G-20 Backs Plan to Curb Tax Evasion by Large Corporations
G-20 Backs Plan to Curb Tax Evasion by Large Corporations
By ANDREW E. KRAMER
Published: July 19, 2013
MOSCOW — Government officials from the world’s largest
and richest economies on Friday for the first time endorsed a blueprint to curb
widely used tax avoidance strategies that allow some multinational corporations
to pay only a pittance in income taxes.
Angel Gurria, secretary-general of the Organization for
Economic Cooperation and Development, spoke about the agency's tax-avoidance
proposal on Friday in Moscow.
In one widely cited example, Starbucks last year paid no
corporate tax in Britain despite generating sales of nearly £400 million, or
about $630 million, from more than 700 stores in that country. Apple, despite
being the most profitable American technology company, avoided billions in
taxes in the United States and around the world through a web of complex
subsidiaries.
In light of such practices – which are entirely legal,
but take advantage of differing tax rules around the world – the Organization
for Economic Cooperation and Development has proposed that all nations adopt 15
new tax principles for corporations. The plan focuses only on corporations and
would, if adopted widely, shift some of the global tax burden toward large
companies — the ones big and rich enough to devise complex tax-reduction
strategies — and away from small businesses and individuals, which tend to
spend a much bigger share of their incomes on taxes.
The list, presented Friday at a meeting of finance
ministers of the Group of 20 countries in Moscow, includes ideas to prevent
corporations from “treaty shopping” to find countries with the lowest taxes and
then find ways to book their profits there, even when much the money is made
elsewhere.
The group recommended strict rules for defining where a
company has a permanent presence. It also proposed three measures to limit the
practice of so-called transfer pricing — the shunting of profits and losses
between subsidiaries by disguising them as internal corporate payments for
goods or, as is increasingly common, for copyright or patent royalties.
It may be too soon to know whether Friday’s proposal
represents a new global commitment to tackle an issue that has drawn angry
outcry in some countries — lawmakers in the British Parliament and the United
States Congress this year have held hearings on corporate tax avoidance — or
whether this proposal will gain no more traction than past statements of
resolve by the Group of 20 nations with the biggest economies. Although the
United States did not have a representative at Friday’s presentation, the Obama
administration has endorsed the international reform and signed an initial
commitment earlier this year.
The O.E.C.D. does not expect to complete work on the
proposals until the fall of 2015, and after that it would be up to governments
and legislatures to implement them by passing new tax laws.
Some of the proposals would seek to standardize the way
profits are counted, and to assure that companies could not – as Apple did –
create subsidiaries that had profits but, for tax purposes, were located
nowhere. There would also be efforts to assure an international exchange of
information, to make it possible for countries to assess the taxes each
multinational was paying around the world.
The plan is called BEPS, for “base erosion and profit
shifting,” a description of tactics that companies use to reduce their taxes.
If successful, it would mean that countries could collect more in taxes at the
same time they lowered tax rates, simply because the base they were taxing was
larger.
The details, however, may prove daunting and will be
subject to intense lobbying by corporations. In addition, countries have long
used tax policies in efforts to lure businesses to locate operations there. The
O.E.C.D. plan would not seek to end such competition entirely – any country
would be free to charge lower rates than others did — but it would try to keep
countries from essentially offering companies ways to avoid paying taxes
anywhere, something critics say Ireland did in reaching agreements with Apple.
Senator Carl Levin, the Michigan Democrat who chaired a
subcommittee that has investigated tax arrangements at several major companies,
including Apple, said there is “growing global demand for reining in corporate
offshore tax abuses” and said he hoped the United States would act on the
proposals.
“It’s long overdue for Congress to close outrageous
corporate tax loopholes, increase tax fairness, and use the revenue to stop
irrational sequestration cuts from further damaging national security,
education, health care, research and innovation and more,” he said Friday.
If accepted, the countries in the Group of 20 would
commit to the reform at a gathering of heads of state in St. Petersburg,
Russia, in September.
“It’s a matter of justice and fairness,” Angel Gurría,
the secretary general of the O.E.C.D., said at the presentation of the new plan
with the finance ministers of France, Britain, Germany and Russia.
Pierre Moscovici, the minister of economy and finance of
France, said some multinational corporations manage to pay an income tax of
only 3 percent or so. “This is unbelievable to our fellow citizens, who pay
their fair share,” he said.
Multinational companies have found they can pay less by
opening subsidiaries in the Netherlands, Luxembourg and Ireland, or in North
America in offshore havens like Bermuda or the Cayman Islands.
Authorities in Ireland, for example, for years have
encouraged multinational companies like Google, Facebook, Pfizer, Johnson &
Johnson and Citigroup to set up shop and provide good jobs, in return for
helping those companies pay less tax around the world. And in response to
critics, Ireland has blamed loopholes in other countries’ tax policies and the
lack of uniformity in international taxation principles.
On Friday, Ireland’s Department of Finance issued a
statement saying “Ireland welcomes the work of the O.E.C.D.,” and that tax
avoidance strategies arose because “of the constantly changing business
environment with which international common tax principles may not have kept
pace.” The statement noted that Ireland had been part of the task force that
helped draft the proposals announced on Friday.
Shifting profits to low-tax countries and costs to
high-tax countries is less an option for small businesses and individuals, who
inevitably wind up carrying more of the tax burden as a result. In the United
States, for example, taxes on corporate profit contributed 40 percent of all
income tax to the United States Treasury 50 years ago. Today, corporations
contribute less than 20 percent, with the slack taken up by small companies and
those paying individual income tax.
The Organization for Economic Cooperation and
Development, a government-supported research organization representing 34
countries, says taxes on individuals and small businesses have increased in
nearly all its members. Value added taxes — or sales taxes — have gone up in
recent years in more than two dozen O.E.C.D. countries, for example.
The tactics of tax-shopping companies include placing
copyrights in offshore shell companies, then paying royalties to those shell
entities as a way of reducing the stated taxable profits earned in higher-tax
countries. Using such gambits, businesses that operate across borders have an
advantage over businesses operating mostly domestically, skewing the global
economy in favor of multinational chains and large corporations, the O.E.C.D.
report said.
The Starbucks example in Britain is telling. Last year it
reported no profits there after paying high prices for coffee and for copyright
royalties to other Starbucks subsidiaries that were located outside the
jurisdiction of British tax authorities.
In contrast, the owners of a small coffee shop would
probably not able to reduce its tax liability by claiming they had paid royalty
fees to an overseas company owning the copyright to their cafe’s name.
The reform is intended to address such inequities, the
finance ministers said Friday.
Although it did not violate British laws in its tax
strategy last year, Starbucks has volunteered to pay £10 million pounds, or
about $16 million, in additional taxes to the British government in future
years, saying it understood its British customers were upset by the outcome of
the tax rules the company was following.
Floyd Norris contributed reporting from New York and
Stephen Castle from London.
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