Synopsis: New OECD measures to prevent “aggressive” corporate tax avoidance. Another move that, as well as preventing avoidance, will impact on the attitudes and behaviours of individuals and those running companies in relation to tax planning
Date posted: Monday, September 22, 2014
Recently proposed international tax rules could eliminate structures that have allowed companies such as Google and Amazon to substantially reduce their tax bills.
The Organisation for Economic Cooperation and Development (OECD) announced a series of measures that, if implemented by members, could stop companies from employing many commonly-used practices to shift profits into tax havens.
Corporate tax avoidance has become a hot political topic following media coverage and parliamentary investigations into the arrangements many big companies use to cut tax bills.
Understandably, Amazon and Google say they pay all the taxes they should. Analysts say competitive pressures and the need to satisfy the expectations of investors force companies to seek to minimise all costs, including tax. This has raised the much debated, and widespread official desire, to act against tax saving strategies which, while strictly speaking legal and within ‘the letter of the law’, are against the principle and intent of the legislation.
In the UK this has led to so-called ‘substance over form’ judgements being given in favour of HMRC in the courts and tribunals and, of course, the General Anti Abuse Rule.
It is well recognised that effectively combating global corporate ‘tax avoidance’ requires comprehensive international cooperation. With that in mind, last year, the G20 members asked the OECD to develop an action plan to tackle the problem.
It is thought that US technology companies could be those most affected by the OECD’s plans but others could also be hit, including pharmaceuticals and branded consumer goods firms, as well as many European companies.
The draft proposals announced have been agreed by all G20 members and OECD members, which include most major industrialised countries, the OECD said in a statement.
But the measures form part of a larger ‘(tax) base erosion and profit shifting’ programme that will conclude next year. Only then will countries look at enshrining the results of the programme into law.
As well as this anti avoidance proposal, action to prevent the misuse of double tax treaties has been proposed too. For more than 50 years the OECD’s work on international taxation has been focused on ensuring companies are not taxed twice on the same profits. The fear was that this would hamper trade and limit global growth.
Over the years, the OECD has formulated a standardised model tax treaty which allows countries to split taxation rights and avoid double taxation, partly by providing reliefs from measures intended to stop tax avoidance, such as withholding taxes.
But companies have apparently been using such treaties to ensure profits are not taxed anywhere.
For example, it seems that search giants Google takes advantage of tax treaties to channel more than $8 billion in untaxed profits out of Europe and Asia each year and into a subsidiary that is tax resident in Bermuda, which has no income tax.
The OECD’s proposals would make amendments to its model treaty so that cross-border transactions would not benefit from the reliefs in tax treaties, if a principal reason for engaging in the transactions was to avoid tax.
In a nice turn of phrase, OECD head of tax Pascal Saint-Amans said ‘We are putting an end to double non-taxation’.
The think tank, which also advises members on economic policy, also wants curbs on how much profit companies can report in centralised intra-company lending and purchasing arms, which are often based in tax havens. Where such subsidiaries generate large profits on the back of intra-company trade, the OECD said the profits should be shared across the group.
In addition some proposals have also been made on corporate tax residence.
The OECD has proposed a change in the rules on tax residence that allows US tech giants to generate billions of dollars in sales in many countries but not have those revenues assessed for tax by those countries’ tax authorities.
A long-standing rule that allows a company to operate a warehouse in a country without creating a tax residence there should be reconsidered, the OECD said.
This would potentially hit internet retailer Amazon, as the warehouse exclusion allowed Amazon to channel 15 billion euros in European sales to a subsidiary in Luxembourg last year.
A raft of companies which sell online, including Apple Inc’s iTunes service, software provider Adobe Systems Inc. (ADBE.O) and e-commerce group eBay Inc (EBAY.O) could also be forced to report revenues in the countries where they are generated, if the OECD’s proposal that having a ‘significant digital presence’ in a country would also create a tax residence.
A Reuters investigation last year found that three-quarters of the 50 biggest US technology companies channelled revenues from European sales into low tax jurisdictions such as Ireland and Switzerland, rather than reporting them nationally.
The companies all say they comply with tax rules in all the countries where they operate.
As well as the tax that will be directly generated (ie through stemming tax loss) by these measures (if enacted and implemented as intended), there is also the undoubted negative impact that high profile ‘anti-avoidance provisions’ have on individual and corporate appetite for avoidance.
This will be something that will be very much in the minds of legislators when assessing the impact of these kind of provisions.
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