Sealing the tax loophole

The ‘golden era’ for multinational firms attempting to avoid taxes may be coming to an end it was announced at the G20 summit in Moscow this week. Finance ministers including UK finance minister George Osborne criticised businesses including Google who used international tax rules to reduce their tax bills, despite having large international operations. Included in the proposed OECD 15 step action plan is for tax to be charged where the original economic activity takes place, rather than where profits are transferred.

As finance ministers are still divided on specific corrective action it will be their willingness to compromise that will drive these plans forward. The impact of such proposals will be determined in the next two years as details are drawn out, which must be conducted on a bilateral basis between nations if the system is to work effectively.

However, some authorities such as the Tax Justice Network feel that the OECD has missed a big opportunity for a large tax crackdown and instead insist these proposals are comparable to trying to ‘plug the holes in a sieve’. Others insist that despite helping to prevent income shifting and tax reduction measures applied by some big businesses, these proposals will not fix the system but rather provide a temporary solution to a much wider problem which has not been addressed, a complete modernisation of the tax system.

Despite conflicts over how the system should change, it appears a universal consensus has been reached that the days of big businesses avoiding taxes are coming to an end. One such business that will be affected by these implementations is Starbucks, the well-known American coffee chain who this year paid their first corporation tax since 2009. Despite recording sales of over £400m a year the business has only paid £8.6m corporation tax in the last 14 years, avoiding larger payments through implementing a combination of strategies such as profit transfers to a Dutch sister company, purchases of coffee beans from Switzerland and high interest borrowing from other parts of the business. Such obvious disregard for the morality of their actions is further proof of the increasing need for reforms.

Whilst issues such as the price at which business departments buy and sell to each other, known as transfer pricing, may still be a cause for concern in this area, this G20 summit has bought forward a highly welcomed proposal that may be the beginning of the end for large multinationals abusing the system for their own gain.