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OECD unveils global crackdown on tax arbitrage by multinationals

Story highlights

  • The impact of the project will depend on governments' willingness to make compromises over the next two years'
  • The effort to reshape the international tax rules was a chance to avert "global tax chaos"
  • The plan sets out more than a dozen proposals to block gaps between national tax systems

Plans for a global crackdown on tax arbitrage marking "a turning point in the history of international co-operation on taxation" were unveiled on Friday at the meeting of G20 finance ministers in Moscow.

The wide-ranging action plan on tackling "base erosion and profits shifting" has been drawn up by the Paris-based Organisation for Economic Co-operation and Development for the G20 in response to sustained criticism of the low tax rates paid by some multinationals companies such as Google.

Pascal Saint-Amans, the top tax official at the OECD, said the initiative would force up tax rates for multinationals that organise their affairs so they paid little tax. He said: "They know the golden age of 'we don't pay taxes anywhere' is over."

The effort to reshape the international tax rules was a chance to avert "global tax chaos", according to the OECD, which said a failure to act could result in governments taking unilateral action. Countries outside the OECD such as India and China will be invited to take part in the revamp of the rules on an equal footing, in what experts said might be the last opportunity for the OECD to exert sufficient influence on the international tax system to reach a global accord.

The plan sets out more than a dozen proposals to block gaps between national tax systems and tackle practices that artificially separate taxable income from the activity that generates it. It includes proposals to tackle abuses of tax treaties, to prevent tax avoidance by shifting intangibles between group companies and to neutralise the impact of "hybrid" structures used to minimise billions of dollars of tax.

The action plan aims to tackle the selling arrangements known as "commissionaire" structures that are widely used by multinationals including digital companies such as Google and Amazon to limit their tax bills in countries where they make sales. But broader issues around the taxation of the digital economy will be examined by a dedicated task force.

The impact of the project will depend on governments' willingness to make compromises over the next two years as details of the proposed changes are hammered out.

Richard Collier, tax partner at PwC, professional services firm, said the initiative could be "the biggest reform of global taxation in a lifetime" but warned that change would not be swift and depended on continued commitment of governments and business. He said: "The biggest risk to the . . . project will be if momentum and buy-in now wanes."

The Business and Industry Advisory Committee at the OECD said it welcomed a "considered and analytical" review of the rules but stressed the continued importance of relieving double taxation. Will Morris, chair of the BIAC's tax committee said: "In some areas, the international tax system has not kept pace with globalisation and changing business models, and it is appropriate to look again at those areas and consider, based on all the evidence, whether any changes are required."

The Tax Justice Network, a campaign group that has been pushing for a radical change in the international tax rules, criticised the OECD for failing to deal with "fundamental flaws" in the system. It said "piecemeal recommendations for states to apply patches to the increasingly leaky international tax system . . . would be like trying to plug the holes in a sieve."