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Britain, France and Germany to drive corporation tax reform

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The UK is to draw up changes to the transfer pricing rules, governing the allocation of multinationals’ profits allocated between countries, after G20 finance ministers resolved to develop measures to address base erosion and profit shifting.

Last week the OECD warned that gaps in the international tax system were giving multinationals an unfair competitive advantage over smaller businesses and ‘hurt investment, growth and employment’. Some multinationals use strategies that allow them to pay ‘as little as 5% in corporate taxes when smaller businesses are paying up to 30%’, it said.

OECD secretary-general Angel Gurría said that while they are legal, these strategies ‘erode the tax base of many countries and threaten the stability of the international tax system’.

‘The international corporate tax system is increasingly outdated,’ the UK chancellor George Osborne, and the French and German finance ministers Pierre Moscovici and Wolfgang Schäuble, said in a letter to the Financial Times. ‘No one country wants to act alone and drive investment away. But people in our countries are rightly calling for something to be done.’

Some ‘quite simple’ tax concepts had not necessarily kept up to date with a more complex world, they said. ‘Germany, France and Britain want competitive corporate tax systems that attract global companies to our countries and help our economies to grow. They are a significant source of growth, investment, employment and tax. But we also want global companies to pay their fair share of taxes …

‘The UK will use its chairmanship of the transfer pricing group to draw up necessary changes to the principles on which multinationals’ profits are allocated between countries. Germany will lead work on how to prevent the erosion of the corporate tax base including through exploitation of gaps between countries’ tax laws and through harmful preferential tax regimes of countries, and France will co-chair with the US work on how to determine tax jurisdiction, particularly in the context of e-trading and reclaiming of profits shifted to low-tax countries and jurisdictions.’

G20 finance ministers’ communiqué

‘In the tax area, we welcome the OECD report on addressing base erosion and profit shifting and acknowledge that an important part of fiscal sustainability is securing our revenue bases. We are determined to develop measures to address base erosion and profit shifting, take necessary collective actions and look forward to the comprehensive action plan the OECD will present to us in July.

‘We strongly encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance. We encourage the Global Forum on Transparency and Exchange of Information to continue to make rapid progress in assessing and monitoring on a continuous basis the implementation of the international standard on information exchange and look forward to the progress report by April 2013. We reiterate our commitment to extending the practice of automatic exchange of information, as appropriate, and commend the progress made recently in this area. We support the OECD analysis for multilateral implementation in that domain.’

Source: Communiqué of G20 finance ministers and central bank governors’ meeting in Moscow, 16 February 2013