OECD releases plan to curb corporate tax-dodging

The Organization for Economic Cooperation and Development has released details of a plan to eliminate tax-dodging by multinational companies that has been developed over the last two years.

The plan aims to clamp down on the practice of shifting profits from the jurisdiction where they are earned into low-tax havens. It also attempts to make sure that value added taxes or GST on digital products are paid in the country where the consumer bought the goods.

• Leaked Luxembourg files expose global companies' secret deals to avoid tax
• HSBC documents show bank helped clients hide billions from tax man
• Fighting the corporate tax tricks that lead to inequality

The plansets outrequirementsfor detailed reporting by multinationals to show how expenses are allocated and taxes are paid in holding companies around the world, in an effort to introduce transparency. And it provides for extensive sharing of these details among countries.

Fundamental changes in international tax rules

The OECD and G20 nations began attempting to redraft tax rules in 2013 and now call the proposal "the most fundamental changes to international tax rules in almost a century."

Finance ministers from the 20 leading world economies will discuss the plan in Peru on Thursday, and their leaders are expected to finalize it at a G-20 summit next month in Turkey.

The 62 countries involved in the process estimated that between four and 10 per cent of corporate taxes are lost to governments because of sophisticated tax dodging schemes.

"The confidence that citizens have in the fairness of the tax system is at stake when there is a perception that some can legally avoid tax liabilities," the OECD said in its background document.

The problem is that domestic taxation rules are not the same across borders and multinationals have been quick to exploit those differences, while tax law is slow to catch up.

Among the provisions:

• New standardized rules on transfer pricing.
• Stronger tax treaties.
• Insisting that economic activities are taxed in jurisdictions where they occur.
• Strengthening rules for where profits from digital sales are taxed.
• Greater transparency in corporate reporting.

Critics of plan

Once the agreement is approved by the G20 nations, the next step is implementation, which could take some time as each country will have to review its own tax rules to bring them in line.

There is no shortage of critics of the plan, with non-profit groups saying the rules aren't tough enough and business groups lamenting the cost of implementing new reporting rules.

KPMG, itself implicated in tax-dodging schemes involving wealthy clients, urged corporations to takeheed of Monday's announcement.

The plan should be "a call to action for many multinationals to focus on new transparency and reporting obligations that likely will become law in a number of countries," said Manal Corwin, a former U.S. Treasury official overseeing this issue for KPMG's international tax team.