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OECD acts to stop legal tax gaps
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THE OECD yesterday unveiled new proposals it said would “change the rules of the game” for companies which avoid paying huge taxes 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 optimization 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 said at the offices of the Organization 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 corporations, 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.
Apple, Starbucks and Fiat are all in the European Union’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 optimization is based on many sophisticated techniques, one being to ensure by internal billing procedures that cost rises in high-tax countries and profits are booked in countries where taxes are low.
One issue addressed by the new proposals is “transfer pricing,” which can also involve units of companies paying “royalties” to another unit of the business in countries with more favorable 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 US$2 trillion in Bermuda.
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