The Prime Minister’s speech at Davos, and the Chancellor’s article in yesterday’s Observer, describe how the UK is working with OECD experts to push reform of the international tax system – to reduce tax base erosion and the shifting of profits by global corporations.
I remember being struck by this issue at an Economic Club lunch in Washington D.C. back in March 2011. The guest speaker was GE CEO Jeff Immelt, and there was a real sense of anticipation in the audience because a story had just broken that GE had made $5.1 billion in US profits in 2010 but not paid any federal corporate taxes, partly through the legal movement of profits to different tax jurisdictions.
At the lunch, Immelt explained how the “old, complex and uncompetitive tax system” had allowed such a situation to arise and called for reform (something that looks like its on President Obama’s agenda in his second term).
Other countries have also become more aware of this phenomenon in recent months. At Davos, the Prime Minister David Cameron said, “We want to use the G8 to drive a more serious debate on tax evasion and tax avoidance”. And this weekend, the British Chancellor put it on the G20 agenda in Moscow.
As he said in an article in The Observer, “The principles governing tax for multinational companies have barely changed since they were developed by the League of Nations almost a century ago. As a result, some large multinationals are able to restructure their business to avoid paying their fair share in tax.”
The OECD are the experts in international tax rules, and presented their interim report to the G20 meeting after receiving financial support for the work from the UK, Germany and France. G20 Finance Ministers have invited them to work up their proposals into an action plan for G20 leaders to consider in July.
The OECD study shows how the current international tax rules allow tax base erosion and profit shifting (BEPS) to take place, including through the shifting of taxable profits within a company to a location away from where the actual business took place.
The Prime Minister and Chancellor have also highlighted the important development aspect of this issue. As multinational activity in emerging and developing countries grows rapidly it will be important to ensure that the international tax rules enable companies to support development in those countries through their tax contributions.