G20 report warns of global tax chaos

Patrick Wintour 

Governments risk "global tax chaos" as they chase dwindling revenues from multinational companies unless the international tax regime is radically overhauled, according to a report commissioned by the G20 group of nations.

On Thursday the chancellor, George Osborne, will hail a two-year action plan drawn up by the OECD thinktank to clamp down on questionable international corporate tax practices.

The long-awaited report, prepared for a meeting of the G20 finance ministers in Moscow this weekend says "a bold move by policy makers" is necessary to prevent a worsening in the position. The OECD calls it "a turning point in the history of international co-operation on tax".

The report sets out 15 separate actions the international community needs to take to modernise a tax system established in the 1920s. It argues the international tax system is outmoded and unequipped to deal with mobile multinational firms that have found innumerable ways of avoiding tax often by shifting profits to low-tax countries.

The work follows the proposals set out by David Cameron at the G8 to attack tax havens, and increase the sharing of information on companies tax status between tax authorities.

The OECD work, funded by the G20, is designed to look at the international changes to tax law and definitions that would be required to allow national governments bring often legal corporate tax avoidance under control. It says corporations should pay more tax where the value of a product or service was created.

The report warns that, "inaction in this area would likely result in some governments losing corporate tax revenue, the emergence of competing sets of international standards and the replacement of the current consensus-based framework by unilateral measures which could lead to global tax chaos". That in turn could see the massive re-emergence of double taxation – where two countries seek to tax the same corporate income.

The report lists the actions required – sometimes involving painstaking work in international tax to re-establish a measure of control over multinationals such as Google, Starbucks, Amazon, Apple that have found it relatively easy to exploit the current loose rules, and sometimes pay no tax on billions of revenue.

It says some of the proposals might take only a year to prepare, but others may require as long as 18 months or even two years. The work will look at rules on how transfer pricing, profit-shifting, the true location of a permanent establishment and the need for more multilateral tax agreements – a requirement tailored to undermine profit-shifting.

The OECD was tasked by the G20 to undertake this work as the premier organisation responsible for international tax treaties.

It says "the current weaknesses in the rules and the interaction of different tax rules leads to double non-taxation or less than single taxation". It also says the rise of the digital economy raises fundamental questions as to where and how enterprises generate value.

It warns "the way in which multinationals have greatly minimised their tax burden has led to a tense situation in which citizens have become more sensitive to tax fairness issues."

Critics of the OECD report are likely to argue that it is stronger on analysis than specific solutions, but the OECD says it has managed to create a framework in which to address the key issues confronting governments, including the critical need for greater international co-operation between sovereign tax authorities.

At its most ambitious the report suggests countries should be willing to put most of its bilateral tax treaties into a multilateral framework, so as to block companies getting round bilateral arrangements between tax authorities.

The report points out that "the involvement of third countries in the bilateral framework established by treaty partners puts a strain on the existing rules, in particular when done via shell companies that have little or no substance in terms of office space, tangible assets and employees".

Firms such as Google and Apple have arguably used such techniques in Ireland.

The OECD say they want "to examine how a company has a digital presence in the economy of another country without being liable to taxation due to lack of nexus under current international rules".

It suggests "existing domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income".

It highlights loose rules on the definition of a company's "permanent establishments" that allows "contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise without the profits from their sales being taxable". It adds: "Multinationals have been able to use or misapply those rules to separate income from the economic activities that produce that income and to shift it to low tax environments. This most often results from transfers of intangibles and other mobile assets for less than full value."

It says: "There is an increasing disconnect between the location where value creating activities and investment take place and the location where profits are made."

Multinationals, the OECD suggests, must disclose all their various costs in all OECD countries, including licence expenses, earned interest, administration fees and wages.

They would also be required to publish their tax avoidance plans so expose aggressive tax avoidance schemes to public scrutiny.

Alex Prats, principal economic justice adviser at Christian Aid, said: "The plan is a welcome and long-overdue step towards tackling tax dodging by unscrupulous multinationals.

"The OECD clearly acknowledges that existing international tax rules make it easy for multinational corporations to avoid paying their fair share of tax – as shown by the recent Google and Amazon scandals. We all now agree, with the possible exception of some multinationals and tax havens, that the current situation is unfair and requires urgent reform."

Oxfam's senior policy adviser Claire Godfrey said: "International tax rules affect everyone and it is often the poorest countries that suffer the greatest losses due to tax abuse.

Negotiations on new international tax rules must include all countries, including those that are not OECD or G20 members – from the very start."

Action Aid says the report has laid down a challenge to the UK and governments around the world to fix the broken tax system. "Are they prepared to co-operate fully with other nations to establish an equitable set of rules, or will competitive self-interest continue to win the day?

For the developing countries that lose billions of dollars each year to aggressive tax avoidance, the stakes couldn't be higher." Guardian