“LONDON—An internationally agreed, comprehensive overhaul of rules is needed if governments are to be able to continue to tax companies without resorting to unilateral action that would damage investment and economic growth, the Organization for Economic Cooperation and Development said Tuesday.
As governments in many developed countries look to boost their revenues to cut high budget deficits and debt, the strategies that companies with operations in a number of different countries use to minimize their tax bill have come under heightened scrutiny.
Led by the U.K., Germany and France, governments have begun to discuss how to stop big multinational companies from using legal loopholes to shift their profits to low-tax countries.
In a report prepared for a meeting of finance ministers from the Group of 20 largest economies in Moscow next Friday and Saturday, the OECD said that while corporate tax revenues haven’t fallen in recent years, there is evidence that the practice of recording profits in low tax jurisdictions rather than where revenue is generated—a practice known as profit shifting—is increasing.
It warned that the practice poses a threat to the ability of governments to tax any company, since the perception that large multinationals can avoid paying their fair share will erode compliance more broadly.
“If other taxpayers [including ordinary individuals] think that multinational corporations can legally avoid paying income tax it will undermine voluntary compliance by all taxpayers—upon which modern tax administration depends,” the OECD said.
The OECD also said that it would be impossible, and potentially damaging, for individual governments to act alone to prevent profit sifting.
“Unilateral and uncoordinated actions by governments responding in isolation could result in the risk of double—and possibly multiple—taxation for business,” the OECD said. “This would have a negative impact on investment, and thus on growth and employment globally.”
The OECD said corporate tax regimes haven’t responded to changes in the way businesses operate, both because they are “grounded in an economic environment characterized by a lower degree of economic integration across borders” and because the nature of cross-border transactions has changed….”
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