OECD to end ‘golden era’ of taxation for multinationals

September 2013 | FEATURE | CORPORATE TAX

Financier Worldwide Magazine

In July, the Organisation for Economic Co-operation and Development (OECD) unveiled a 15 point plan to tackle what it perceives to be tax evasion by some of the world’s largest and most profitable multinational corporations. According to the OECD, the action plan contained within the report will provide governments with “the domestic and international instruments to prevent corporations from paying little or no taxes”.

Primarily, the OECD’s ambitious scheme, introduced at the G20 finance ministers meeting in Moscow on 19 July, aims to fundamentally overhaul the taxation of multinational firms within a 24 month timescale. The organisation also hopes to ensure that transfer pricing outcomes are brought in line with value creation. The OECD maintains that when a multinational corporation’s foreign subsidiary sells a product to its parent company, the proceeds of that sale should face the same taxation obligations as if the sale were made by an entirely separate company. One of the key objectives of the action plan will be the development of a new set of standards aimed at eliminating double non-taxation of corporate income.

The plan proposed by the OECD, at the behest of a number of European governments, is the biggest and most comprehensive revamp of tax principles since bilateral taxation treaties were first established by the League of Nations in the 1920s. It has already won the support of influential European finance ministers in the UK, France and Germany.

The G20 nations, in a statement, confirmed that the group “fully endorse(s) the ambitious and comprehensive” plan. Furthermore, ministers in some of the increasingly prominent emerging nations, such as China, India and Brazil, have also ratified the plan. Even European Union members such as Netherlands and the Republic of Ireland, which have previously adopted a beggar-thy-neighbour attitude towards existing tax policies, have lent their support to the new measures.

Through the new scheme the OECD hopes to close off a number of taxation loopholes which have attracted a great deal of negative media and public attention in recent years, while simultaneously allowing countries to appropriately tax profits held by companies in their offshore subsidiaries.

At the time of writing, only the US has really struck a cautious tone regarding the new plan. Indeed, absent from the launch of the OECD’s plan was US Treasury Secretary Jack Lew. The nonappearance of Mr Lew at the launch of the plan only served to add weight to suggestions that the US is becoming increasingly perturbed by perceived European sniping aimed at some of the country’s most successful multinationals. Giants Google, Amazon, Starbucks and Apple, among others, have all faced scrutiny and criticism for their aggressive taxation minimisation policies.

Mr Lew also feels too many European states are concentrating too heavily on issues of taxation when they should be focusing on job creation, particularly in the private sector. The United States Council for International Business and the Confederation of British Industry have lent their support to Mr Lew on the matter, suggesting the scale of tax avoidance by multinationals currently being reported in the media is grossly exaggerated.

The OECD has also noted that existing national taxation laws have not kept pace with globalisation and the emergence of the digital economy. This failure, according to the OECD, has left gaps between different regimes, which could be ‘exploited’ by multinational corporations to artificially reduce their taxes, including moving funds to lower-rate countries. Globalisation has also led to a situation that the OECD describes as “a borderless world of products and services that too often do not fall within the tax regime of any specific country, leaving loopholes that allow profits to go untaxed”.

The OECD’s action plan also calls for the establishment of a dedicated task force on the digital economy to analyse business models and value generators in the sector. The task force will cover direct and indirect taxation.

However, there are a number of obstacles that could potentially derail implementation of the plan. Primarily, the OECD may find its own timescale for implementation to be extremely challenging. Although the plan has significant political support, the OECD is not a regulatory power, nor does it enjoy any kind of legislative authority. Therefore, it remains to be seen whether governments will be prepared to make changes to their tax regimes in order to achieve the levels of coordination and integration of international corporate taxation that the OECD desires.

Despite these potential roadblocks, it is of paramount importance that any companies affected by the OECD’s suggestions engage and cooperate with policymakers at both domestic and international levels. By engaging with policymakers, companies can play a formative role in the development of new regulations. The opportunity to vocalise concerns and provide input during the formative stages of the new regulations could ultimately be invaluable.

Richard Summerfield