Finance ministers from the G20 group of the world’s largest economies are backing the first ever international plan to rein in tax avoidance by big multinational companies.
They have responded to public anger over tax dodging by supporting an action plan drawn up by the Organisation for Economic Co-operation and Development.
OECD Secretary-General Angel Gurria told reporters at the G20 finance ministers meeting in Moscow: “International tax rules ensure that business don’t pay taxes in two countries. Double taxation – that’s right, we should avoid double taxation. But unfortunately the rules have now produced double non-taxation which is what we are trying to fight now.”
The international tax system has not been changed since the 1920s and currently has no means to stop firms shifting profits to low-tax countries:
French Finance Minister Pierre Moscovici said: “It is clear that multinational companies developed an unprecedented know-how for minimising their world-wide tax pressure. Some big companies managed to have a three or four percent tax rate on their income world-wide.”
The new set of global standards is tailored to better cope with the problems of taxing companies that trade – for example – only online in the so-called digital economy. The plan is have them written into law within two and a half years.
The idea is to close loopholes used by firm such as Apple, Google, Starbucks, Amazon Vodafone, Diageo and Cadburys to avoid paying billions in taxes. They would be forced to pay tax where their sales and profits are made.
The companies defend their actions by saying they follow the law in the countries where they operate and pay what tax is due.
Business groups welcomed the international approach being taken by the G20, saying unilateral action could hinder cross border trade and investment, but they advised caution in changing the current rules.
British business lobby group the CBI said it supported an examination of the loopholes that the OECD said facilitated profit shifting but questioned whether the OECD had “proven serious base erosion and profit shifting issues caused by these structures”.
Mark Nebergall, President of the Software Finance & Tax Executives Council, which represents companies including technology giant Microsoft, dismissed the accusations of profit shifting often levelled against his industry and warned there was a risk any OECD action would fall foul of “the law of unintended consequences”.
Business lobby groups such as the CBI and the United States Council for International Business (USCIB) have previously opposed OECD moves that could have tackled tax avoidance, saying the measures would also hit job creation and innovation.
Non-governmental organisations, especially those focused on development in poorer nations, welcomed the OECD’s recognition of the shortcomings in the international tax system and the commitment to take action.
But Professor Sol Picciotto of the tax Justice Network questioned whether governments would take action in the face of opposition from business that would likely follow the tabling of any firm proposals.
Nebergall added that the tendency of governments to seek to attract foreign investment by lowering taxes could also make it hard to reach international agreement. “Tax competition will be an issue,” he said.