Fed up with corporate tax avoidance that keeps their fingers off of billions of dollars in potential revenue to feed their spendthrift ways each year, governments in the world's richest economies soon hope to have a plan to do something about it.
The Organization for Economic Cooperation and Development (OECD) will present a preliminary version of such a plan at the meeting of G20 finance minister in Moscow on July 17.
Getting the world's major governments to cooperate on anything is never easy, but in corporate tax avoidance they have an issue that politicians of almost any culture or political stripe can agree on.
"This is a very challenging piece of work," said OECD secretary general Angel Gurria at the organization's annual conference in May. "We have created a regime where it is legal to pay no or little taxes. But I'm very confident we can find a formula that provides a level playing field."
In government speak, this level playing field means hiking corporate taxes.
Most of the world's developed economies also happen to have severe debt problems and are looking for revenue wherever they can find it. Getting more money out of multinational corporations would be a big help.
And several high profile examples of corporate tax avoidance over the past year have also put the issue on the public's radar screen, adding to the political pressure to "do something."
Back in May, for example, Apple Inc. (Nasdaq: AAPL) CEO Tim Cook was hauled before a Congressional committee to answer questions about the tech giant's practice of using Ireland to avoid paying billions in taxes.
Just last week the Government Accountability Office (GAO) issued a report saying that large U.S. corporations pay a tax rate of just 12.6% — far below the statutory U.S. corporate tax rate of 35% and less than many average working Americans pay.
And France caused a stir earlier this year when it proposed an "Internet tax" on the collection of personal data in an attempt to recapture lost tax revenue from companies like Apple, Google Inc. (Nasdaq: GOOG), Facebook, Inc. (NYSE: FB) and Amazon.com Inc. (Nasdaq: AMZN).
An End to Corporate Tax Avoidance by 2015?
The OECD's draft plan calls for its 60 member countries — in addition to the G20 nations — to agree to specific changes in the international tax rules in just one to two years.
That's lightning fast for international tax changes, particularly ones of the magnitude that the OECD is proposing.
And it means that multinational corporations that rely on tax avoidance strategies in their tax planning will need to start preparing for these major changes very soon, if they haven't already. Of course consumers will have to adjust too in anticipation of higher prices for multinational products.
While some companies will end up paying more in taxes if the OECD plan is adopted, a streamlining of international tax rules would also have some benefits.
"There is considerable instability, and instability is the enemy of business and investment," William Morris, the senior international tax counsel for General Electric Co. (NYSE: GE), told Reuters. Morris also serves as a liaison between business interests and the OECD.
The OECD has looked at all the classic corporate tax avoidance strategies and intends to address them all.
For example, routing revenue through Ireland, as Apple does, is a very popular tool for dodging taxes. Companies simply create subsidiaries based in Ireland, which has one of the lowest corporate tax rates in the Europe.
Also widely used is a scheme for distributing some profits from research to business entities in low-tax nations like Ireland. Microsoft Corp. (Nasdaq: MSFT) is among the companies doing this.
The OECD would especially like to put to an end one galling abuse in particular. Some corporations use international tax rules designed to prevent double taxation to create "dual resident entities" that result in the company having no tax status in either county, with no taxes owed to anyone.
In all, the OECD plan makes 12 recommendations to its member countries.
"My assessment is that there is strong consensus on what we will come up with," Pascal Saint-Amans, the head of the OECD's tax division, said at the May conference.
Corporate Taxes Are Government's Problem
Governments have been expressing more and more frustration over corporate tax avoidance, but domestic laws can't fix the whole problem — only an international solution such as the one the OECD is proposing will close all the loopholes.
One of the key aspects of the problem is that it is of the government's own making – the corporations aren't doing anything illegal. The CEOs have a fiduciary duty to their shareholders to maximize return, and that includes using legal methods of avoiding taxes.
Governments finally seem to be realizing that corporate tax avoidance is an issue only they can fix.
Just last month the United States pledged to move forward on legislation that would deal with the use of shell companies by requiring disclosure of true ownership – a step that would work in concert with the OECD proposals to curb corporate tax avoidance.
British Prime Minister David Cameron made a similar promise, and has made cracking down on corporate tax avoidance a central theme of his presidency of the G8 this year.
With the international consensus for action growing stronger every day, the chances of the OECD plan becoming reality in the next few years are better than average.
"It is an issue we are committed to addressing," Sigbjorn Johnsen, Norway's finance minister, told The Guardian. "This is a moving train: it is on the rails and it cannot be stopped."
Recently Money Morning Chief Investment Strategist Keith Fitz-Gerald laid out his plan for fixing corporate tax issues – and how some addle-minded tax reform proposals would affect the average investor.
- Money Morning:
How These Companies Get Away with Paying Peanuts in Corporate Taxes
- Money Morning:
The G8 Will Never Get a Handle on Taxes at This Rate
- The Guardian:
OECD prepares new rules to limit corporate tax avoidance
Governments to target tech giants' tax avoidance: draft
OECD drive against tax avoidance gets fresh backing