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July 26, 2013


G-20 Goes after Corporate Tax Reform

The days of loopholes and lower taxes for corporations may soon be at an end as the Group of 20 largest economies is poised to back a major overhaul of international taxation designed to eliminate these perks. This 15-point plan has been developed by the Organization for Economic Cooperation and Development, and will likely be issued as meetings in Moscow between finance ministers from the G-20 come to a close.

These talks come as many governments have questioned whether corporations are paying enough taxes in an attempt to increase their revenue and cut high budget deficits and debts. Top executives from Google, Starbucks, and Amazon have been grilled during these hearings. The new plan aims to close gaps created by a web of bilateral tax treaties that has expanded since the 1920’s. These gaps allow for “aggressive” tax planning, enabling companies to adopt legal structures designed to shift their profits to the lowest-tax jurisdictions, regardless of where those profits are earned. It also seeks to replace an international tax system focused on what happens within national borders with a more modernized system to match the increasingly globalized operations of companies.

Part of this modernization would include updating rules on how goods transferred between units of a company in different countries are priced to reflect the fact that many are now “intangible”, in the form of licenses. These updates would also enable the government to tax profits that have been shifted to low-tax jurisdiction and to eliminate a company’s opportunity to avoid taxation through the use of complex financing structures and the use of contracts to avoid having a taxable presence in a country in which that company operates.

The OECD believes it has the support of all G-20 members and intends to implement the plan fully in two years. However smooth things appear to be going, there are still major disagreements. One of these disagreements involved digital companies like Google. France has argued that digital companies should pay taxes in countries like France because they are using the personal information of their citizens to earn profits; the United States sees this as an attempt to grab tax revenue and staunchly opposes the idea.

While governments quarrel over who will be getting a piece of the pie, the OECD has begun to introduce the new plan to companies that are likely to effected by the change.

“I have to say we are finding not only a receptive but cooperative private sector,” said Angel Gurria, the OECD’s secretary-general. “Although of course we do not expect them to very happily go there and deposit their more substantial check, I think they will understand that this is a way to keep the systems running better and the trains running on time.”

Any sort of attempt to fight this new plan may very well prove futile without public support, and the public’s opinion on large companies has been a little less than friendly as of late, seeing them as “hypocritical and untrustworthy,” as stated by Florian Wettstein, professor of business ethics at the University of St. Gallen.

Offshore Accounts/International Tax Disputes