In proposals being tracked closely by tax lawyers around the world, the Organization for Economic Co-operation and Development released a series of measures on Tuesday that it says, if implemented, would restrict the ability of global corporations to use national borders to game the international tax system.
The plans, agreed to by delegates from 44 countries in the Paris-based OECD and the Group of 20, are a response to worldwide controversy in recent years over aggressive tax strategies used by multinational companies such as Apple Inc., Google Inc. and Starbucks Corp. to move billions in profits out of higher-tax countries into low- or no-tax jurisdictions.
The proposals also come amid increasing concern in the United States about so-called "inversions," in which U.S. companies, eager to flee the country's nominal 35-per-cent corporate tax rate, merge with foreign firms and move the new company's headquarters outside the U.S., as in the recent takeover of Canada's Tim Hortons Inc. by Burger King Worldwide Inc.
The sweeping OECD report doesn't directly address the inversion issue, which is largely unique to the United States, but it does suggest large changes to the way the international tax system treats multinationals.
The proposals, to to be submitted this weekend to the G20 finance ministers meeting in Cairns, Australia, call for new laws to "neutralize" loopholes in the international tax system that allow companies to avoid paying tax by using what are known as "hybrid mismatch arrangements," such as the multiple tax deductions that some companies can make in multiple countries for a single expense.
The plans would also impose new rules on companies trying to take unfair advantage of tax treaties between countries (so-called "treaty shopping") and the aggressive use of "transfer pricing," or the practice of assigning inflated prices to intra-company movements of goods or services for tax purposes, which allows companies to slide profits across borders. (Canada recently backed off its own proposals to crack down on treaty shopping, but has apparently agreed to the OECD plans.)
An explanatory statement accompanying the report says that "cash boxes," or the "artificial shifting of profit" to no- or low-tax jurisdictions, "can no longer be tolerated." New rules would minimize the ability of companies to transfer hard-to-value "intangibles," such as intellectual property, to tax havens and then charge their other subsidiaries in high-tax countries a licensing fee for their use, the report says.
The report also calls for companies to disclose to tax authorities where they make profits and how much tax they pay, country by country.
Whether any of the measures come into place, or will be effective, remains to be seen. Some of the proposals released Tuesday have not yet been agreed to, and practical details remain to be worked out.
G20 leaders, at their 2013 meeting in St. Petersburg, Russia, approved the OECD action plan on what is known as the Base Erosion and Profit Shifting project, amid growing alarm among cash-strapped governments about the increasing use of tax havens and loopholes by some of the world's largest corporations.
"These practices erode the integrity of our tax system," OECD general secretary Angel Gurria told a Paris news conference on Tuesday. "They damage the capabilities of our governments. They diminish the growth potential of our economies. And they corrode the trust of our citizens in the institutions that we have created in the past 100 years."
But the G20 must still formally approve the finalized tax plans, not due until next year. The proposals would then have to either be implemented through legislative changes in each country or the renegotiation of international tax treaties. The OECD has also proposed a "multilateral instrument," which could allow countries that sign on to immediately rewrite all existing tax treaties to reflect the new rules.