Gaps in the international tax system give multinationals an unfair competitive advantage over smaller businesses and ‘hurt investment, growth and employment’, according to a ground-breaking OECD report to be shared with G20 finance ministers meeting in Moscow this week.
The OECD study has found that some multinationals use strategies that allow them to pay ‘as little as 5% in corporate taxes when smaller businesses are paying up to 30%’.
‘These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system,’ said OECD secretary-general Angel Gurría.
‘As governments and their citizens are struggling to make ends meet, it is critical that all taxpayers – private and corporate – pay their fair amount of taxes and trust the international tax system is transparent. This report is an important step towards ensuring that global tax rules are equitable, and responds to the call that the G20 has made for the OECD to help provide solutions to the global economic crisis.’
A number of indicators showed that the tax practices of some multinationals have become more aggressive over time, raising ‘serious compliance and fairness issues’, according to the report titled Addressing Base Erosion and Profit Shifting (BEPS).
The report claims that ‘what is at stake is the integrity of the corporate income tax’. It calls for a holistic approach to address BEPS issues in a comprehensive manner.
‘Many of the existing rules which protect multinational corporations from paying double taxation too often allow them to pay no taxes at all. These rules do not properly reflect today’s economic integration across borders, the value of intellectual property or new communications technologies,’ the OECD said.
‘The practices multinational enterprises use to reduce their tax liabilities have become more aggressive over the past decade. Some, based in high-tax regimes, create numerous off-shore subsidiaries or shell-companies, each time taking advantage of the tax breaks allowed in that jurisdiction. They also claim expenses and losses in high-tax countries and declare profits in jurisdictions with a low or no tax rate.’
International tax standards ‘may not have kept pace with changes in global business practices, in particular in the areas of intangibles and the development of the digital economy’, the report says. ‘It is possible to be heavily involved in the economic life of another country, e.g. by doing business with customers located in that country via the internet, without having a taxable presence there or in another country that levies tax on profits.’
The report adds that as businesses increasingly integrate across borders, a number of structures that are ‘technically legal’ take advantage of ‘asymmetries in domestic and international tax rules’.
Action plan
The OECD intends to draw up an action plan during the next few months in co-operation with governments and the business community. The plan will ‘further quantify the corporate taxes lost and provide concrete timelines and methodologies for solutions to reinforce the integrity of the global tax system’.
The action plan will include proposals to develop:
instruments to put an end to or neutralise the effects of hybrid mismatch arrangements and arbitrage;
improvements or clarifications to transfer pricing rules including those relating to intangibles – a ‘particular area of concern’;
updated solutions to issues related to jurisdiction to tax, particularly in the area of digital goods and services;
more effective anti-avoidance measures including general anti-avoidance rules;
rules on the treatment of intra-group financial transactions, such as those on deductibility of payments and withholding taxes; and
solutions to counter ‘harmful regimes’ more effectively.
Gaps in the international tax system give multinationals an unfair competitive advantage over smaller businesses and ‘hurt investment, growth and employment’, according to a ground-breaking OECD report to be shared with G20 finance ministers meeting in Moscow this week.
The OECD study has found that some multinationals use strategies that allow them to pay ‘as little as 5% in corporate taxes when smaller businesses are paying up to 30%’.
‘These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system,’ said OECD secretary-general Angel Gurría.
‘As governments and their citizens are struggling to make ends meet, it is critical that all taxpayers – private and corporate – pay their fair amount of taxes and trust the international tax system is transparent. This report is an important step towards ensuring that global tax rules are equitable, and responds to the call that the G20 has made for the OECD to help provide solutions to the global economic crisis.’
A number of indicators showed that the tax practices of some multinationals have become more aggressive over time, raising ‘serious compliance and fairness issues’, according to the report titled Addressing Base Erosion and Profit Shifting (BEPS).
The report claims that ‘what is at stake is the integrity of the corporate income tax’. It calls for a holistic approach to address BEPS issues in a comprehensive manner.
‘Many of the existing rules which protect multinational corporations from paying double taxation too often allow them to pay no taxes at all. These rules do not properly reflect today’s economic integration across borders, the value of intellectual property or new communications technologies,’ the OECD said.
‘The practices multinational enterprises use to reduce their tax liabilities have become more aggressive over the past decade. Some, based in high-tax regimes, create numerous off-shore subsidiaries or shell-companies, each time taking advantage of the tax breaks allowed in that jurisdiction. They also claim expenses and losses in high-tax countries and declare profits in jurisdictions with a low or no tax rate.’
International tax standards ‘may not have kept pace with changes in global business practices, in particular in the areas of intangibles and the development of the digital economy’, the report says. ‘It is possible to be heavily involved in the economic life of another country, e.g. by doing business with customers located in that country via the internet, without having a taxable presence there or in another country that levies tax on profits.’
The report adds that as businesses increasingly integrate across borders, a number of structures that are ‘technically legal’ take advantage of ‘asymmetries in domestic and international tax rules’.
Action plan
The OECD intends to draw up an action plan during the next few months in co-operation with governments and the business community. The plan will ‘further quantify the corporate taxes lost and provide concrete timelines and methodologies for solutions to reinforce the integrity of the global tax system’.
The action plan will include proposals to develop:
instruments to put an end to or neutralise the effects of hybrid mismatch arrangements and arbitrage;
improvements or clarifications to transfer pricing rules including those relating to intangibles – a ‘particular area of concern’;
updated solutions to issues related to jurisdiction to tax, particularly in the area of digital goods and services;
more effective anti-avoidance measures including general anti-avoidance rules;
rules on the treatment of intra-group financial transactions, such as those on deductibility of payments and withholding taxes; and
solutions to counter ‘harmful regimes’ more effectively.
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