New rules aim to cut company tax dodges

• 5 October 2015
• From the section Business

Companies should pay tax in the countries where they conduct business under new proposals intended to cut corporate tax minimisation.

An OECD/G20 report found laws allowing companies to shift profits to low-tax jurisdictions means that between $100bn and $240bn is lost annually.

That equates to between 4% and 10% of global corporate tax revenues.

While governments are being encouraged to adopt the proposals, they do not have to implement them.

The final report from the Base Erosion and Profit Shifting (BEPS) Project found that no single rule was to blame for making profits “disappear” for tax purposes.

Rather, it was the “interplay among different rules… domestic laws and rules which are not coordinated across borders, international standards which have not always kept pace with the changing global business environment and an endemic and worrying lack of data and information”.

Transfer pricing

The report outlines measures intended to combat the practice of transfer pricing – whereby companies conduct transactions between different parts of the same organisation.

Companies will now be required to outline their global business operations and transfer pricing policies in a “master file”, with more detail in a “local file”.

“Country-by-country reporting will provide a clear overview of where profits, sales, employees and assets are located and where taxes are paid and accrued,” the report stated.

Richard Murphy, of Tax Research UK, said the proposals represented some progress but that the governments of the UK and US in particular were not committed to implementing them.

“Anyone who thinks that this will solve the problem with international tax is living in cloud cuckoo land,” he said.

George Osborne’s plan to cut corporate tax rates meant that the UK was embroiled in a “race to the bottom” of tax competition rather than tax cooperation with its neighbours, Mr Murphy said.

‘Sticking-plaster approach’

The charity Christian Aid said the proposals amounted to a “sticking-plaster approach” that will allow global companies to keep depriving poor countries of billions every year.

Toby Quantrill, its principal advisor on economic justice, said: “It is frustrating to see that the OECD correctly diagnosed the tax dodging crisis but has not been allowed to prescribe the right cures.

“Despite being clear what the problem was, any potential the OECD experts had to recommend effective solutions has been thwarted governments’ unwillingness to stand up to multinationals and the tax avoidance industry.”

The BEPS project, which began in 2013, involved all OECD and G20 member countries and is said to be the most significant revision of international tax rules in decades.

It was partly a response to consumer anger about multinational companies such as Starbucks and Amazon paying small amounts of tax in countries such as the UK despite having sales worth billions of pounds.

In 2012, a Reuters investigation found that Starbucks paid just £8.6m in UK corporation tax over 14 years, despite making sales worth more than £3bn in UK sales since 1998.

New measures will ensure that governments review rules intended to attract “paper” profits rather than substantial business activities.

A new framework to ensure greater transparency between governments is also proposed.

Rules have also been devised to ensure that value-added tax is collected in the country where the consumer is located.

Implementing the changes was now the next step, the report said, with a new framework for monitoring set to be drawn up.

The measures will be presented to a meeting of G20 finance ministers on Thursday in Lima and G20 leaders at a November summit in Antalya.