A proposed clampdown on global tax avoidance took a step forward on Tuesday with a leading global think tank releasing key recommendations ahead of a G-20 meeting later this month.
The practice of companies shifting their profits to other country's jurisdictions to avoid paying tax has drawn criticism from governments and pressure groups. The Organization for Economic Co-Operation and Development (OECD), a Paris-based think tank, released seven guidelines on Tuesday to combat this practice. It hopes they will be implemented into international law. The guidelines are is also intended to help put an end to the erosion of tax bases for countries and create a single set of rules for every government to follow.
"Our recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system," OECD Secretary-General Angel Gurria said in a statement announcing the guidelines.
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The OECD, which is made up of 34 members who are mostly from the developed world, has been campaigning vigorously for governments to get tougher on corporate tax reform. It believes aggressive tax strategies by many multinational companies represent a grave risk to tax revenues, sovereignty and fairness, and hopes these new plans will be addressed by 2015.
In July 2013, the OECD drew up a proposal for a fundamental rethink of global tax rules, which was backed by the G-20 group of leading economies. The plan called the Action Plan on Base Erosion and Profit Shifting—identified 15 actions that will allow governments to collect the tax revenue they need and give businesses the certainty they need to invest and grow.
Tuesday's release builds on this work and effectively defines the first seven of the 15 guidelines it hopes to be a key item on the agenda at the G-20 finance ministers meeting on Sept. 20-21 in Cairns, Australia.
Among the seven new elements there are plans on how to address tax in the digital economy and a model to help put an end to costly multiple deductions in one country that might not correspond to the taxation in another. "Treaty shopping"—where multinationals structure their business to take advantage of more favorable tax treaties elsewhere—and other forms of treaty abuse have been targeted as well as what it calls "harmful" tax practices.
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Google, Apple scrutinized
High-profile companies such as Google, Amazon and Apple, have had their tax practices scrutinized in the past few years, although they have claimed that they follow the law wherever they operate and pay what tax is due. Tim Cook, Apple's CEO, even testified at a hearing by the U.S. Senate Permanent Subcommittee in May 2013, disputing assertions that the company avoids billions of dollars in U.S. taxes by shifting profits to foreign affiliates.
The OECD has previously stated that the ability for big companies to move profits back and forth overseas, and exploit tax loopholes, gives them a distinct advantage over small businesses. Some multinationals have found ways to pay as little as 5 percent in corporation tax, while the tax burden on smaller businesses is as much as 30 percent. The organization has also singled out specific countries in the past, pointing the finger at Luxembourg, Cyprus, the British Virgin Islands and the Seychelles for not meeting its international standards on tax transparency.
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CEOs want change
In countries like the U.S and the U.K., the subject has been a hot topic for ordinary taxpayers in the years following the financial crash of 2008. However, it appears there is a genuine willingness to change within the business community, too. A PwC survey in January found that chief executive officers from around the world are in favor of an overhaul of the international tax system, claiming that nearly two-thirds of its respondents believed in the need for change.
With Australia currently chairing the G-20 meetings in 2014, Prime Minister Tony Abbott has been the loudest cheerleader for an overhaul of the corporate tax system. At the World Economic Forum in Davos in January, Abbott argued that corporate tax should be paid in the country in which the revenues are generated and vowed to combat companies that chased tax opportunities to push for private-sector led growth.
—By CNBC's Matt Clinch