OECD outlines plan for cracking down on tax-dodge strategies
But governments must be willing to take measures as OECD has limited power
The OECD’s plan aims to develop rules over the next two years preventing companies from escaping taxes by putting patent rights into shell companies, taking interest deductions in one country without reporting taxable profit in another, and forcing them to disclose where they report to regulators their income around the world.
Prepared for a meeting of the Group of 20 finance ministers in Moscow beginning today, the plan aims to develop rules over the next two years preventing companies from escaping taxes by putting patent rights into shell companies, taking interest deductions in one country without reporting taxable profit in another, and forcing them to disclose where they report to regulators their income around the world.
“The golden era of ‘we don’t pay taxes anywhere’ is over,” Pascal Saint-Amans, director of the Center for Tax Policy and Administration for the Paris-based OECD, told reporters at the agency’s headquarters.
The OECD is a government funded think tank that was charged by the G20 to tackle the issue.
The 40-page report will complement efforts by deficit-laden governments to increase revenue they collect from profitable enterprises. It follows hearings in the US and UK revealing how companies avoided billions in taxes by attributing profits to mailbox subsidiaries in places like Bermuda and the Cayman Islands.
The UK parliament has held three hearings since November on corporate tax dodging - examining strategies used by Google, Amazon and Starbucks. In May, the US senate held a hearing on Apple’s offshore tax strategies.
The companies all say they’ve complied with international tax laws.
A pair of the OECD proposals calls for rules to make it harder to shift profits by assigning intellectual property, such as patent rights, to offshore units. Under current law, such offshore subsidiaries can take credit for profits arising from patents developed in countries like the US and UK - generally with cash the parent companies provided to them in the first place. Mountain View, Calfornia-based
Google, for example, has avoided as much as $2 billion in worldwide income taxes annually by attributing profits to a subsidiary in Bermuda that holds the rights to its intellectual property for sales outside the US, as reported by Bloomberg News in December.
Though there is no real economic activity going on in Bermuda “all the returns are in Bermuda”, said Mr Saint-Amans, not referring specifically to Google. “This is wrong, we need to fix it.”
The plan contrasts with the OECD’s previous approach that critics say enabled corporate-profit shifting and resisted reform efforts. As reported by Bloomberg News in March, the agency has seen a revolving door between the top tax officials that write its guidelines and law firms that advise companies on manipulating those rules to avoid taxes.
“For an OECD document this is a really strong report,” said Stephen E Shay, former deputy assistant secretary for international-tax affairs at the US Treasury Department under president Barack Obama and now a professor at Harvard Law School. “It’s proposing what could be important and positive changes to international tax rules. Whether the member countries can get there, that’s an open question.”
Achieving the plan’s objectives may be hamstrung by the role that several European countries - including Ireland, the Netherlands and Luxembourg - play in enabling the avoidance, said Sol Picciotto, an emeritus professor of law at Lancaster University in the UK and a senior adviser to the Tax Justice Network advocacy group.
“It depends on governments willing to take measures and the OECD doesn’t have any power to compel any governments to do anything,” he said.
The OECD rejected a fundamental overhaul. Under current law in most developed countries, companies allocate corporate income for tax purposes based on paper transactions between units under “arm’s-length” prices, or the amounts that would be paid between unrelated parties. That has let subsidiaries in tax havens pay low prices for patent rights, moving profits offshore.
A competing approach, considered by the European Union since 2004, would allocate companies’ profit between countries based on measures such as sales in each country. The OECD plan said moving to this system, known as “formulary apportionment,” is not viable.