Combating corporate tax avoidance globally, OECD

Firms like Google, Amazon and Starbucks have hit the headlines this year for pursuing strategies to avoid paying corporate tax. The OECD today issued recommendations on combating corporate tax avoidance by multinationals worldwide.

It proposes establishing a single set of international tax laws which would eliminate the erosion of tax bases and the artificial manipulation of profits to jurisdictions to reduce the tax bill.

Multinationals today can take advantage of agreements aimed at preventing double taxation of profits by utilizing them to get double tax discounts and end up paying virtually no tax at all.

They also use administration procedures to make sure that their profits end up being posted just in countries with super-low corporate tax rates.

The corporate tax-avoiding strategies used by many multinationals are generally legal. However, since the global financial crisis and the Great Recession that followed, lawmakers in North American, Europe and other countries have come to agree that corporate tax planning is undermining the global economy.

The laws governing global taxes, which were created about ninety years ago, are clearly obsolete when Microsoft, Apple and Google can transfer billions in profits from one nation to another just by pushing a button.

When Google announced in a letter to regulators in May that its $30 billion “acquisition fund” would remain abroad, there was nothing anybody could do about it. The company knows how to manipulate the system, move money around, and keep its profits and funds intact.

The OECD’s plan aims to overcome this issue, one that infuriates lawmakers and members of the public (whose salaries are taxed at source) across the globe.

According to the OECD, forty-four countries representing 90% of global GDP favor its plan.

International tax system suggested

For this to be effective, nations will need to cooperate, says the OECD.

Secretary-General Angel Gurría, who presented the OECD’s recommendations, said:

“The G20 has identified base erosion and profit shifting as a serious risk to tax revenues, sovereignty and fair tax systems worldwide.”

“Our recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment.”

The OECD’s work, which was requested by the leaders of the G20 nations, is based on a BEPS Action Plan. It sets out the fifteen key elements to be addressed by the end of next year. (Seven of them are listed further down the page.)

The aim of the project is to help lawmakers protect their tax bases and offer taxpayers more certainty and predictability, “while guarding against new domestic rules that result in double taxation, unwarranted compliance burdens or restrictions to legitimate cross-border activity,” the OECD wrote.

Video – Fighting tax avoidance by multinationals

Highlighted below are the first 7 elements of the Action Plan:

  • Action 1: tackle the challenges of the digital economy.
  • Action 2: make corporate income taxes more coherent internationally, through new model tax and treaty provisions, thus neutralizing hybrid mismatch arrangements.
  • Action 5: counter damaging tax practices.
  • Action 6: “realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties.”
  • Action 8: make sure that transfer pricing outcomes are in line with value creation, by acting on transfer pricing problems in the key area of intangibles.
  • Action 13: have better transparency for tax administrations and enhance certainty and predictability for taxpayers through better transfer pricing documentation and a template for nation-by-nation reporting.
  • Action 15: report on the feasibility of creating a multilateral instrument of amending bilateral tax treaties so that the BEP actions can be implemented swiftly.

The suggestions put forward by the OECD will be discussed by the G20 finance ministers when they meet in Cairns, Australia, on September 20-21.