Overhaul corporation tax to curb avoidance, says OECD

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The Organisation for Economic Co-operation and Development has demanded a crackdown on corporation tax avoidance, backing complaints that global companies have advantages that “undermine competition”.

In a report published today, the OECD calls for an overhaul of tax laws including controversial transfer pricing rules that are based on “principles developed by the League of Nations in the 1920s”.

The report blames “profit shifting” from high to low tax countries for a “significant” erosion of tax bases in major economies.

It warns that the practice “constitutes a serious risk to tax revenues, tax sovereignty and tax fairness” around the world.

Companies including Starbucks, Amazon and Google (NasdaqGS: GOOG - news) have been criticised for avoiding UK corporation tax by transferring profits to lower tax jurisdictions. The practice is legal but has been branded “immoral” by the Public Accounts Committee.

However the OECD, which prepared its report for G20 finance ministers who meet in Moscow at the end of the week, blames governments and companies.

It says that the “tax practices of some multinational companies have become more aggressive over time, raising serious compliance and fairness issues”.

However, it adds that “there is a fundamental policy issue” which is that tax laws have not “kept pace with the changing business environment”.

Both domestic and international tax rules are “still grounded in an economic environment” that fails to account for the escalation in global trade or “the development of the digital economy”.

The so-called “double tax treaties”, which are meant to minimise trade distortions, were designed to boost global trade in the 1920s. Their inadequacies have “led to gaps that provide opportunities to eliminate or significantly reduce taxation on income ”.

Companies, the report says, are left to “exploit differences in domestic tax rules and international standards”. It calls for immediate and co-ordinated action by governments and warns that the effort could require treaty changes. “What is at stake is the integrity of the corporate income tax,” it adds.

Pascal Saint Amans, the OECD’s director of tax policy, said: “If you are a multinational, you will be able to reduce your taxes substantially because the international tax architecture is completely out of date.

“However, if you are a purely domestic business, then you will have a lot more difficult time and will be at a competitive disadvantage.”

The OECD has offered to draft new proposals so governments can implement rules within two years . In his Autumn Statement, George Osborne said he had asked the OECD to look at overhauling corporation tax said the UK would “make it an important priority of our G8 presidency”.

Richard Woolhouse, head of tax and fiscal policy at the CBI, said: “In some cases the last time business tax rules were updated was in the ’60s and ’70s, reflecting an era of national-based firms. That’s why the tax system needs to be updated for the global and digital age.”