Resources

Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

New global tax proposals target corporate tax dodging

LONDON (Reuters) – The body that advises industrial nations on economic policy published proposals on Monday to overhaul the way international companies are taxed in an effort to tackle avoidance.

Tight government finances and media reports on the tax structuring used by companies including Starbucks and Google have spurred significant public anger in Europe and the United States in recent years over tax avoidance.

The Group of 20 largest economies asked the Organisation for Economic Co-operation and Development (OECD) in 2012 to look at changing outdated tax rules that allow multinational companies such as Apple and Vodafone to pay almost no tax on their profits in many jurisdictions.

The companies say they follow the current rules.

Unveiling its recommendations on Monday, the OECD said they represented a fundamental shift, though critics said they did not go far enough.

“The tax world will not be the same before and after this,” Pascal Saint-Amans, head of tax policy at the OECD, told reporters.

“We are moving into this new era where massive tax planning, massive tax avoidance is over. It will be much more difficult, much more costly and it (profit shifting) will become evasion and no more avoidance,” he added.

The OECD said a conservative estimate of the amount of untaxed money moved by companies into tax havens was $100 billion to $240 billion annually, suggesting tens of billions of dollars in lost tax revenue.

Tax advisers agreed that the measures – which had been debated over the past year – could force many companies to restructure their operations and rethink how they fund themselves.

A spokesperson for the Confederation of British Industry (CBI), the U.K.’s main business lobby group, said any changes should be implemented at the same pace internationally to avoid giving a competitive advantage to some companies.

However, some tax campaigners said the OECD could have gone further and questioned whether countries would turn the proposals into law.

“These proposals would not have prevented many of the major tax avoidance scandals of the last few years, nor do they do enough to help developing countries find a sustainable route out of poverty,” Pamela Chisanga, Country Director for Zambia at charity ActionAid, said in a statement.

TECH TITANS

The rules that govern taxation of profits from international commerce date back almost a century.

However, globalisation and technology that allows products and services to be delivered in non-traditional ways have created opportunities for companies to shift profits out of the countries where the money is earned and into jurisdictions such as Luxembourg, Ireland or Bermuda which do not tax them.

The technology giants are seen as the most adept at exploiting loopholes, but drug makers, medical device groups, banks, fast food groups and retailers all commonly use contrived arrangements to cut their tax bills.

Most corporate tax avoidance hinges on transactions between affiliated companies, which reduce the taxable profit in a country where customers or production facilities are based and boost profits in low tax jurisdictions where the company has little real presence.

The OECD plans to target the main ways this is believed to be done.

One way companies shift profits is to have an onshore company borrow from offshore affiliates at high interest rates.

The OECD recommends tackling this by limiting tax deductions to at most 30 percent of profits. Some countries such as Britain have no limits. Any change could have a big impact on highly leveraged businesses such as private equity.

The OECD also recommends changes to rules that allow companies to make sales worth billions of dollars in a country without establishing a tax residence there simply by having a tax haven entity rubber-stamp sales contracts.

A Reuters investigation in 2013 found that 74 percent of the 50 biggest U.S. technology groups used such mechanisms to cut their tax bills.

Tax authorities should also be able to challenge the pricing of inter-group transactions – known as transfer pricing – which allow profits to leak out of the countries where they are earned, the OECD said.

For example, a company should not be allowed to position a subsidiary in a tax haven which then generates large profits by buying goods or services it sells to onshore affiliates at marked-up prices. The OECD said in future this profit should be shared among the units where the end user sales are made.

That could hit UK telecom group Vodafone, which made more than 540 million euros tax-free last year at a Luxembourg unit which buys handsets and sells them to group companies. The company said it followed all international tax rules.

Governments can introduce some measures unilaterally but the most important actions would require changing the terms of tax treaties between countries.

To avoid such complexity, the OECD will continue to work on a mechanism to allow automatic updating of swathes of the thousands of tax treaties but it will take until the end of 2016 to devise this.

It is likely to take years before all the measures become effective even if governments remain committed. But Saint-Amans said companies including Starbucks and Amazon were already unwinding arrangements to comply with the OECD proposals.

Tagged with →