Leigh Thomas Paris

A sweeping overhaul of international corporate tax rules was urgently needed to stop big companies dodging payments to cash-strapped governments, the Organisation for Economic Co-operation and Development (OECD) said yesterday.

Governments face a growing outcry from voters to force big companies with extensive international business to pay more tax as evidence mounts that many multinationals use differences between countries’ rules to reduce their tax bill.

The OECD said multinational firms were increasingly reporting profits in different countries from where their revenue was earned to avoid taxes.

The trend comes against the backdrop of falling business tax rates as OECD governments trimmed their statutory corporate income tax rates to an average of 25.4 percent in 2011 from 32.6 percent in 2000.

However, the effective tax rate paid by companies is often far lower due to deductions, allowances and a range of measures that firms use to reduce the tax they pay to authorities.

The OECD also warned in a report that governments were not alone in losing out.

“If you are a multinational you will be able to reduce your taxes substantially because the international tax architecture is completely out of date,” OECD director of tax policy Pascal Saint-Amans said

“However, if you are a purely domestic business, then you will have a lot more difficult time and will be at a competitive disadvantage.”

British legislators are mulling changes to the law following revelations about how companies such as Apple, Starbucks, Google and Amazon use complex inter-company transactions to cut their tax bills. UK legislators grilled tax officials from top accounting firms last month over their role in helping big companies avoid tax.

France is also studying new ways to collect more tax from global internet companies, which often serve consumers in high-tax countries with subsidiaries in low-tax jurisdictions to reduce their tax.

The OECD report called for a rethink of international rules that go back to the 1920s to overcome the constraints of existing bilateral tax treaties.

“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,” Saint-Amans said.

The OECD offered to draft proposals for tackling the problem so governments could work towards introducing new rules within two years.

Saint-Amans said support among governments was growing for a deep overhaul of international guidelines from the OECD for transfer pricing, which is how companies charge for services and goods among units in the same group.

He also saw growing demand to revise rules for determining how much business a company must do in a country to pay taxes there.

“If we want change and it is not going to take 10 years, then maybe we need a multilateral instrument that sweeps aside the existing conventions,” Saint-Amans said. “If there is political support to go in this direction, then two years would be good.” – Reuters