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In a report published yesterday, the Organisation for Economic Cooperation & Development (OECD) calls for an overhaul of international tax laws, including controversial transfer pricing rules, in an effort to stamp out corporate tax avoidance. The report addressed concerns from many quarters that global companies have opportunities to “profit shift” from high to low tax countries and the OECD claim that this “constitutes a serious risk to tax revenues, tax sovereignty and tax fairness” around the world.

 

In the UK companies such as Starbucks, Amazon and Google have been criticised for avoiding UK corporation tax by transferring profits to lower tax jurisdictions. The practice is legal but has been branded “immoral” by the Public Accounts Committee even though these companies have fully complied with the internationally agreed transfer pricing rules. As the President of Google told Margaret Hodge’s Public Accounts Committee “we adhere to the legislation. We don’t make the legislation, you do. If you don’t like it, change it and we will comply with the new legislation.”

For nearly 100 years all “Double Tax Treaties” between countries have included “Transfer Pricing Rules” which are based on principles developed by the League of Nations in the 1920s.

As the rules currently stand global companies (referred to as multi-national enterprises) such as Starbucks, Amazon and Google are required to document transactions between group companies and justify payments between them – be they invoices or royalty payments – as being carried out on an arms-length or third-party basis. In other words at the same price as if the transactions between unconnected companies. We must assume they have done so and that HMRC and the appropriate tax authorities in the other countries, have accepted their justifications. It is worth noting that the other countries involved are full EU member states (Ireland, Luxembourg & the Netherlands) not “dodgy tax havens” as the media and politicians would have us believe.

According to the OECD report both domestic and international tax rules are grounded in an economic environment that fails to account for the escalation in global trade or the development of the digital economy. The “double tax treaties”, which are meant to minimise trade distortions, were designed to boost global trade in the 1920s and are no longer fit for purpose. They need to be revised.

The report says that companies are left to “exploit differences in domestic tax rules and international standards”. It calls for immediate and co-ordinated action by governments and warns that the effort could require treaty changes. “What is at stake is the integrity of the corporate income tax,” it adds.

Pascal Saint Amans, the OECD’s director of tax policy, said: “If you are a multinational, you will be able to reduce your taxes substantially because the international tax architecture is completely out of date.

“However, if you are a purely domestic business, then you will have a lot more difficult time and will be at a competitive disadvantage.”

The OECD has offered to draft new proposals so governments can implement rules within two years. In his Autumn Statement, George Osborne said he had asked the OECD to look at overhauling corporation tax said the UK would “make it an important priority of our G8 presidency”.

As someone who practices in the area of international taxation I have carried out many transfer pricing studies and I agree that revision of the existing rules is long overdue. Apart from the concerns of governments as outlined above in my experience companies need much more certainty in how tax authorities in different countries will apply the rules. In fact in some cases different tax authorities in the same country often interpret the rules differently. For example a customs authority prefers a high fair value when goods are landed so it can get more revenue but a corporate tax authority prefers a low fair value when goods are landed so there is more profit to be taxed when they are sold.

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Category: International Taxation

 

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