The global tax regime is outdated and ill-equipped to deal with the evolving ways in which multinational firms avoid tax, and governments risk facing “global tax chaos” if the international tax regime is not overhauled, according to a new report by the Organisation for Economic Co-operation and Development (OECD). Weak co-operation among the G-20 countries on international tax matters means that the lack of transparency about offshore tax systems has led to rising tax evasion, and the international tax system has become highly skewed in favour of large multinational companies, stated the OECD report, which was commissioned by the G-20.
Presented in July 2013, at the G-20 finance ministers meeting in Moscow, the OECD report said: “The recent ‘offshore leaks’ disclosures and other scandals are clear indications that more remains to be done to combat offshore tax evasion.” Highlighting multinational companies such as Amazon, which have extensive warehouse operations in overseas countries, the report warned that the methods that multinational companies have used to minimise their tax burden has led to rising tensions among citizens who have developed an acute sense of “unfairness”, with respect to the international tax system.
Among its 15 recommendations on how to stem this worsening scenario, the report suggested that the G-20 established tougher rules that blocked the transfer of high-value and intangible assets, such as brands and intellectual property rights, to tax havens where there is little associated business activity. It also suggested that companies with extensive warehouse networks in a country should be required to pay local tax, and old treaties should be updated to neutralise the tax advantages of complex financial instruments, such as hybrid capital, interest payment deductions and over-capitalisation.
Frédéric Donnedieu de Vabres, the chairman of Taxand, an independent global organisation of specialist tax advisors, said that while the international tax regime needs a careful review, the prospect of a radically new international tax system may cause excessive uncertainty. “Any reform needs to be carefully thought out and subjected to a rigorous tax benefit analysis before implementation,” Mr de Vabres said in an online statement.
“The argument for transparency appears sound… but the consequences need to be carefully considered. The first countries to adopt full transparency are likely to suffer a competitive disadvantage, [as] multinationals could leave in droves for jurisdictions such as China or Singapore that are under less pressure to sign up to information exchange agreements. The consequences of these proposals could have a dramatic effect on business and… We should be careful for what we wish for," said Mr de Vabres.