The Organisation for Economic Cooperation and Development (OECD) has called for an urgent overhaul of international corporate tax regulations to curb multinationals corporations’ employment of loopholes, in various jurisdictions, aimed at reducing their exposure to national tax frameworks they operate in.
In a report on 12 February, the Paris-based think-tank said multinational companies were increasingly reporting profits in different jurisdictions from where their revenues were generated to avoid taxes. This flies in the face of research which suggests that OECD governments have actually trimmed their statutory corporate income tax rates from an average of 32.6 per cent in 2000 to 25.4 per cent in 2011.
Yet, the OECD said the effective tax rate paid by multinationals is often far lower due to deductions, allowances and a number of measures that firms use to reduce what they pay to the tax authorities.
"If you are a multinational you will be able to reduce your taxes substantially because the international tax architecture is completely out of date," said Pascal Saint Amans, director of tax policy at the OECD.
"However, if you are a purely domestic business, then you will have a lot more difficult time and will be at a competitive disadvantage," he added.
The OECD report comes in wake of renewed pressure on multinationals such as Google, Amazon, Starbucks and Apple who are widely thought to employ tax avoidance measures and take advantage of regulatory loopholes.
Recently, a UK parliamentary committee grilled multinational executives and called for an aggressive British clampdown on corporate tax avoidance. France has instigated its own official enquiries. Saint Amans said, "The idea is to come up with proposals that can be quickly implemented, perhaps a multilateral convention that could replace the 3,000 bilateral conventions."
"The OECD has offered to draft proposals for tackling the problem. If we want change and it's not going to take 10 years, then maybe we need a multilateral instrument that sweeps aside the existing conventions," he added. "If there is political support to go in this direction, then two years would be good, but it shouldn't take more time."
Responding to the OECD report, Bill Dodwell, head of Deloitte's tax policy group said there was widespread agreement that some form of international consensus is needed to update the international corporate tax framework.
"The OECD is best-placed to lead the development of new approaches to taxation. Implementing a new framework may require a global convention to override the many thousands of existing Double Tax Treaties – renegotiating these bilaterally could take many years," he added.
Dodwell felt the key to developing a new framework was contingent upon the willingness of major economies to adopt approaches which may in some cases act to their detriment. "US technology companies have leading positions in the development of internet-based commerce and US agreement to new approaches will be fundamental," he concluded.
The OCED has also warned the Eurozone is stunting economic growth internationally and poses the greatest risk to global recovery.