David Cameron has called on the world’s leaders to get behind a global crackdown on tax avoidance and “break down the walls of corporate secrecy”.
George Osborne said in Moscow that the OECD plan represented 'a major step forward' in the battle against tax avoidance.
The Prime Minister was throwing his support behind proposals to stamp out
sophisticated tax dodging strategies unveiled by the Organisation for
Economic Co-operation and Development (OECD) at the G20 in Moscow yesterday.
The Paris-based think-tank has drawn up a 15-point action plan to stop
multi-nationals moving profits from one country to another to reduce their
tax bill. In future, the OECD pledged, tax will be largely paid where the
original economic activity takes place.
The crackdown follows public outrage in the UK, the US and across Europe about
the minimal amounts of tax paid by big businesses. In Britain, Google,
Amazon and Starbucks have been accused by politicians of being “immoral” for
not paying their “fair share”.
In response, companies have argued they are simply playing by the rules and
that politicians should change the tax laws if they don’t approve.
Britain has been at the forefront of efforts to overhaul the antiquated global
tax system. Tax reform has been a key feature of the UK’s G8 presidency this
year and it followed up its commitment by pledging to contribute €400,000,
alongside France and Germany, to help the OECD turn its proposals into
concrete policies.
Mr Cameron said he would highlight the OECD plan at the G20 summit in St
Petersburg in September: “I will call on fellow leaders to get behind this
action plan to ensure that we break down the walls of corporate secrecy,
once and for all, and that all companies pay their fair share.”
George Osborne described the action plan as “a major step forward, saying: “Our message is clear – everyone must pay their fair share of tax.”
Political and public outrage about aggressive tax avoidance has created a “once in a century” opportunity to overhaul the international rules, which date back to the League of Nations in the 1930s, the OECD said. Pascal Saint-Amans, director of the OECD’s centre for tax policy and administration, added: “The golden era of 'we don’t pay taxes anywhere’ is over.”
Its 15 point action plan includes measures to force companies to pay tax in countries where sales are made, to make them more open about their tax affairs, to prevent governments breaking global tax treaties to gain competitive advantage, and to create a tax regime that is fit for purpose for the digital economy.
The driving principle in the proposals was to put more emphasis on economic substance, such as where sales are made and staff are based. “Existing domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income,” the report said.
Formal proposals to prevent what the OECD described as “artificial shifting of income” through “base erosion and profit shifting” will not be in place for two years, but will only work if they win universal support, lawyers and accountants warned.
Sandy Bhogal, head of tax at law firm Mayer Brown, said: “The aim of linking the revenues of multinational businesses to particular territories and requiring reporting on a multilateral basis will be extremely complex to agree and implement.
“Not withstanding the fact that the G20 leaders are far from united on how to proceed, any global reforms will have to be brought in through changes between countries on a bilateral basis and also amend existing domestic laws.
“This process will take a considerable amount of time, even with the cooperation of all the relevant parties.”
Frank Haskew, head of tax at the ICAEW accounting body, added: “This plan isn’t without its challenges, not least because to secure a truly international approach some countries will at some point need to make some compromises on their approach to tax policies.”
Business groups such as the CBI have disputed that there is a broad problem with tax avoidance and claim measures to address it could hit job creation, trade and innovation.
Others welcomed the proposals, though. Steve Radley, director of policy at EEF, the manufacturers association, said: “EEF welcomes today’s report and urges the UK and the G20 generally to respond positively to its central recommendations.”
Q&A
Q What is base erosion and profit shifting?
A The term refers to tax strategies big business uses to exploit gaps in the international framework either to make profits disappear for tax purposes or to move them from the country of activity to a low-tax jurisdiction. Strategies can include inter-company loans so interest payments are used to offset tax, or citing intellectual property in tax havens and charging subsidiaries for its use.
Q Is it illegal?
A In most cases, no. Usually, multi-nationals simply take advantage of rules that were designed for a “bricks and mortar” economic world rather than a digital one with vast value tied up in intellectual property. Companies argue that they are not at fault, the rules need changing.
Q Why is it under scrutiny now?
