OECD’s Plan for Crackdown on Companies’ Tax Avoidance

A plan for cracking down on tax-avoiding strategies used by companies such as Google Inc. (GOOG), Yahoo! Inc. (YHOO) and Apple Inc. (AAPL) was proposed by The Organization for Economic Cooperation and Development. The OECD was charged by the G-20 to tackle the issue.

The OECD’s plan was called by German Finance Minister Wolfgang Schaeuble a “major step.” The aim of the proposal is to develop rules over the next two years which would prevent companies from evading taxes by putting patent rights into shell companies, taking interest deductions in one country without reporting profit in another, as well as forcing them to reveal information regarding income all over the world.

“It’s a matter of justice and fairness that multinational companies pay their fair contribution” to national budgets, Schaeuble claimed. Without “fair burden sharing, in the end we will destroy even a global, open economy,” he said.

The 40-page report underlines how new rules could benefit economy of different countries if companies would stop using mailbox subsidiaries in places like Bermuda and the Cayman Islands and avoid paying billions in taxes.

“It is clear multinational companies have developed an unprecedented know-how for minimizing their worldwide tax pressure. These situations are literally impossible to explain to our fellow citizens,” underlined the importance of new rules French Finance Minister Pierre Moscovici.

Some of the OECD proposals request for rules which would make it harder to shift profits by assigning intellectual property, such as patent rights, to offshore units. Today such offshore subsidiaries can take credit for profits arising from rights developed in countries like the U.K. and U.S., usually with cash which was initially provided to them by parent companies.

The OECD can propose the changes but it is up to governments to decide whether they wish to compel with them.

The plan of OECD was called by The Tax Justice Network, which is a non-profit group “a series of piecemeal patches. These patches are generally to be welcomed, as immediate remedies to the gaping holes in the broken international tax system.”

“International tax rules affect everyone and it is often the poorest countries that suffer the greatest losses due to tax abuse,” claimed Claire Godfrey, senior policy advisor of development agency called Oxfam. Oxfam and Christian Aid groups appealed for adjustment of OECD’s proposal to require companies to tell regulators in each country where they report their profits so that such information would be made public. That way it would be possible to see how much profit is in tax havens.

According to U.K. Prime Minister David Cameron the OECD report “shows how taxpayers, governments and businesses all suffer when some companies manipulate the tax system to avoid paying their fair share of taxes. And it highlights how much we still have to do to bring the international tax system, conceived back in the 1920s, into the 21st century.”

Source: Bloomberg