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.
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
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
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
They also claim expenses and losses in high-tax countries
and declare profits in jurisdictions with a low or no-tax rate.
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
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
firstname.lastname@example.org Leon Harris is a certified public accountant and tax
specialist at Harris Consulting & Tax Ltd.