Thanks in part to past concerns that globalization could lead to double taxation, corporations have numerous techniques at their disposal to reduce their tax bills, including the placement of subsidiaries and spinoff holding companies in low-tax jurisdictions.
The Group of 20 wants to change that. The Organisation for Economic Cooperation and Development is developing proposals to bring the international tax system, currently a maze of more than 3,000 treaties and ad hoc laws to prevent tax evasion, into the digital age. The effort is part of the OECD’s “Base Erosion and Profit Shifting” project, launched in 2013 at the G20’s direction.
The OECD is taking on several issues, including how to allocate profits when the ownership of an intangible asset, such as a trademark, is separated from activity, such as research and development, that enhances the asset.
Another proposal could eliminate a rule that allows companies to have a warehouse in a country without establishing a tax residence there. That could hit Amazon.com, which reports its European profits to tax haven Luxembourg thanks to the warehouse exemption.
The world’s major economies have already signed on to a new information-sharing standard as part of the project, but the OECD has no enforcement power, so each country would need to change domestic laws to limit profit shifting and abusive transfer pricing.
The GOP sees a money grab. Noting that firms whose tax strategies have drawn the most attention — Google, Apple, Starbucks — are American, Republicans have warned the Treasury that the project may be little more than effort by foreign countries to dig into U.S. tax coffers.