OECD Urges International Tax Clampdown on Multinational Companies

Tuesday, 12 Feb 2013 10:07 AM

 

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A sweeping overhaul of international corporate tax rules is urgently needed to stop savvy big companies escaping the payment of billions of euros to cash-strapped governments, the OECD said on Tuesday.

Governments face a growing outcry from voters to force big companies with extensive international business to pay more tax in wake of mounting evidence that many use differences between different countries' rules to reduce their tax bill.

The Paris-based Organisation for Economic Cooperation and Development said multinational companies were increasingly reporting profits in different countries from where their revenues were generated to avoid taxes.

The trend comes against the backdrop of falling taxes on businesses as OECD governments have trimmed their statutory corporate income tax rates to an average of 25.4 percent in 2011 from 32.6 percent in 2000.

However, the effective tax rate paid by companies is often far lower due to deductions, allowances and a range of measures that firms use to reduce what they pay to the tax authorities.

In a report prepared for the Group of 20 (G-20) economic powers ahead of a meeting of its finance ministers in Moscow this week, the OECD warned that governments were not alone in losing out.

"If you are a multinational you will be able to reduce your taxes substantially because the international tax architecture is completely out of date," OECD director of tax policy Pascal Saint Amans told journalists.

"However, if you are a purely domestic business, then you will have a lot more difficult time and will be at a competitive disadvantage," he added.

CHANGE OF LAW

British lawmakers are mulling changing the law following revelations about how companies such as Starbucks, Apple, Google and Amazon use complex inter-company transactions to cut their tax bills.

UK lawmakers grilled senior tax officials from leading accounting firms PricewaterhouseCoopers, Deloitte, KPMG and Ernst & Young last month over their role in helping big companies avoid tax.

France is also studying new ways to collect more tax from global internet companies, which often serve consumers in high-tax countries with subsidiaries in low-tax jurisdictions in order to reduce what they owe to governments.

Faced with challenges from online commerce, the OECD report called for a rethink of international rules that go back as far as the 1920s to overcome the constraints of the web of existing bilateral tax treaties.

"The idea is to come up with proposals that can be quickly implemented, perhaps a multilateral convention that could replace the 3,000 bilateral conventions," Saint Amans said.

The OECD offered to draft proposals for tackling the problem in coming months so governments could work towards introducing new international rules within two years.

Saint Amans said support among governments is growing for a deep overhaul of international guidelines from the OECD for transfer pricing, which is how companies charge for services and goods among units in the same group.

He also saw growing demand to revise rules for determining how much business a company must do in a country to pay taxes there, as internet firms in particular exploit weaknesses in current rules.

"If we want change and it's not going to take 10 years, then maybe we need a multilateral instrument that sweeps aside the existing conventions," Saint Amans said.

"If there is political support to go in this direction, then two years would be good, but it shouldn't take more time."

© 2014 Thomson/Reuters. All rights reserved.

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