontier.  We are finally captured.


Half_A_Billion_Hollow_Points's picture


Marc To Market's picture

Apparently, Half_A_Billion_ thinks it is ok to post racist comments on ZH, substitute name calling for arugment, but it is not proper to post cogent arguments that disagree with other posts.    The answer lies in the question.  I have not infiltrated ZH.  There is a greater range of opinion that perhaps you care for.  Suck it up.   

bank guy in Brussels's picture

Well Orly it was a funny comment ... a hearty laugh is always tonic

Marc Chandler is a bit over-doing it with his 'this is not a currency war' thing above ... Sometimes Marc is sharp and even radical, at other times he takes the system propaganda at face value and helps spread the shite ... while Tyler sees the propaganda and laughs about it

'Keynesian Zimbabwean who infiltrated ZH', ha! I liked that

Marc To Market's picture

Nearly every mass media publication I have seen and much of the financial blogosphere has written ad nauseum about the currency war.  I suggest it is gross exaggerated and misunderstood and "bank guy in Brussels" claims I take system propaganda at face value.  And here I thought I was offering ZH readers non-main stream alternative to the usual hype.    Who is sticking to the conventional view here.  Don't confuse name calling for analysis.   Since when is name calling funny ?  Sick, sad, and fails to contribute one iota to the discussion and it is a discussion, not the communist party where all have to agree with a party line, no ?    

tradewithdave's picture

If you examine how the meme roll out was managed, you may agree with me that its purpose was to serve as a "war on paper currencies" rather than a "Currency War" between currencies which is how it has been framed.  From a psyop perspective it would be the tried and true "War on Drugs", "War on Terror"solutions-based approach to Hegelian problem-reaction. 

Just take a look at the video Jim Rickard's IQ test preview that came out last night.  The dichotomy between gold and paper money is portrayed with no mention of fully traceable electronic forms of money.  A block chain such as Bitcoin's solves Irving Fisher's money illusion and puts the Q genie back in the QE fiat bottle.  All that's needed after that is to monetize the conceptual "full faith and credit" so that it's convenience yield on a mobile phone is sufficient for you to give up your paper money entirely and divorce from the balance of wealth found in the petro dollar with some modified Real Bill that is harder to liquidate than a 401(k). 

Throw in some mortgage jubilee and an entitlements means test and you can get 80% of folks to sign up voluntarily to a sovereign debt-for-equity swap.  Greece is simply a trial run for parallel currencies such as Drachma-Euro where electronic D will serve the double coincidence of needs and nearly inaccessible E will serve as a store of wealth.  

The fact that at near-zero friction Gresham's law reverses is a bonus... if you're a central banker collecting high interest lease payments on rehypothecated gold at the near zero-bound Chicago Plan.

the video:




Orly's picture

The "currency war" thing is way over-blown and hasn't been understood by many on these boards.  I can tell because when MarketWatch and CNBC have articles about the impending doom brought on by the currency war, I pretty much know it is not true.

What we have actually had is a war of words, meaning it has been difficult to trade 4X lately because we never knew which jawbone of which ass was going to come out and say something stupid.

First, Aso says that they're targeting NKY13K by the end of March and Abe USDJPY 100.  Then the G20 preliminary statement said no one is targeting the Japanese.  Then, some "unknown G7 official" (most prolly with a French surname...) came out and said oh yes they were.

In the final commnique, it was stated in no uncertain terms that this inappropriate use of the media to radically alter the flow of currencies in the open market will stop immediately.  (Thanks God!  Jawboning makes my job very, very difficult...)

So, there have not been currency wars per se; only talk of currency wars.  Marc Chandler is correct in that the insane volatility in currency markets we have seen lately will come to a screeching halt.

I have never thought of Marc as being a radical.  It seems his logic and knowlege of the inner workings of the bond markets, especially as they relate to currency trading, are first-rate.


Payne's picture

To think that the G20 have dominion over all the off shore Corp domiciles is fantasy !   

bank guy in Brussels's picture

Am not sure that is right - my thought is that the offshore havens exist because the Western oligarchs use them

Seems to me if they wanted to crack down on these tax haven places and big corps, they could ... especially with regard to corporations that have a business presence in bigger countries, they can be squeezed in ways an exile individual cannot. 'Pay taxes where you do business and have income, or shut down.' ... Any country has power to block any website, including Google Inc., from its ISPs ... (probably would be a better world if they did block the CIA's Google, ha!).

When Noriega and his Panama tax haven wouldn't play ball and co-operate with another round of murdering innocent people in Central America, they mounted an invasion and global media propaganda against him pretty fast ... they had all the evidence of his past crimes because the USA etc. hired Noriega in the first place

A giant chunk of these tax havens are in the British orbit, former colonies and now still in the Brit orbit ... Seems to me that the Cayman Islands etc. remain untouched because they serve purposes for Western oligarchs, governments and central banks.

They are putting the screws to Switzerland big-time and they are one of the biggest of all such places with a quite substantial small-country military ... what little island or city-state could really survive a big-government 'sanctions' attack, unless they were protected by another big power, like Hong Kong under China?

AnAnonymous's picture

Corporations, as creatures of middle class societies, hide their revenues from taxation to serve the middle class.

