Tue, Jul 23, 2013 - Page 9 News List

G20 report warns of ‘global tax chaos’

The international tax system cannot deal with mobile multinational firms that shift profits to low-tax countries, the Organisation for Economic Co-operation and Development says

By PAtrick Wintour and Simon Bowers  /  The Guardian, LONDON

Illustration: Yusha

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.

On Friday, British Chancellor of the Exchequer George Osborne hailed a two-year action plan drawn up by the Organisation for Economic Co-operation and Development (OECD) to clamp down on questionable international corporate tax practices.

The long-awaited report, prepared for a meeting of the G20 finance ministers in Moscow last weekend, says “a bold move by policymakers” 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 action plan sets out 15 initiatives for arming tax authorities around the world with the tools to crack down on some areas international leaders agree are among the most widely exploited by multinational tax avoiders. These initiatives are to produce a range of hard recommendations for changes to the tax treaty rulebook, with deadlines ranging from 12 months to two-and-a-half years.

Among the highlights are additional disclosures multinationals must make to all tax authorities, helping officials know where to look for the worst avoidance. Proposals are to require companies such as Amazon with extensive warehouse networks in a country to pay more local tax; multinationals posting high-value “intangible” assets, such as brands and intellectual property rights, to tax havens will also be targeted; as will special tax break policies introduced by individual nations that are seen as predatory.

The report sets out 15 separate actions the international community needs to take to modernize 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 British Prime Minister David Cameron at the G8 to attack tax havens and increase the sharing of information on companies’ tax status between tax authorities.

Responding to the report, Cameron said: “This report shows how taxpayers, governments and businesses all suffer when some companies manipulate the tax system to avoid paying their fair share of taxes.”

“That’s why I put the issue at the heart of our G8 agenda. I’m delighted that the OECD have risen to the challenge we set at Lough Erne: Committing to set out by next September new rules for a common template that will require multinationals to disclose where they earn their profits and where they pay their taxes,” he added.

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 to 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.

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