A crackdown on corporate tax dodgers or a let-off for big companies?

The OECD has unveiled its grand plan to curb multinational tax avoidance. But will it really force global firms to pay their fair share?

Ben Chu
Tuesday 06 October 2015 02:32
Comments
Google, one of the companies under fire, has a stand at the Tory party conference
Google, one of the companies under fire, has a stand at the Tory party conference

It’s more than three years since public fury over the meagre amounts of UK corporation tax being paid by large global companies such as Starbucks, Google and Amazon to the Treasury first erupted. And now the global response to tax avoidance by multinational firms seems to be taking shape.

Yesterday the OECD, the Paris-based multilateral economic organisation, unveiled the outlines of a plan of action to crack down on aggressive corporate tax avoidance. More than 60 countries were involved in drawing up the new rule book, as well as “stakeholders” from business, academia and civil society organisations.

The long list of new measures includes a ceiling on cross-border tax deduction, curbs on rubber-stamp sales contracts in tax havens, new powers for tax authorities to challenge pricing of inter-group transactions and mandatory “country by country” reporting by global firms over the location of their economic sales activities.

The goal is to prevent firms from artificially shifting their profits out of countries in which they actually transact their business and registering them in jurisdictions that charge a lower, or even zero, rate of corporation tax.

The OECD was asked by rich world governments, including our own, to put the action plan together two years ago. And it’s expected to be enthusiastically endorsed by G20 finance ministers meeting in Peru later this week.

If the OECD’s calculations are correct, there are big potential gains for state treasuries. It estimates that global tax revenue losses due to aggressive avoidance by firms are between $100bn (£66bn) and $240bn. That’s equivalent to between 4 and 10 per cent of global corporate tax revenues. But how effective will this package be in channelling those much needed funds into treasury coffers?

Very, according to OECD officials. “The tax world will not be the same before and after this,” claimed Pascal Saint-Amans, the OECD’s head of tax yesterday.

Accountancy firms (some of which have made a comfortable living from helping big firms avoid tax over the years) agreed. Rebecca Reading of Baker Tilly described the plans as “incredibly bold”.

“Most multinationals are likely to be affected in some way” said Stella Amiss, international tax partner at PwC. “International businesses will need to look at the way their operations and investments are financed, and may face additional withholding taxes or find it harder to access particular tax treaties.”

A spokesperson for the UK’s CBI business lobby group urged governments to roll out the new rules at the same pace internationally to avoid conferring a competitive advantage on slow movers. A survey by Reuters suggests that multinationals are already preparing themselves, with nearly a third expecting to restructure their tax reporting operations before the new rules are introduced.

Yet many campaigners are far from satisfied. Anders Dahlbeck, ActionAid’s tax policy advisor, described the OECD reforms as a “sticking plaster” and argued that they will not do enough to enable to developing countries to collect tax from multinational activities operating in their territories.

“This tax deal has been cooked up by a club of rich countries and fails to properly tackle tax avoidance by large multinationals,” he said.

That negative verdict was echoed by Oxfam: “Once again rich governments have talked a good game when it comes to cracking down on corporate tax dodging but have failed to deliver when it matters,” said Nick Bryer, head of Oxfam’s inequality campaign.

ActionAid pointed out that the results of the country-by-country financial reporting by multinationals will not be made public, limiting transparency and the possibility for popular pressure to be brought to bear on firms that seem to be abusing the spirit of the new regime.

The response from Richard Murphy, the veteran anti-corporate tax avoidance campaigner of Tax Research UK, was slightly more positive. “The OECD has taken a small step forward today, but what’s notable is how small it is,” he said.

What draws Mr Murphy’s ire is what he regards as the double-dealing approach of governments such as the UK’s on corporate tax. He argues that while David Cameron and George Osborne say they support the OECD’s new plan, at the same time they are slashing the UK’s headline rate of corporation tax to lure foreign companies to establish their headquarters here in a beggar-thy-neighbour gambit. They are also implementing measures such as the tax-free “patent box” for corporate intellectual property, which is widely seen as a form of state-sanctioned tax avoidance.

“What these countries are doing is signalling to major corporations that it is business as normal for the tax abuse industry, whatever the OECD is saying,” he said.

Another powerful complaint is that the OECD approach on tackling multinational tax avoidance was flawed almost from inception. From an early stage it decided not to wholeheartedly pursue the kind of unitary tax on global corporate earnings known as “formulary apportionment” that exists in America to ensure firms’ profits are not artificially shifted across state lines.

Unless these OECD reforms result in a significant increase in corporate tax revenues from multinationals over the coming years, the complaint that not enough has been done is likely to grow louder.

Shifting sands: What’s in the package

Mandatory “country by country” reporting by firms over the location of their economic activities, to give tax administrations a global picture of their operations

A 30 per cent ceiling on cross-border tax deduction

Curbs on “rubber-stamp” sales contracts in tax havens

New powers for tax authorities to challenge pricing of inter-group transactions

Automatic exchange of tax rulings by different jurisdictions

Overhaul of “mutual agreement procedures” between jurisdictions

Strengthened rules on Controlled Foreign Companies

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Please enter a valid email
Please enter a valid email
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Must be at least 6 characters, include an upper and lower case character and a number
Please enter your first name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
Please enter your last name
Special characters aren’t allowed
Please enter a name between 1 and 40 characters
You must be over 18 years old to register
You must be over 18 years old to register
Opt-out-policy
You can opt-out at any time by signing in to your account to manage your preferences. Each email has a link to unsubscribe.

By clicking ‘Create my account’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Register for free to continue reading

Registration is a free and easy way to support our truly independent journalism

By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists

Already have an account? sign in

By clicking ‘Register’ you confirm that your data has been entered correctly and you have read and agree to our Terms of use, Cookie policy and Privacy notice.

This site is protected by reCAPTCHA and the Google Privacy policy and Terms of service apply.

Join our new commenting forum

Join thought-provoking conversations, follow other Independent readers and see their replies

Comments

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged inPlease refresh your browser to be logged in