The OECD on Tuesday put forward new proposals it said would “change the rules of the game” for companies which avoid paying huge amounts of tax by exploiting international loopholes.
Pascal Saint-Amans, head of tax at the OECD, said that 44 countries representing 90 percent of the world economy had agreed on the need to stop companies taking advantage of different regimes by means of what are known as tax optimisation strategies.
Many of these strategies are legal, but are sometimes at the limit of the law.
The seven items of the action plan will “change the rules of the game” to ensure companies pay taxes where they make their profits, he told journalists at the offices of the Organisation for Economic Cooperation and Development in Paris.
The basic principle behind the proposals is that tax should be paid in the country where it is generated, and to prevent international tax agreements intended to avoid double-taxation from being used to obtain double-tax deductions.
Corporate tax avoidance, particularly by some multinational groups, has become a political hot potato since the financial crisis.
Governments struggling to cope with budget deficits have sought to close legal tax loopholes for businesses.
Giants such as Apple, Starbucks and Fiat are all in the EU’s cross-hairs over allegations they unfairly cut deals with Ireland, the Netherlands and Luxembourg which meant they paid lower tax rates.
The International Monetary Fund has warned that the “race to the bottom” in setting corporate tax rates is particularly hurting already struggling developing economies.
Tax optimisation is based on many sophisticate techniques, one being to ensure by internal billing procedures that costs arise in high-tax countries and profits are booked in countries where taxes are low.
One issue addressed by the new proposals is this so-called “transfer pricing”, which can also involve units of companies paying ‘royalties’ to another unit of the business in countries with more favourable tax regimes.
The EU argues this is how companies are able to pay less tax than they should in Ireland, the Netherlands and Luxembourg, while the OECD estimates US companies have hidden some $2 trillion (1.5 trillion euros) in Bermuda using this technique.
The OECD also called for an end to “hybrid arrangements”, when a company plays off different tax systems to get advantages, and “treaty shopping”, where a company structures its business to take advantage of more favourable tax deals in different jurisdictions.
So far, 44 countries have adopted a “country by country” model of declaration that would show the revenue, profit, staff and the tax paid in each state.
But this will be given only to tax authorities and not made public, which threatens to “limit the effectiveness of the OECD’s plan of action” according to Friederike Roeder, the head of the French branch of anti-poverty charity ONE.
The growth of the digital economy has also made it increasingly difficult to crack down on companies as they can now even shift intangible assets such as intellectual property to avoid taxes, the OECD said.
The action plan will be presented to finance ministers for the G20 top economies at the next meeting in Cairns, Australia, on September 20-21.
The OECD expects them to be formalised into legislation or some kind of mutlinational treaty next year, when it will prevent a further eight proposals.