The Organisation for Economic Co-operation and Development has unveiled new proposals to tackle tax avoidance used by multi-national companies such as Amazon, Starbucks and Google.

The Organisation for Economic Co-operation and Development has unveiled new proposals to tackle tax avoidance used by multi-national companies such as Amazon, Starbucks and Google.

The proposed measures aim to increase transparency and close loopholes which allow companies to shift profits to jurisdictions to avoid paying tax by using complex finance structures known as hybrid mismatch arrangements.

“Gaps and mismatches in the current, outdated tax rules can make profits ‘disappear’ for tax purposes, or allow the shifting of profits to no-or low-tax locations where the business has little or no economic activity,” the report said.

The new guidelines include rules to improve transparency through revised standards for transfer pricing and country-by-country reporting of revenues, profits and taxes.

The draft proposals announced have been agreed by delegates from 44 countries in the Paris-based OECD and the G20.

“The G20 has identified base erosion and profit shifting as a serious risk to tax revenues, sovereignty and fair tax systems worldwide. 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 to artificially shift profits to locations where they are subject to more favourable tax treatment,” said Angel Gurría, secretary general of the OECD.

Following the global financial crisis, governments in Europe and the US have made it a key priority to increase transparency and crack down on tax evasion and secrecy.

The OECD recommendations will be a key item on the agenda when G20 finance ministers next convene at a meeting hosted by Australia’s Finance Minister Joe Hockey on 20-21 September in Cairns, Australia.

Controversy

There has been controversy on how multinational corporations such as Apple, Starbucks and Google have been able move profits from high-tax to low-tax jurisdictions through subsidiaries and offshore companies in order to reduce their tax bills. In their defence, it is argued that if policymakers attack firms for making use of legal activity, then such attacks undermine the rule of law and that it is up to elected governments to enact better, simpler and clearer rules in the first place.

Also, in the US, lawmakers and president Barack Obama have been angered at examples of US-listed firms moving their tax domicile status to low-tax jurisdictions such as Luxembourg, a process known as a corporate "inversion". US corporation taxes are among the highest in the world, against the OECD average of around 26 per cent.

Heather Self, partner at law firm Pinsent Masons, said the OECD had sensibly decided not to treat the digital economy as a separate case due to the difficulty in defining special rules for digital businesses which would “be out of date as soon as they had been introduced”.

“There is a lot of work still to do, and there are concerns that the overall package will not be coherent. The OECD recognises this risk, but the extreme time pressure to complete everything by the end of 2015 means it will be hard to achieve consensus in some difficult areas,” said Self.

Self said that companies required to prepare a country-by-country report of their activities will be “concerned” to ensure that the compliance burdens are proportionate.

“The OECD are to be congratulated on the degree of consensus reached, and on the quality of their communications. However, there is still a long way to go before we have a tax system fit for the 21st century,” she added.