The Organisation for Economic Co-operation and Development (OECD) is calling on member states tocrack down on tax avoidance by multinational companies.
The international economic body presented a historic framework that aims “to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.” The aim is to prevent companies from shifting profits between countries in order to lower their tax burdens.
Household names such as Apple, Google, Fiat, and Starbucks have all been accused of taxing advantage of loopholes that allow them to declare profits in lower tax jurisdictions. Though there is no accusation that such moves fall outside of the law, there is a growing discomfort among policymakers about the practice.
In his speech on Tuesday Angel Gurría, the OECD Secretary-General, said the proposals would:
… tackle aggressive practices which erode the tax base of companies and artificially shift profits to low or no-tax jurisdictions. These practices erode the integrity of our tax systems, damage the capabilities of our governments, diminish the growth potential of our economies and corrode the trust of our citizens in the institutions that we created in the past 100 years.
With so many countries in the developed world focused on putting their public finances onto a sustainable footing through painful spending cuts, the measures are sure to stoke vigorous debate. Even in the US, which has largely avoided the pain of austerity, the uproar over tax inversion deals where companies purchase foreign competitors and shift their domicile abroad to take advantage of lower tax rates, shows the scale of feeling that this subject can provoke.
International cooperation over tax would mark a huge departure from the orthodoxy of recent decades that has seen corporation tax slashed as countries attempted to compete for these same multinational corporates.
Between 2000 and 2011 the OECD average corporate income tax fell from 32.6% to 25.4%, continuing the trend that began with the tax reforms in the UK and US in the mid-1980s.
However, as the digital economy continues to grow in importance it has become easier and easier for companies to shift their activities. Given that “it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes,” the OECD is hoping that the spirit of cooperation with overcome the temptation to compete on tax rates to attract large firms.
If larger economies move first to enact the proposals, the pressure on smaller states to do likewise could become too great to resist. Though it may not achieve all of its goals the OECD has at least forced the discussion about tax transparency back onto the international agenda.