A Tax avoidance has long been the bane of governments but, in the current austere times, it has come to be seen as totally unacceptable. Politicians in many leading countries – including the UK, US, France and Germany – want to tighten up the loopholes. As the problem is the international tax arrangement, changing it needs universal support. The current co-operative global mood on the issue has provided a rare opportunity for reform.
Q What is the main reform planned?
A At the moment, the economic activity of a business can be in one country but the tax paid in another. In essence, the principle of the new rules will be that tax should be paid where the economic activity takes place. In practice that will probably mean where a sale occurs and where staff are employed.
Q Will the plan affect tax havens?
A Inevitably. Tax havens are used to create shell companies. One single building in the Cayman Islands, Ugland House, is the registered address for almost 19,000 companies, for example. The planned rule changes will mean companies do not benefit by using those shell companies to move profits overseas.
George Osborne described the action plan as “a major step forward, saying: “Our message is clear – everyone must pay their fair share of tax.”
Political and public outrage about aggressive tax avoidance has created a “once in a century” opportunity to overhaul the international rules, which date back to the League of Nations in the 1930s, the OECD said. Pascal Saint-Amans, director of the OECD’s centre for tax policy and administration, added: “The golden era of 'we don’t pay taxes anywhere’ is over.”
Its 15 point action plan includes measures to force companies to pay tax in countries where sales are made, to make them more open about their tax affairs, to prevent governments breaking global tax treaties to gain competitive advantage, and to create a tax regime that is fit for purpose for the digital economy.
The driving principle in the proposals was to put more emphasis on economic substance, such as where sales are made and staff are based. “Existing domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income,” the report said.
Formal proposals to prevent what the OECD described as “artificial shifting of income” through “base erosion and profit shifting” will not be in place for two years, but will only work if they win universal support, lawyers and accountants warned.
Sandy Bhogal, head of tax at law firm Mayer Brown, said: “The aim of linking the revenues of multinational businesses to particular territories and requiring reporting on a multilateral basis will be extremely complex to agree and implement.
“Not withstanding the fact that the G20 leaders are far from united on how to proceed, any global reforms will have to be brought in through changes between countries on a bilateral basis and also amend existing domestic laws.
“This process will take a considerable amount of time, even with the cooperation of all the relevant parties.”
Frank Haskew, head of tax at the ICAEW accounting body, added: “This plan isn’t without its challenges, not least because to secure a truly international approach some countries will at some point need to make some compromises on their approach to tax policies.”
Business groups such as the CBI have disputed that there is a broad problem with tax avoidance and claim measures to address it could hit job creation, trade and innovation.
Others welcomed the proposals, though. Steve Radley, director of policy at EEF, the manufacturers association, said: “EEF welcomes today’s report and urges the UK and the G20 generally to respond positively to its central recommendations.”
Q&A
Q What is base erosion and profit shifting?
A The term refers to tax strategies big business uses to exploit gaps in the international framework either to make profits disappear for tax purposes or to move them from the country of activity to a low-tax jurisdiction. Strategies can include inter-company loans so interest payments are used to offset tax, or citing intellectual property in tax havens and charging subsidiaries for its use.
Q Is it illegal?
A In most cases, no. Usually, multi-nationals simply take advantage of rules that were designed for a “bricks and mortar” economic world rather than a digital one with vast value tied up in intellectual property. Companies argue that they are not at fault, the rules need changing.
Q Why is it under scrutiny now?
A Tax avoidance has long been the bane of governments but, in the current austere times, it has come to be seen as totally unacceptable. Politicians in many leading countries – including the UK, US, France and Germany – want to tighten up the loopholes. As the problem is the international tax arrangement, changing it needs universal support. The current co-operative global mood on the issue has provided a rare opportunity for reform.
Q What is the main reform planned?
A At the moment, the economic activity of a business can be in one country but the tax paid in another. In essence, the principle of the new rules will be that tax should be paid where the economic activity takes place. In practice that will probably mean where a sale occurs and where staff are employed.
Q Will the plan affect tax havens?
A Inevitably. Tax havens are used to create shell companies. One single building in the Cayman Islands, Ugland House, is the registered address for almost 19,000 companies, for example. The planned rule changes will mean companies do not benefit by using those shell companies to move profits overseas.
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