RULES designed to protect multinational companies from double taxation are allowing them to either greatly reduce or eliminate their tax rates in many countries, an OECD report to the G20 has found.
The study shows multinationals frequently pay rates of around 5% in corporate taxes, while smaller businesses generally contribute closer to 30%. It also noted some small jurisdictions act as conduits, attracting disproportionately large amounts of foreign direct investment compared to large industrialised countries and were also investing disproportionately large amounts in major developed and emerging economies.
The rules as they stand, the OECD said, do not reflect today's economic integration across borders, the value of intellectual property or new communications technologies. Indeed, the body added the companies enjoy an unfair competitive advantage over smaller businesses; hurting investment, growth and employment and, in many cases, leaving average citizens footing a larger chunk of the tax bill.
OECD secretary-general Angel Gurría noted the practice had become more aggressive over the past decade and pledged the organisation would draw up an action plan in the coming months in co-operation with member governments and businesses.
"These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system," he said. "As governments and their citizens are struggling to make ends meet, it is critical that all taxpayers - private and corporate - pay their fair amount of taxes and trust the international tax system is transparent.
"This report is an important step towards ensuring that global tax rules are equitable, and responds to the call that the G20 has made for the OECD to help provide solutions to the global economic crisis."
Responding to the report, CIoT president Patrick Stevens said the current international corporate tax system is more suited to the 1950s than today's economy.
He said: "We have been saying for a long time that the international corporate tax system is designed for the mid-20th century trading economy rather than the e-enabled world of seamless multinationals we now find ourselves in. The system needs to change and adapt and that is difficult for individual countries to do: it needs bodies such as the OECD to take a lead. We welcome this report as a constructive move by the OECD and a start to a more focused debate.
"Transfer pricing based on arm's-length prices has its difficulties, especially when it comes to measuring what is the correct value which should be attached to something intangible like brand value. However the underlying principle, that profit should be taxed in the country where it is generated, is a sound one."
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