The Organization for Economic Cooperation and Development recently issued a report saying global solutions are needed to ensure that tax systems do not unduly favor multinational enterprises, leaving citizens and small businesses with bigger tax bills. Israel joined the OECD in 2010.

The OECD report commissioned by the G-20, “Addressing Base Erosion and Profit Shifting,” said some multinationals use strategies that allow them to pay as little as 5 percent in corporate taxes, when smaller businesses are paying up to 30%. Some small jurisdictions act as conduits, receiving disproportionately large amounts of foreign direct investment compared to large industrialized countries and investing disproportionately large amounts in major developed and emerging economies, the report said.

“These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system,” OECD Secretary-General Angel Gurria said.

“As governments and their citizens are struggling to make ends meet, it is critical that all tax payers – private and corporate – pay their fair amount of taxes and trust the international tax system is transparent. This report is an important step towards ensuring that global tax rules are equitable and responds to the call that the G-20 has made for the OECD to help provide solutions to the global economic crisis.”

According to the OECD, many of the existing rules that protect multinational corporations from paying double taxation too often allow them to pay no taxes at all. These rules do not properly reflect today’s economic integration across borders, the value of intellectual property or new communications technologies. These gaps, which enable multinationals to eliminate or reduce their taxation on income, give them an unfair competitive advantage over smaller businesses.

They hurt investment, growth and employment and can leave average citizens footing a larger chunk of the tax bill.

The OECD claims that the practices multinational enterprises use to reduce their tax liabilities have become more aggressive over the past decade. Some, based in high-tax regimes, create numerous offshore subsidiaries or shell companies, each time taking advantage of the tax breaks allowed in that jurisdiction.

They also claim expenses and losses in high-tax countries and declare profits in jurisdictions with a low or no-tax rate.

What is going on? The OECD report identifies the following as “key pressure areas”: • international mismatches in entity and instrument characterization; for example, using US limited liability companies that are transparent in some countries and not others, or using bonds that are treated like loans in some countries and like share capital in other countries • the application of tax-treaty concepts to profits derived from the delivery of digital goods and services • the tax treatment of related-party debt-financing, captive insurance and other intra-group financial transactions • transfer pricing, in particular in relation to the shifting of risks and intellectual property • the effectiveness of anti-avoidance measures, in particular general anti avoidance rules (GAARs), controlled foreign corporation (CFC) regimes, thin capitalization (excessive debt) rules and rules to prevent tax-treaty abuse • the availability of harmful preferential regimes in offshore and onshore locations.

What is likely to be proposed? Given the key pressure areas, the OECD report indicates that its action plan will include proposals to develop: • instruments to end or neutralize the effects of hybrid mismatch arrangements and arbitrage • improvements or clarifications to transfer-pricing rules • updated solutions to “jurisdiction to tax” issues, in particular for digital goods and services (these solutions may include revised treaty provisions) • more effective anti-avoidance measures that complement the previous items; such measures might include GAARs, CFC rules, limitationof- benefits rules and other anti-treatyabuse provisions • rules on the treatment of intragroup financial transactions, such as those related to the deductibility of payments and the application of withholding taxes • solutions to counter harmful regimes more effectively, taking into account factors such as transparency and substance.

Comments

But you never know, the e-commerce proposals might slow down e-commerce.

It remains to be seen what will be proposed and implemented this side of 2020.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

leon@hcat.co Leon Harris is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd.

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