Tax Crackdown: World Profit-Shifting Ban Looms

08 October 2014

Measures to prevent multi-national firms avoiding billions in tax by shifting profits abroad are outlined by the OECD.

International authorities have unveiled the first step in a major crackdown on billions of dollars' worth of international corporate tax avoidance, warning that existing rules are not fit for purpose.

The Organisation for Economic Co-operation and Development (OECD) said its plan would help prevent the kind of legal corporate tax avoidance which it is alleged has been used extensively by companies such as AppleGoogle and Starbucks.

Its detailed new proposals, seven of which are published today, are largely aimed at stemming the extent to which companies can shift profits from one country to another in order to take advantage of lower tax rates.

Such practices are particularly common among tech businesses and other companies whose activities are not easily traced to single countries.

The OECD report said: "Gaps and mismatches in the current, outdated tax rules can make profits 'disappear' for tax purposes, or allow the shifting of profits to no-or low-tax locations where the business has little or no economic activity".

Although there are few reliable estimates of these practices - also known as base erosion and profit shifting (BEPS) - they are thought to have contributed to billions of dollars of tax avoidance by leading multinationals.

According to one calculation, there is more than $2trn held by US multinationals in offshore financial centres which, at a 30% tax rate, would be equivalent to around $700bn in missing government revenue.

The reports suggests this money could be used support the fragile economic recovery after years of austerity and "social hardship".

Although such tax avoidance is legal, the report says taxpayer trust has been damaged by these practices.

The OECD says the measures are aimed at promoting the "spirit of the law - not just the letter".

They were described by auditors PwC as "the most significant change to international tax in modern times".

The proposals, which are long and complex, aim to close numerous loopholes in domestic and international laws which allow companies to shift such profits around the world, using a variety of financial instruments.

“The BEPS Project marks a turning point in the history of international co-operation on taxation", the report said.

However, it is likely to be some years before the plans come to fruition. A second half of the report, including more proposals, is due next year. The plans will need then to be approved by the G20, before individual governments have an opportunity to implement them.

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