Corporate tax dodging targeted as nations draw up battle plan

SEP 16, 2014
By  Bloomberg
The tax-avoidance strategies that companies like Google Inc., Apple Inc. and Amazon.com Inc. use to escape more than $100 billion a year of levies in the U.S. and Europe are under threat from a plan drawn up by the Organization for Economic Cooperation and Development. The Paris-based OECD, a research institute funded by 34 countries including the U.S., recommended governments limit the techniques those companies use to avoid taxes, such as assigning valuable patent rights to shell companies based in tax havens, according to draft rules released today. All of the OECD member countries and 10 others, including China and Russia, have approved the recommendations, though further action by countries would be required for them to take effect. The right to tax “has been threatened and undermined by the way multinationals use and abuse the existing international tax framework,” Pascal Saint-Amans, who heads the rule-making effort as director of the OECD's Center for Tax Policy and Administration, said on a conference call. Citing the use of mailbox subsidiaries in places like Bermuda and Grand Cayman as a particular focus, he said: “You multinationals stand ready, it's over.” The OECD's proposals, which will be discussed at the Group of 20 Nations meeting in Cairns, Australia, this weekend, reflect the strongest official response yet to corporate tax avoidance. The practice has prompted a growing international backlash, including street protests around the world, a series of high-profile documentaries, and numerous congressional and parliamentary hearings in the U.S. and the U.K. BUYING TAX BREAKS Elected officials have scrutinized the tax strategies of Google, Apple, Amazon, Starbucks Corp., Microsoft Corp., Hewlett-Packard Co., and others, which have used avoidance techniques nicknamed the “Double Irish” and “Dutch Sandwich.” The OECD recommendations could also hinder the recent wave of tax “inversions” by U.S. companies, which combine with smaller foreign partners to move their addresses overseas. By inverting, companies can put to use the profits they've moved offshore without paying U.S. taxes, and more easily cut their future tax bills. Shifting profits into low-tax jurisdictions overseas costs the U.S. at least $100 billion a year, according to Kimberly Clausing, an economics professor at Reed University in Portland, Ore. She has not calculated that figure for Europe, but said the problem is likely of a similar magnitude. While the OECD can't require countries to implement its tax recommendations, they have a powerful influence. Tax regulations in its 34 member countries are required to conform to OECD standards. In some countries, regulators simply adopt OECD tax guidelines, rather than write their own. G-20 finance ministers will likely discuss how to advance the recommendations in Cairns and may refer to the plans in the summit conclusions due to be issued on Sept. 21. The OECD aims to complete its work, with a total of 15 recommendations, by the end of 2015. “The OECD clearly has a good grasp of current problems, and the clarity with which they describe them makes clear they are quite serious about recommending effective measures,” said Michael Durst, a veteran international tax lawyer in Washington, DC, who was interviewed about the group's work before the release of the draft rules. “A lot depends on whether political will is present in individual countries.” REPUBLICAN OPPOSITION The OECD's stance may be awkward for its biggest funder, the U.S., where many of the multinational companies whose tax avoidance techniques have received publicity are based. Some lawmakers have warned that the OECD's project could lead to a disproportionate tax increase on U.S. multinationals. Two Republican members of the U.S. Congress — Representative Dave Camp, the chairman of the House Ways and Means Committee and Sen. Orrin Hatch, the ranking member of the Senate Finance Committee — said in a June 22 joint statement they were “concerned” that the project is “being used as a way for other countries to simply increase taxes on American taxpayers.” Lawmakers in the U.S. and other countries are not required to follow the OECD recommendations. Still, if the U.S. doesn't adopt them, while other countries do, the discrepancies could potentially create conflicts between different countries' tax administrators. One of the group's most significant recommendations would limit the scope for companies to take deductions in one country without reporting commensurate profit in another. That would restrict the use of “hybrid instruments” which generate a tax deduction when paid out by a subsidiary in one country, but then get counted as a dividend received by a sister unit, which is often exempt. Another would make it harder to take advantage of the tax treaty benefits of a particular country simply by funneling profits through a paper subsidiary there, jeopardizing a popular technique used by Google and others known as a “Dutch Sandwich.” The plan also calls for companies to disclose to regulators detailed geographic breakdowns of sales, profits and taxes paid around the world, known as country-by-country reporting. The OECD's work has come in for criticism from the advocates for tougher measures, who say the current international tax system should be replaced with one that allocates taxable profits around the world according to factors such as where employees, sales or property are located.

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