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 The Organisation for Economic Co-operation and Development (OECD)
announced a series of measures that, if implemented by members,
could stop companies from employing many commonly-used practices to
shift profits into tax havens.
Corporate tax avoidance has become a hot political topic following
media coverage and parliamentary investigations into the
arrangements many big companies use to cut their tax bills.
Amazon and Google say they pay all the taxes they should. Analysts
say competitive pressures force companies to seek to minimize all
costs, including tax.
Last year, the Group of 20 leading economies asked the OECD to
develop an action plan to tackle the problem.
Big U.S. technology companies could be those most affected by the
OECD's plans but others could also be impacted including
pharmaceuticals and branded consumer goods, as well as many European
companies.
The draft proposals announced have been agreed by all G20 members
and OECD members, which include most major industrialized countries,
the OECD said in a statement.
But the measures form part of a larger ‘(tax) base erosion and
profit shifting’ program that will conclude next year. Only then
will countries look at enshrining the results of the program in law.
TREATY MISUSE
For more than 50 years, the OECD’s work on international taxation
has been focused on ensuring companies are not taxed twice on the
same profits. The fear was that this would hamper trade and limit
global growth.
Over the years, the OECD has formulated a standardized model tax
treaty which allows countries to split taxation rights and avoid
double taxation, partly by providing reliefs from measures intended
to stop tax avoidance, like withholding taxes.
But companies have been using such treaties to ensure profits are
not taxed anywhere.
For example, search giant Google takes advantage of tax treaties to
channel more than $8 billion in untaxed profits out of Europe and
Asia each year and into a subsidiary that is tax resident in
Bermuda, which has no income tax.
Google Executive Chairman Eric Schmidt has said changes to tax rules
that increased its tax bill would hit innovation.
The OECD's proposals would make amendments to its model treaty so
that cross-border transactions would not benefit from the reliefs in
tax treaties if a principal reason for engaging in the transactions
was to avoid tax.
“We are putting an end to double non-taxation,” OECD head of tax
Pascal Saint-Amans said in a call with journalists.
The think tank, which also advises members on economic policy, also
wants curbs on how much profit companies can report in centralized
inter-company lending and purchasing arms, which are often based in
tax havens.
Where such subsidiaries generate large profits on the back of
intra-company trade, the OECD said the profits should be shared
across the group.
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This could hit UK telecoms provider Vodafone Group Plc, which has a
Luxembourg subsidiary that buys telephone equipment for the group.
Vodafone Procurement Company’s 200 staff generated profits of over
400 million euros (518.52 million US dollar) last year, making it
one of the group’s smallest but most profitable divisions. An
unusual Luxembourg tax rule allowed the subsidiary to pay no tax on
that profit.
Vodafone said businesses across Europe already benefited from
savings achieved by the Luxembourg operation and that it did not
expect a significant impact on its business from the OECD measures.
TAX RESIDENCE
The OECD has also proposed changes in the rules on tax residence
that allow U.S. tech giants to generate billions of dollars in sales
in many countries but not have those revenues assessed for tax by
those countries’ tax authorities.
A long-standing rule that allows a company to operate a warehouse in
a country without creating a tax residence there should be
reconsidered, the OECD said.
This would potentially impact internet retailer Amazon as the
warehouse exclusion allowed Amazon to channel 15 billion euros last
year in European sales to a subsidiary in Luxembourg, where it can
build up profits tax free.
A raft of companies which sell online including Apple Inc’s iTunes
service, software provider Adobe Systems Inc. <ADBE.O> and
e-commerce group eBay Inc. <EBAY.O> could also be forced to report
revenues in the countries where they are generated, if the OECD’s
proposal that having a ‘significant digital presence’ in a country
would also create a tax residence.
A Reuters investigation last year found that three quarters of the
50 biggest U.S. technology companies channeled revenues from
European sales into low tax jurisdictions like Ireland and
Switzerland, rather than reporting them nationally.
The companies all say they comply with tax rules in all the
countries where they operate.
(Reporting by Tom Bergin. Editing by Jane Merriman)
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