TheFourthStooge-ing's picture

AnAnonymous, as a creature of Chinese citizenism, consumes like a gluttoon at fastfood franchise JKC (Just Killed Cat) because they serve General Tso's Kitten.

disabledvet's picture

Our own Treasury Secretary has admitted to being part of the "Cayman Islands thingy" amazingly enough. If that doesn't say to Bernie Sanders "you're a dope" I don't know what does. Anywho "there will no crackdown." At least not yet. "The War isn't big enough."

mendigo's picture

Strange analysis I think an effort to be contrarian.
Basically it seems that the G20 agreed that its OK to devalue a currency as long as you don't do it for the purpose of devaluing the currency with respect to other curency though it may be an unavoidable result. It doesn't matter what it is its all in how you present it. Or as Tyler put it in another post: which is more important at any moment the perceived reality or the real reality - sadly clearly it is the former.
The danger to the status quo may be that people will grow board with tweaking thier Facebook page and arranging the icons on thier smart phone.
As the artical points out however it is interesting how global trade is becoming increasingly interreliant - which will mean the small players will have the choice to comply or be crushed under the wheels of progress.

falak pema's picture

Like I said in a previous post : The private oligarchy of banks were given the privilege to create money ad infinitum by the state sector and that has resulted in current global crisis. Now the state sector oligarchs,  to save their own necks, will use the ONLY true measure they have at their disposal : not to stop the money printing 'cos that means the end of private sector and maybe war, but to use the tax mechanism to pull back into the socialised debt balance sheets some more of those ill gotten gains that the banksta/corpocracy oligarchs have amassed over these steroid pumped years of deregulated bliss. 

They have no other choice in this eleventh hour. You can ONLY take money from the rich. Its that simple, while you print to save the world and hope against hope. 

koncaswatch's picture

Intersting point falak, that there is a schism between the private and state oligarchs. This would mean that we are to believe that the two factions will no longer be working in concert. An interesting point of view.

Mr Lennon Hendrix's picture

Or they let the system fail and try to be in charge of whatever rises from the ashes.

disabledvet's picture

"not only that but all you G-20 types are hogging our Oligarchy Air Time too!" I on. The point of creating the bubble in the first place is to get out before all the others you suckered into it do. (Goldman's prop desk for example.) I still fail to see how "long Uncle Gorilla paper" helps the Oligarchy however. One could argue that once Treasuries become the primary asset of choice "Wall Street has utterly failed." As with "boy i can't wait to run that business once i buy it" so it is with The War. Wall Street is suppose to be undermining the debt that allows that War Thingy to exist in the first place...not trying to "front run the whole boondoggle in fear that their Great Boondoggle be exposed." Just a thought of course. I'm not sure this President ever really considered himself "the Cop to take down Wall Street" anyways. Clearly there will be no Rooseveltian "traitor to his class" comments. Amazingly "he's had no problem going all in on the War on Terror" as well. yet another "huh?" moment. anywho "the fact the Mr. Big thinks he has it all figured out usually is a good time to get out." hm. "Wall Street makes a housing bubble part deaux." we are talking money after all and "if you ain't cheatin' you sure know the other guy is."

Orly's picture

Well said, falak.  Well said.


ebworthen's picture

"...a new effort to modernize the international tax architecture, which could be ready in the next couple of years.  Three committees have been established and more from them will likely be heard around the July G20 meeting."

Three committees?  Couple of years?  Sounds like it will never happen.

When politicians take bribes (lobbying money) from corporations, and corporations are viewed as individuals (U.S. Supine Court), the chances that politicians and political organizations will tax their corporate masters are slim to none.

After the past five years of watching corporations and banks run the show and our politicians - I don't see a snowball's chance in hell of corporations paying their fair share.

Whether it is an implicit goal or not, currency devaluation is occurring as central banks compete with each other to print money to the moon.

Corporations can simply shuffle their money between nations and currencies to avoid taxes and negative aspects of currency devaluation while the citizens of the nations and regions continue to suffer the consequences.

disabledvet's picture

you can't have the check bounce ala Greece. "that's a no-no Major Domo." the Euro zone is clearly going to torn asunder (, i mean German Banks vs Southern States? no thanks...i'll pass. and take a pass on your euro's too.) Japan? that one has "geo political pressure point" written all over it. Canada? deflating housing bubble...i don't see how the Center holds. Mexico. After Venezuela? "Talk to the hand." Even Great Britain looks dicey in here. Nope...i'm sticking with my Queen-- Sweden bitchez. Macks and Volvo's...coming through. and for your added pleasure:

Manthong's picture

Well, golly gee whiz..   what could a cabal of godless, evil Marxist collectivists possibly gain by eliminating the freedom of corporations or individuals to seek refuge from oppressive tax confiscations anywhere on the planet?

Darned if I can figure it out.

Mr Lennon Hendrix's picture

The Cabal is the Corporations.

Lore's picture

The author seems confused. Monetary policy to support domestic industry necessarily has a cross-border effect.

He might as well assert that for every action there is NOT an equal and opposite reaction. 


It's a big world out there, with divergent interests, including people who say one thing while doing another.

Somebody needs to get out more.

Orly's picture

Excellent analysis and, of course, news to me.



TooBearish's picture

Ah Brother Marc- the G-#? have absolutely no enforcement capabilities, hence the currency wars will resume post haste in the name of national soverignty. Japan being the most threatened by the lack of a navy or military (and basic resourses) that might defend itself from China or Korea - your analysis is refreshingly naive though.....