Milking the multinationals

The G20 is taking aim at the huge companies that appear to pay little or no tax. But will its proposals have the desired effect? Simon Wilson reports.


Public anger has moved the debate about tax

The G20 is taking aim at the huge companies that appear to pay little or no tax.But will its proposals have the desired effect? Simon Wilson reports.

What is the BEPS project?

The Base Erosion and Profit Shifting (BEPS) project, put together by the OECD club of rich countries on behalf of the G20, is about reworking the rules on taxing global corporations to make it harder for firms, particularly big multinationals, to minimise their tax bills unfairly. If adopted and the G20 governments are expected to approve the proposals formally next month analysts say the BEPS measures amount to the biggest shake-up of multinational taxation since the basics of today's framework were put in place in the 1920s.

The new proposals are not about tackling outright abuses and illegal tax evasion. Rather, the project is about addressing the legal loopholes, gaps and mismatches between jurisdictions that "erode" the tax base by allowing profits to "disappear" for tax purposes, or by allowing firms to "shift" their profits to no- or low-tax locations where the business in question has little or no genuine economic activity. Such tactics are not illegal but they are easier to pull off in an age where lots of business activity is less focused on physical products, and more on services and intangible assets, such as intellectual property.

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Why is all this important?

Public anger at gigantic corporations that appear to pay little or no tax has grown since the financial crisis, and politicians in almost all rich countries are under increasing pressure to tackle issues of tax justice. The BEPS project matters most fundamentally because citizens need to have confidence in the tax system for a polity to function the perception that businesses can legally avoid tax undermines that trust. In terms of hard numbers, the OECD estimates that tax-dodging tactics lose governments 4%-10% of global corporate tax revenues a year, or between $100bn and $240bn.

But it's not just a political issue: the current tax mishmash is, some argue, bad for businesses, too. As Martin Sandhu argues in the Financial Times, the current system encourages the creation of "inefficient business structures and drains real resources" by encouraging firms to gear investment decisions towards minimising tax rather than maximising profit. Second, it unfairly advantages "large, deracinated and lawyer-armed multinationals over... local businesses that cannot make use of the same loopholes".

What are the proposals?

The OECD has put forward 15 action points, the thrust of which is to ensure that multinationals are taxed "where economic activities take place and where value is created". The most significant plank of the reforms is an internationally agreed template for forcing companies above a certain size to do more country-by-country reporting of where they really earn their money, hold assets, employ people and book their profits. Such a regime will help countries' tax authorities to identify anomalies and follow the money, although there will be no compulsion on companies to make this information public an oddity of the OECD proposals that may prove impossible to sustain.

What else is in there?

The other key measures are aimed at plugging the gaps through which tax revenues leak. These include a common approach for regulating the deduction of interest payments, which multinationals use to shift costs around. There will be a more stringent definition of what constitutes "permanent establishment" in a country, making it harder for companies to disguise their operations in a particular jurisdiction. And there are also measures aimed at curbing the converse "cash box" tactic, under which companies pretend to have a significant presence in a low-tax country when all they really have is a source of finance and a token presence for legal reasons.

What's missing from the package?

The "biggest disappointment", reckons The Economist, is that in opting to renovate the existing structure, rather than go for a root-and-branch overhaul, the OECD has stuck with the current system's most deeply flawed pillar namely the "independent entity" principle. This rests on the "fictitious assumption that the various parent and subsidiary companies in a corporate group act like separate legal persons that transact with each other at arm's length".

In reality, of course, in some cases the whole point of setting up a subsidiary is so that it can transact at non-market prices especially with regard to the payment of royalties on patents, copyrights and the like in order to minimise tax. The BEPS project does nothing to tackle this. Its proposals do seek to toughen the rules on "transfer pricing" (ie, the pricing of goods/intangibles transferred between different entities within a bigger enterprise), although some analysts fear the BEPS proposals may simply add another layer of complexity on this front.

Will companies pay more tax?

It's likely that some multinationals will, even if it is only a fewpercentage points. Indeed, some are already backing awayfrom practices deemed controversial in the anticipation of newrules requiring greater transparency. Amazon, for example,has opened taxable branches in European countries where itdoes lots of business, and no longer diverts all its profits toLuxembourg. But several commentators believe that the BEPSproject could have the (presumably unintended) consequenceof actually lowering corporate tax yields, at least in somejurisdictions. That's because some governments are highlylikely to try and remain tax-competitive by cutting their taxrates to compensate for closing avoidance loopholes.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.