G20 accepts OECD plan to limit multinational profit-shifting

Monday, 22 July 2013
Finance ministers of industrialised countries have approved wide-ranging measures to control profit-shifting by multinational companies, put forward by the Organisation for Economic Co-operation and Development (OECD) at the weekend G20 meeting in Moscow.

The proposed measures, called Action Plan on Base Erosion and Profit Shifting, will be negotiated by governments over the next two years. they consist of 15 actions that will give countries the domestic and international instruments to prevent corporations from paying little or no taxes.

International co-operation will close gaps that allow income to ‘disappear’ for tax purposes, for example by using multiple deductions for the same expense, and treaty-shopping. Governments are also encouraged to introduce stronger rules on controlled foreign companies, so that they can tax profits sequestered in overseas subsidiaries.

Domestic and international tax rules will be amended to cover not just income but also the economic activity that generates it. Multinationals that use 'aggressive' tax planning are to be forced to report it on a country-by-country basis. This proposal is intended to help governments identify risk areas and focus their audit strategies, but it is certain to meet resistance from industry.

The OECD proposals are aimed particularly at internet businesses, some of which have achieved notoriety in past months for their low effective rates of corporation tax in the jurisdictions to which they market their services. Google and Apple in particular have come under heavy fire. The nature of their business makes it especially easy for them to move intangible assets such as intellectual property, as well as capital or debt, to low-tax jurisdictions, and to avoid creating operating bases ('permanent establishments') in companies where they earn high revenues. Tax planning methods such as the 'double Irish Dutch sandwich' are prime targets of the OECD's attack.

'National tax laws have not kept pace with the globalisation of corporations and the digital economy, leaving gaps that can be exploited by multinational corporations to artificially reduce their taxes,' says the OECD.

The elements of the plan are to be introduced via amendments to double tax treaties, the commentary on the OECD Model Tax Convention, transfer pricing guidelines, and domestic law. It will take at least two years to get international agreement on these measures, and an indeterminate time for countries actually to implement them. Some may not be in a hurry to do this, given the increasing cut-throat nature of inter-jurisdictional tax competition ‒ the so-called 'race to the bottom'.

'Anyone who thinks amending tax treaties, or signing up everyone to a multi-lateral instrument, is going to be a swift or comprehensive process, should think again,' said Eloise Walker, a corporate tax expert at UK law firm Pinsent Masons. 'Inter-governmental co-operation always, without exception, gets mired in arguments about its scope and specifics.'

Richard Collier of tax advisers PwC warned that change depended on the 'continued commitment of governments and business', and would in any case not be quick.


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