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G20 backs OECD plan to tackle corporate tax avoidance

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24th Jul 2013
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Finance ministers from the G20 group of leading nations have backed plans to tackle international tax avoidance, reports Nick Huber.

The plan to reform the tax system and close tax loopholes has been broadly welcomed by accountants, business and tax, although critics say it isn’t radical enough and doubt whether most of the proposals will be implemented.

World leaders agreed to reform the tax system based on a plan published last week (20 July) by the Organisation for Economic Cooperation and Development. The plan intends to stop firms moving their profits across borders to avoid taxes.

The plan comes amid growing political concern and public anger over multinationals such as AppleGoogle and Amazon using legal arrangements to pay little or no corporation tax.

Action proposed by the OECD includes:

  • Multinationals would be required to disclose more details of their international tax planning structures and taxes paid in each country they operate
  • Tougher rules to block transfers of high-value and mobile "intangible" assets – such as brands and intellectual property rights – to tax havens if little or no associated business activity
  • Require taxpayers to disclose their “aggressive” tax planning
  • The possibility of new rules to stop global companies using transfer pricing (transactions between subsidiaries in a corporate group) to pay less tax

“If the proposals are implemented in full, multi nationals are likely to find that the efficacy of some routes currently used to reduce tax bills is reduced,” said Louise Higginbottom, head of tax for EMEA at law firm Norton Rose Fulbright. “Often proposals such as these get lost in a welter of disagreement on the detail between the jurisdictions involved, but the international impetus on this occasion, and the methods proposed for implementation would seem to give a better chance of real action happening on this occasion.”

The ICAEW said that the OECD tax plan “isn’t without its challenges”. Getting international agreement will means some countries will need to make some compromises on their approach to tax policies, the institute said.

Employers’ group the CBI said it agreed with the OECD that in the majority of cases existing international tax rules and principles work well but some need updating to reflect today’s changing global business environment.

But some tax campaigners said OECD tax plan wasn’t radical enough. “This report is a long list of tweaks to try and fix a broken system, and tweaks simply aren't enough,” said Kirsty Walker of protest group UK Uncut.

According to the Guardian the main areas that have not been addressed by the OECD action plan are:

  • French proposals for new tax rules specifically targeting digital companies such as Google, Apple and Microsoft. In addition, France's finance minister, Pierre Moscovici, had called for a link between tax and the collection of commercially valuable personal data by digital firms
  • Calls from anti-poverty campaign groups to involved developing nations – often the biggest losers from sophisticated tax engineering by multinationals – on an equal footing with representatives from larger economies.
  • Wholesale scrapping of existing tax treaty principles, as advocated by campaign groups such as Tax Justice Network. These groups argue that the current system is so open to abuse it should be replaced with a new model – known as unitary taxation – which they claim would better link the apportionment of taxable profits by multinationals to the territories in which economic activities occur. The OECD claimed there was international consensus at the G20 against such a radical approach. Pascal Saint-Amans, director of the OECD's Centre for Tax Policy, said he was "agnostic" but that member nations regarded such proposals as "unfeasible"

Corporate clients (and governments) will need advice on putting the OECD ideas into action. This could be boost income for accountancy firms, although AccountingWEB contributor Simon Sweetman reckons that the main beneficiaries of any compliance boom are likely to be the big accountancy firms.

Once again “the wolves will be put in charge of the flock” and “synthetic indignation” will remain the government’s default setting, Sweetman wrote in an article for AccountingWEB.

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By Chaztax
24th Jul 2013 19:54

The way forward

I'll keep this as brief as I can. In my opinion:

The rise of technology has highlighted fundamental weaknesses in the very concept of permanent establishment as a basis for determining whether a non-resident company is within the scope of CT. Given the scale nowadays of "disembodied" transactions, it is inappropriate to link taxability with physical presence as, for example, s.5 (2) CTA 2009 does.
 The foundation for a sound and enduring tax system must be laid by reflecting on the question of where, in principle, profits should be taxed.
 If an item is produced at a cost of £20 in country A, and then sold to a customer in country B for £30, then the correct split is for the £20 cost to be taxed in country A (when the taxpaying suppliers there are paid) and ALL of the £10 profit in country B.   

This is appropriate because the existence of the end customer is the entire raison d'être of the transaction; without a customer there is no point, from a business perspective, of making a product in the first place.
 My proposal is therefore to replace P/E, as one of the basic "building blocks" of international taxation, with a system which applies CT in the destination country.

I am not currently suggesting a change in, for example, the arm's length principle.
 Many practical questions would then need to be addressed, such as the need to set appropriate thresholds to avoid imposing a disproportionate administrative burden on smaller businesses.

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