Governments risk “global tax chaos” as they chase dwindling revenues from multinational companies unless the international tax regime is radically overhauled, according to a report commissioned by the G20 group of nations.
The report, prepared for a meeting of the G20 finance ministers in Moscow last weekend, outlines a two-year action plan drawn up by the Organisation for Economic Co-operation and Development (OECD) think-tank to clamp down on questionable international corporate tax practices. It says “a bold move by policymakers” is needed to prevent a worsening in the position.
The action plan sets out 15 initiatives for arming tax authorities with the tools to crack down on some areas international leaders agree are among the most widely exploited by multinational tax avoiders.
These initiatives are to produce a range of hard recommendations for changes to the tax treaty rule book, with deadlines ranging from 12 months to two-and-a-half years.
Among the highlights are additional disclosures that multinationals must make to all tax authorities, helping officials to know where to look for the worst avoidance.
Proposals to require companies such as Amazon, with extensive warehouse networks, to pay more local tax; multinationals posting high-value “intangible” assets, such as brands and intellectual property rights, to tax havens will also be targeted; as will special tax break policies introduced by individual nations that are seen as predatory.
Actions to be taken
The report sets out 15 separate actions that the international community needs to take to modernise a tax system established in the 1920s. It argues the international tax system is outmoded and unequipped to deal with mobile multinational firms that have found many ways of avoiding tax, often by shifting profits to low-tax countries.
The work follows the proposals set out by British Prime Minister David Cameron at the G8 to attack tax havens and increase the sharing of information on companies’ tax status between tax authorities.
Responding to the report, Cameron said: “This report shows how taxpayers, governments and businesses all suffer when some companies manipulate the tax system to avoid paying their fair share of taxes … I’m delighted that the OECD … [has committed] to set out by next September new rules for a common template that will require multinationals to disclose where they earn their profits and where they pay their taxes.”
The OECD work is looking at the international changes to tax law and definitions that would be required to allow governments to bring often legal corporate tax avoidance under control.
It says corporations should pay more tax where the value of a product or service was created.
The report warns that “inaction would likely result in some governments losing corporate tax revenue, the emergence of competing sets of international standards and the replacement of the current consensus-based framework by unilateral measures which could lead to global tax chaos”.
That in turn could see the massive re-emergence of double taxation — where two countries seek to tax the same corporate income.
The report lists the actions required, sometimes involving painstaking work in international tax to re-establish a measure of control over multinationals such as Google, Starbucks, Amazon and Apple, which have found it relatively easy to exploit the current loose rules and sometimes pay no tax on billions of revenue.
The OECD says the rise of the digital economy raises fundamental questions as to where and how enterprises generate value.
It warns “the way in which multinationals have greatly minimised their tax burden has led to a tense situation in which citizens have become more sensitive to tax fairness issues”.
Critics of the report are likely to argue that it is stronger on analysis than solutions, but the OECD says it has managed to create a framework in which to address the key issues confronting governments, including the critical need for greater international co-operation between sovereign tax authorities.
At its most ambitious, the report suggests countries should be willing to put most of its bilateral tax treaties into a multilateral framework to block companies getting around bilateral arrangements between tax authorities.
A strain on the existing rules
The report points out that “the involvement of third countries in the bilateral framework established by treaty partners puts a strain on the existing rules, in particular when done via shell companies that have little or no substance in terms of office space, tangible assets and employees”.
The OECD say it wants “to examine how a company has a digital presence in the economy of another country without being liable to taxation due to lack of nexus under current international rules”.
It suggests “existing domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income”.
It highlights loose rules on the definition of a company’s “permanent establishments” that allow “contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise without the profits from their sales being taxable”.
“Multinationals have been able to use or misapply those rules to separate income from the economic activities that produce that income and to shift it to low tax environments. This most often results from transfers of intangibles and other mobile assets for less than full value.
“There is an increasing disconnect between the location where value-creating activities and investment take place and the location where profits are made.”
The ambition of the G20 project
Despite the ambition of the G20 project — the scale and pace of which still risks breaking the consensus at a political level — some antipoverty campaigners claim it does not go far enough.
“The OECD has done little to dispel its reputation as the rich men’s club by effectively ruling out the active participation of developing countries in shaping the tax reform agenda,” said the Financial Transparency Coalition (FTC), an umbrella group including charities such as Christian Aid, Global Witness, the Global Financial Integrity Tax Justice Network and Transparency International.
Member groups want the hundreds of existing bilateral tax treaties that facilitate global trade to be torn up and replaced with a new model — known as unitary taxation — which they claim would better link the apportionment of taxable profits by multinationals to the territories in which economic activities occur.
But Pascal Saint-Amans, director of the OECD’s centre for tax policy and administration who has been leading the reform project, said there was consensus among G20 members that unitary taxation was not a feasible solution.
The OECD has signalled that more analysis needs to be done on the new and varied ways business is conducted in the digital economy before a timetable for firm recommendations can be set. It is setting up a new task force to carry out this research in the next 12 months.
France, Germany, the United Kingdom and Australia are all understood to be keen to lead the debate. But winning support from the United States, where many of the most successful digital-economy firms are based, is seen as the main challenge. — © Guardian News & Media 2013