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OECD Takes Aim At Multinationals' Tax Affairs

by Ulrika Lomas,, Brussels

13 February 2013

The Organization for Economic Cooperation and Development (OECD) has released a new report, on the use of tax-efficient business structuring by multinationals to lower group corporate tax liability, as a first step to addressing the use of profit-shifting tax planning techniques by international businesses.

The OECD's report points out that due to imperfect interaction between nations' tax regimes, and their extensive networks of double tax agreements, the global tax system has failed to keep pace with the changing needs of the 21st century in terms of mitigating corporate tax avoidance. The study points that these inadequacies have allowed multinationals to legitimately structure their tax affairs using profit-shifting arrangements to pay tax on their profits at rates as low as 5%, against the corporate tax rates of around 30% in place on fiscally immobile businesses in OECD member states.

The OECD's report states: "The international common principles drawn from national experiences to share tax jurisdiction may not have kept pace with the changing business environment. Domestic rules for international taxation and internationally agreed standards are still grounded in an economic environment characterized by a lower degree of economic integration across borders, rather than today's environment of global taxpayers, which is characterized by the increased importance of intellectual property as a value-driver and by constant developments of information and communication technologies."

"Many of the existing rules which protect multinational corporations from paying double taxation too often allow them to pay no taxes at all. For example, some rules and their underlying policy were built on the assumption that one country would forgo taxation because another country would be imposing tax. In the modern global economy, this assumption is not always correct, as planning opportunities may result in profits ending up untaxed anywhere. These gaps, which enable multinationals to eliminate or reduce their taxation on income, give them an unfair competitive advantage over smaller businesses," it continues.

The report concedes however - amid widespread criticism of multinationals' tax affairs - that the blame may not lie with businesses. It acknowledges a prevailing sentiment among business leaders that "they have a responsibility towards their shareholders to legally reduce the taxes their companies pay. Some of them might consider most of the accusations unjustified, in some cases deeming governments responsible for incoherent tax policies and for designing tax systems that provide incentives for Base Erosion and Profit Shifting (BEPS)."

Furthermore, the report points out that multinationals often suffer at the hands of inadequate global tax rules, paying a greater share of taxes than should be required of them. "Multinationals are still sometimes faced with double taxation on their profits from cross-border activities, with mutual agreement procedures unable to resolve disputes among governments in a timely manner or at all," it acknowledges.

Commenting on the launch of the review, OECD Secretary-General Angel Gurria stated: "These [profit-shifting] strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system. As governments and their citizens are struggling to make ends meet, it is critical that all tax payers - private and corporate - pay their fair amount of taxes."

"This report is an important step towards ensuring that global tax rules are equitable, and responds to the call that the G-20 has made for the OECD to help provide solutions to the global economic crisis," he concluded.

The OECD has announced that in the coming months it will draw up an Action Plan, in cooperation with governments and the business community, to provide concrete timelines and methodologies for solutions to "reinforce the integrity of the global tax system," and is to soon release quantative data on the value of corporate tax believed to have been "lost" to multinational tax planning.

TAGS: compliance | tax | small business | business | tax compliance | tax avoidance | intellectual property | Organisation for Economic Co-operation and Development (OECD) | multinationals | tax planning | tax rates | tax breaks

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