G20 vows to tackle tax avoidance by multinational companies

The commitment appeared in a document summarising discussions between finance ministers of the G20 (6-page / 340KB PDF) group of major global economies at a meeting in Moscow last week. The document stated that ministers would "develop measures to address base erosion and profit shifting, take necessary collective actions" and support the work of the Organisation for Economic Cooperation and Development (OECD) in its review of tax avoidance laws.

"The global economy has changed massively over the last decade, but global tax rules have stood still for almost a century," said Chancellor of the Exchequer George Osborne on the UK Treasury's official Twitter account after the meeting. "Britain will lead the international effort to bring them into the twenty-first century."

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, praised the Chancellor for "taking the lead in seeking an international solution" to tax avoidance issues, such as profit shifting. However, she warned that it would not be easy for states to reach agreement on new rules.

"Any proposed changes to transfer pricing rules will produce both winners and losers among members of the G20, and it will not be easy to achieve consensus," She said. "Transfer pricing rules have not kept up with global business, particularly with the explosive growth in e-trading. But concepts such as residence and the definition of a permanent establishment have been around for a long time and are well-understood: there is a risk of collateral damage if changes are made without understanding the implications."

As an example, she cited the growing volume of exports by UK companies. "It would be a backward step to charge foreign taxes on the basis of sales by UK companies to foreign companies," she said.

She also dismissed suggestions that international governments could establish a single approach to corporate tax as "fanciful".

"Some activists have suggested that we move to a system of unitary taxation, where global revenues are apportioned on the basis of a fixed formula, calculated by reference to factors such as assets, employees and sales in a territory," she said. "It is fanciful to suggest that competing economies around the world could ever agree on a single basis for taxation – the roots of sovereignty are far too deep, and the only likely result is a muddle of competing formulae and multiple tax charges for global businesses."

"Some of the G20 members need to look closely at their own domestic rules, and whether they have produced the climate in which aggressive tax planning has flourished," she said.

Last week the OECD, an international body responsible for promoting economic coordination, warned that the practices being used by multinational businesses to reduce their tax bills were becoming "more aggressive". In its report on 'base erosion and profit shifting', it added that the existing rules gave large businesses an unfair competitive advantage over smaller businesses as they did not properly take account of cross-border integration.

The OECD is working with governments and the business community to produce an 'action plan', setting out ways to reinforce the integrity of the global tax system. As part of this work, three committees chaired by the UK, Germany and France and the US will consider issues relating to transfer pricing and 'base erosion', or the reduction by companies of their taxable income and assets.

The tax affairs of multinational companies including Amazon, Starbucks and Google have come under press scrutiny in recent months following accusations of 'profit shifting'. This refers to the practice of deliberately transferring profits from high tax jurisdictions to those with lower rates of tax. In the UK, HM Revenue and Customs (HMRC) was investigating tax worth £1 billion linked to transfer pricing issues in July last year, up 47% from the £680 million under consideration in 2011, according to figures obtained by Pinsent Masons.