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Schäuble Slams Multinationals' Aggressive Tax Planning

by Ulrika Lomas, Tax-News.com, Brussels

05 March 2013


German Finance Minister Wolfgang Schäuble has recently reiterated the importance of combating aggressive tax planning by multinationals as a matter of justice, highlighting the need for international cooperation to address the issue.

Denouncing the fact that multinational concerns are currently able to skilfully exploit international tax regulations to significantly lower their tax burden, Schäuble insisted that all taxpayers – including internationally active corporations – must contribute their fair share to the costs of society and to maintaining vital infrastructure.

Up to now, the focus has been on avoiding double taxation, Schäuble explained, underlining the need now to put in place agreements to ensure that taxes are at least being paid "somewhere." Given that multinationals are able to exploit tax loopholes to reduce their corporate tax burden and to profit-shift, there must be greater integration of international tax laws, Schäuble said. Here, the minister pointed out that Germany is working closely together with the US, the UK and France for joint action at G20, EU and OECD level to combat base erosion and profit shifting by international concerns.

Last month, the Organization for Economic Cooperation and Development (OECD) 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.

TAGS: environment | Finance | tax | business | tax avoidance | law | intellectual property | agreements | multinationals | tax planning | tax rates | France | Germany | G20 | standards | regulation

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