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 and Apple that have found it relatively easy to exploit the current loose rules, and sometimes pay no tax on billions of revenue.
The OECD was tasked by the G20 to undertake this work as the premier organization responsible for international tax treaties.
“The current weaknesses in the rules and the interaction of different tax rules leads to double non-taxation or less than single taxation,” it says.
It also says the rise of the digital economy raises fundamental questions as to where and how enterprises generate value.
“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,” it says.
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 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,” the report says.
The OECD say it wants “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,” suggesting “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… 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.”
“There is an increasing disconnect between the location where value-creating activities and investment take place, and the location where profits are made,” it says.
Despite the ambition of the G20 project — the scale and pace of which still risks breaking the consensus at a political level — some anti-poverty campaigners claim it does not go far enough.
“The OECD has done little to dispel its reputation as the ‘rich men’s club’ by effectively ruling out the active participation of developing countries in shaping the tax reform agenda,” said the Financial Transparency Coalition, an umbrella group including charities such as Christain Aid, Global Witness, Global Financial Integrity Tax Justice Network and Transparency International.