THE CLAMPDOWN on tax avoidance by multinational corporations has been bolstered by a series of recommendations made by the OECD.
Companies including Google, Amazon and Starbucks have been in the firing line for their use of offshore jurisdictions to drive down their UK tax liabilities.
In particular, the companies have been using transfer pricing, which some claim has the effect of mitigating their liabilities. The method sees multinational corporations value and purchase goods and services moving across international borders from one of the group’s corporate entities to another. An ‘arm’s length’ principle is usually applied to ensure the transaction is made at market value, but there have been questions raised over whether all companies do so in practice.
The detailed recommendations have been out in seven separate reports pertaining to: the digital economy; hybrid mismatch arrangements; harmful tax practices; tax treaty abuse; transfer pricing and intangibles; transfer pricing documentation and country-by-country reporting and; the feasibility of developing a multilateral instrument on base erosion and profit-shifting.
The recommendations have been hailed as a significant shift toward co-ordinated international action against such activity – which is predicated on exploiting discrepancies between different jurisdictions’ tax codes – and tilting the balance of power towards the G20’s tax authorities.
Presenting the OECD’s recommendations, secretary-general Angel Gurría said: “The G20 has identified base erosion and profit shifting as a serious risk to tax revenues, sovereignty and fair tax systems worldwide. Our recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment.”
Chairman of international tax practice network Taxand Frederic Donnedieu said multinationals should be concerned the OECD action plan “legitimises the aggressiveness we have already seen from tax authorities towards taxpayers, particularly in areas such as transfer pricing”.
However, he warned “obtaining broad international agreement will not happen easily, as many countries fight to maintain their competitive advantage which attracts both employment and investment”.
Despite the slow progress, practitioners have noted there has been little in the way of watering-down of the proposals.
“The first part of the OECD’s ambitious package has been delivered on time and intact. The scale and scope of change surpasses what many people had anticipated at the outset,” said PwC tax partner Richard Collier.
“The impact on businesses will depend partly on how the rules are implemented by tax authorities across the world. If tax authorities take an iron fist, standard trading structures could be affected, regardless of any tax avoidance motive.”