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Double taxation rules "allowing companies to pay no tax at all", says OECD


An international body responsible for promoting economic coordination has called for "global solutions" to corporate tax avoidance by multinational businesses.

A new report from the Organisation for Economic Cooperation and Development (OECD) warned that some large international businesses were paying as little as 5% in corporate taxes, while smaller businesses that were not able to use the same "strategies" were paying closer to 30%. The report said that out-dated rules designed to protect companies from paying tax twice were "too often" being used to "allow them to pay no taxes at all".

"These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system," said Angel Gurria, OECD Secretary-General. "As governments and their citizens are struggling to make ends meet, it is critical that all taxpayers - private and corporate - pay their fair amount of taxes and trust the international tax system is transparent."

According to the report, many double taxation agreements between different jurisdictions do not properly reflect the way that large companies are now doing business. By failing to properly take account of cross-border integration, the value of intellectual property or new communications technologies, the rules give large businesses an unfair competitive advantage over smaller businesses, the report said.

The OECD said that the practices used by multinational businesses to reduce their tax bills had become "more aggressive" over the past ten years. Businesses based in countries with higher tax rates were creating numerous off-shore subsidiaries or 'shell' companies in lower tax jurisdictions in order to take advantage of national tax breaks, and were claiming expenses and losses in high tax countries against profits in low tax countries, according to the report.

The report follows calls from governments and tax authorities in Germany, France and the UK action on international tax standards. Addressing the World Economic Forum in Davos last month, UK Prime Minister David Cameron said that unless action was taken at an international level the "travelling caravan of lawyers, accountants and financial gurus" would only "move on elsewhere".

The tax affairs of multinational companies including Amazon, Starbucks and Google have come under press scrutiny in recent months following accusations of 'profit shifting' or deliberately transferring profits from high tax jurisdictions to those with lower rates of tax.

However tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, described the OECD's stance as "disappointing".

"The simple fact is that most well-developed jurisdictions - the UK and US in particular - already have a plethora of anti-avoidance rules they can use to stop diversion of taxable profits; that's what transfer pricing and controlled foreign company rules are for," she said. "If small jurisdictions are truly acting just as conduits in diabolical tax avoidance schemes, you don't need more rules - you need the revenue authorities to start doing their job with the tools they already have."

"The key problem that countries wrestle with is the desire to attract foreign investment with lower tax rates and better tax breaks versus the desire to maximise tax revenue, and every single country approaches this conundrum in a different way. Short of every single country joining together in one consolidated corporate tax system with the same reliefs and tax rate, we will never achieve a truly 'fair' amount of taxes because that conundrum will always be there," she said.

The OECD, which is currently carrying out work to identify and address possible gaps in international standards, sets rules on transfer pricing at an international level. The rules allow tax relief on loans between companies in the same group, providing that the company can show that the loan would have been available commercially on the same terms. In the UK, controlled foreign company (CFC) rules exist to capture companies which artificially divert UK profits to overseas companies, controlled by UK residents, in low tax territories.

The report will be presented to finance ministers for the G20 group of major world economies at their meeting later this week. It will be followed by an 'action plan', developed with governments and the business community, in the coming months, the OECD said. The action plan will set out ways to reinforce the integrity of the global tax system and set out a timeline in which these actions should take place, the OECD said.

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