OECD issues plan to crackdown on global tax dodging

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The Organisation for Economic Co-operation and Development has called for a ‘two-pronged attack’ to tackle tax avoidance and evasion through the introduction of new laws to reduce so-called ‘profit shifting’ and increased international cooperation.

Publishing an action plan to reform tax laws at the Group of 20 countries finance ministers’ meeting in Moscow, the international body said national tax laws had not kept pace with globalisation and the digital economy. This had left gaps between different regimes, which can be ‘exploited’ by multi-national corporations to artificially reduce their taxes, including moving funds to lower-rate countries.

The group therefore called for new laws to be put in place, based on international agreement, to set a new standard of tackling tax avoidance.

A plan published on Friday, set out 15 specific actions governments should take, both on their own and through international agreement, to prevent corporations from paying little or no tax.

Issues to be tackled include matching domestic and international rules to relate taxable income to the place where the economic activity that generated it took place. 

Existing tax treaty and transfer pricing rules can, in some cases, allow firms to separate taxable profits from the activities that generate them, the report warned. The G20 should therefore agree international definitions to ensure the ‘intended effect’ of the system –¬ that taxable profits cannot be artificially shifted away from countries where the value is created – is met. These principles could then be embedded in national law as required.

The OECD also set out plans for the automatic exchange of tax transparency information between jurisdictions.

A new single global standard will state what financial information should be shared automatically between countries signed up to a cooperation protocol. This will likely cover interest payments, dividends and the account balance of firms and individuals, and OECD said sharing arrangements should be in place by 2014.

Publishing the plans, secretary general Angel Gurría said the new strategy marked ‘a turning point in the history of international tax co-operation’.

‘International tax rules, many of them dating from the 1920s, ensure that businesses don’t pay taxes in two countries – double taxation. This is laudable, but unfortunately these rules are now being abused to permit double non-taxation. The action plan aims to remedy this, so multinationals also pay their fair share of taxes.’

The managing director of the International Monetary Fund, Christine Lagarde, welcomed the plans from the OECD.

‘Financial regulation and international taxation issues, including the agenda for dealing with international spillovers of national tax policies, also received attention in Moscow. The IMF will continue to do its part in these areas, given their significant implications for the global economy,’ she added.