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February 12, 2013 10:42 am
A plan to close international tax loopholes was outlined on Tuesday by the Paris-based Organisation for Economic Co-operation and Development, which warned that a failure to take action against profit shifting by multinationals would put “the integrity of the corporate income tax” at stake.
In a report on “base erosion and profit shifting” issued ahead of Friday’s G20 finance ministers’ meeting, the OECD, which draws up global tax standards, said accusations of tax-dodging by multinationals had fuelled a perception that “taxes are only paid by the naive”.
The study, which follows a period of intense criticism of corporate tax practices, is a response to calls by the German, UK and French finance ministers for co-ordinated action to strengthen international tax standards.
It urged governments to join forces in tackling issues ranging from the tax treatment of intra-group financial transactions to structures that take advantage of asymmetries in domestic and international tax rules. The OECD plans to draw up a detailed action plan over the next six months.
The digital economy was putting pressure on long-established principles, raising concerns over whether existing rules provided a fair allocation of taxing rights, it said. “In an era where non-resident taxpayers can derive substantial profits from transacting with customers located in another country, questions are being raised on whether the current rules are fit for purpose.”
Profit shifting by cross-border businesses generated unintended competitive advantages over domestic companies, which could lead to the distortion of investment decisions as well as posing issues of fairness.
It said there was “abundant circumstantial evidence that base erosion and profit shifting behaviours are widespread” but it was hard to quantify using the available data. Most of the writing on the topic was “inconclusive”, it said. Revenue losses “may not be extremely large in relation to tax revenues as a whole”.
Historical data suggested that corporate tax revenues had been maintained before the impact of the financial crisis, despite cuts in tax rates, it said. The average corporate tax take as a percentage of total taxation in OECD countries was 8.8 per cent in 1965, dropped to 7.6 per cent in 1975 and then consistently increased over the years until 2007, when the reported average ratio was 10.6 per cent. The ratio then declined “likely due to the economic downturn” to 10 per cent in 2008 and 8.4 per cent in 2009; subsequently it increased to 8.6 per cent in 2010.
The OECD said business leaders often argued they had a responsibility towards their shareholders legally to reduce the taxes their companies paid. It added: “Some of them might consider most of the accusations unjustified, in some cases deeming governments responsible for incoherent tax policies and for designing tax systems that provide incentives for base erosion and profit shifting.”
The OECD report was welcomed by Algirdas Semeta, the EU tax commissioner, who said it went “very much along the lines” of an action plan drawn up by Brussels at the end of last year. He said there was strong political support for making progress. “Global action is needed to address this issue,” he said.
The problem of profit shifting could be tackled by the commission’s proposal for a pan-European tax system, known as the Common Consolidated Corporate Tax Base, he added. “There is new momentum for discussions of the CCCTB in the Council.” There was widespread support – with the exception of certain countries such as the UK and Ireland – for the principle of a common tax base, which could be the first step towards a consolidated system under which a formula would be used to divide taxable profits between member states.
Mr Semeta said it was premature to consider strategies to take the proposal forward if some member states did not want to sign up. But he highlighted the significance of the recent decision of 11 member states to move ahead with the Financial Transaction Tax under the “enhanced co-operation” mechanism, which was the first tax measure to be introduced without unanimity. “First time is first time. It was very important to break this taboo in tax matters,” he said.
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