By Tom Bergin and Maya Dyakina
LONDON/MOSCOW, July 19 The G20 backed a
"fundamental" rethink of the rules on taxing multinational
corporations on Friday, taking aim at loopholes used by
companies such as Apple and Google to avoid
billions of dollars in taxes.
The group of leading economies released an action plan drawn
up by the Organisation for Economic Co-operation and Development
(OECD) that said the existing system didn't work, especially
when it came to taxing companies that trade online.
"It is a major breakthrough and is at the heart of the
social contract," France's finance minister, Pierre Moscovici,
told a news conference on the sidelines of a meeting of finance
ministers from the Group of 20 leading nations in Moscow.
"People and companies have to pay the taxes that are due.
It's the only way to operate in a fair and competitive society,"
added British finance minister George Osborne.
Large budget deficits and public anger at inter-company
structures designed to channel profits into tax havens have
prodded governments to act.
Google, Apple and others say they follow the law wherever
they operate and pay what tax is due but also have a duty to
shareholders to organise their affairs in a tax-efficient way.
Business groups welcomed the international approach being
taken by the G20, saying unilateral action could hinder cross
border trade and investment, but they advised caution in
changing the current rules.
British business lobby group the CBI said it supported an
examination of the loopholes that the OECD said facilitated
profit shifting but questioned whether the OECD had "proven
serious base erosion and profit shifting issues caused by these
Mark Nebergall, President of the Software Finance & Tax
Executives Council, which represents companies including tech
giant Microsoft, dismissed the accusations of profit
shifting often levelled against his industry and warned there
was a risk any OECD action would fall foul of "the law of
But Pascal Saint-Amans, Director of the OECD's Centre for
Tax Policy, said the existing rules, which date back to the
League of Nations in the 1930s, had led to a "golden era" of tax
He said governments' frustration with companies' aggressive
tax avoidance provided a "once in a century" opportunity for
The OECD, which advises its mainly rich members on tax and
economic policy, has two years to come up with specific measures
that can be adopted internationally.
The OECD identified a raft of loopholes widely used by
companies in the technology, pharmaceutical and consumer goods
sectors, and Saint-Amans said the success of the project could
be measured by whether there is a rise in the effective tax
rates businesses pay.
In future, countries may have more rights to ignore
contrived inter-company transactions created to shift profits
offshore. New rules will seek to put more emphasis on economic
substance, the Paris-based think tank said.
"(Governments) say we cannot be bound by pure contractual
arrangements. It's not possible to only allocate the profit
through only contractual arrangements," Saint-Amans said.
Business lobby groups such as the CBI and the United States
Council for International Business (USCIB) have previously
opposed OECD moves that could have tackled tax avoidance, saying
the measures would also hit job creation and innovation.
Non-governmental organisations, especially those focused on
development in poorer nations, welcomed the OECD's recognition
of the shortcomings in the international tax system and the
commitment to take action.
But Professor Sol Picciotto of the tax Justice Network
questioned whether governments would take action in the face of
opposition from business that would likely follow the tabling of
any firm proposals.
Nebergall added that the tendency of governments to seek to
attract foreign investment by lowering taxes could also make it
hard to reach international agreement.
"Tax competition will be an issue," he said.
As if on cue, Osborne announced on Friday that he hoped to
lure investment into Britain's nascent shale gas industry by
offering a tax regime that was "the most generous for shale in
Some tax advisors questioned whether the U.S. could push
through Congress the kinds of changes that the OECD might
recommend, given the deep divides on Capitol Hill on taxation.
Senator Carl Levin, whose investigations into Apple Inc and
other U.S. multinationals have helped propel corporate tax
avoidance to the top of the international agenda, welcomed the
action plan and called on his peers to support it.
"And it's long overdue for Congress to close outrageous
corporate tax loopholes, increase tax fairness," he said in a
Saint-Amans noted that all OECD members including
Switzerland, Ireland and the Netherlands, which have been
described as tax havens by lawmakers on both sides of the
Atlantic, had backed the action plan.
Among the areas that need to be addressed is the practice of
companies avoiding creating tax residences or 'permanent
establishments' in countries where they have major operations.
The OECD also criticised the way companies designate units
in tax havens as holders of group funds, patents or brands that
can then be lent or licensed, for generous fees, to affiliates
in countries where customers or factories are located. This
ensures little profit is reported in higher tax jurisdictions.
International treaties designed to avoid double taxation of
profits earned from cross-border activities but which have been
used to avoid any taxation are also under scrutiny. Saint-Amans
said protocols to amend existing treaties could be developed to
stop such "double non-taxation".
He added that representatives of OECD and G20 members who
helped draft the plan had rejected a more radical idea favoured
by some non-governmental groups that would split multinationals'
profits among the different countries where they operate,
according to an agreed formula, with each country assessing its
share of profit.