G20 to co-operate on tax avoidance

REPEATED CALLS by George Osborne for co-ordinated international action on the tax affairs of multinational companies have finally gained some traction.

The chancellor is meeting other finance ministers of the G20 group of major economies in Moscow, with Germany and France backing a reform of rules that let companies switch profits and costs between countries.

An OECD report, which found rules designed to protect multinationals from double taxation are allowing them to either greatly reduce or eliminate their tax rates in many countries, will be presented to the G20 ministers at the meeting.

The study shows multinationals frequently pay rates of about 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 investing large amounts in major developed and emerging economies.

“International companies are an important source of jobs – we want them in Britain. We are making sure the taxes in Britain are low but we do expect those international companies to pay those taxes,” George Osborne told the BBC.

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 that 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.

Osborne echoed those sentiments, calling for laws to be updated.

“The international tax laws for these companies have not changed in decades,” he added. “Even though the international economy has changed a lot – people shop online, for example – and so the only way to deal with that is to work with other countries to make sure the international tax laws change and then international companies will pay their fair share of taxes.”

OECD secretary-general José Ángel Gurría noted tax avoidance by multinationals 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.”

Courting controversy

Major corporations including Starbucks, Amazon and Google have been at the centre of controversy over the way in which transfer pricing – which sees multinational corporations value goods and services moving across international borders from one corporate entity to another – is conducted. Those transactions often see a corporation’s global tax costs driven down.

The Public Accounts Committee, investigating tax avoidance, branded the companies’ use of the method “immoral” at the time and has since urged HM Revenue & Customs to be tougher on multinationals, arguing it was “not taking sufficiently aggressive action to assess and collect the appropriate amount of corporation tax from these multinationals”.

In January, it emerged investigations into multinationals’ use of transfer pricing have leapt up 47%, with £1bn of taxes under HMRC’s spotlight. That figure, according to law firm Pinsent Masons, is up from £680m last year.

However, despite efforts and political will to glean more tax pounds from multinationals, the need for international co-operation was emphasised when original author of the incoming General Anti-Abuse Rule, Graham Aaronson QC, told members of the House of Lords sub-committee on the 2013 Finance Bill that the measure will not act as a panacea against avoidance.

He added that, while the legislation could “in theory” be used to “explore stopping multinationals’ tax avoidance”, it is unlikely to do so in practice. The committee later heard the legislation “cannot … be used to re-write rules allocating profits between countries”.

Other tax regimes and competition make it “inevitable companies will locate activities in countries which suit them best”, he said.

Quite what form co-ordinated international action against the practice will take is as yet unclear, but the UK is to chair a committee set up by the OECD looking at transfer pricing, and is one of three countries that will help draw up the OECD’s proposals for changes to the international tax law over the coming months.