As G20 finance ministers began meeting in Moscow on Friday, a study the Organisation for Economic Co-operation and Development conducted at their request found that some multinational companies pay as little as 5% in corporate taxes whereas smaller businesses pay up to 30%. The study, Addressing Base Erosion and Profit Shifting, called for more international cooperation to ensure that countries’ tax laws do not favour large enterprises over smaller ones and people.
The corporate tax systems in many countries were originally designed to prevent corporations from being subject to double taxation, but now allow many multinational companies to escape taxation completely, the OECD reported. Part of the problem stems from outdated rules that do not adequately account for the value of intellectual property or new communications technology and do not deal with the increasingly global nature of many businesses.
The report also noted that tax laws in most countries are still based on an economic model characterised by fixed assets and less cross-border economic integration. The report examines how many large corporations shift profits to low- or no-tax jurisdictions and expenses to higher-tax countries. It does not discuss optimal tax rates, leaving those decisions to the taxing jurisdictions.
“As governments and their citizens are struggling to make ends meet, it is critical that all tax payers—private and corporate—pay their fair amount of taxes and trust the international tax system is transparent,” OECD Secretary-General Angel Gurría said in a prepared statement accompanying the report. And the OECD notes that multinationals have recently become more aggressive in pursuing these strategies to lower their overall taxes.
As Masatsugu Asakawa, the chair of the OECD Committee on Fiscal Affairs put it in a recent report, “It is more important now than ever that taxpayers pay the right amount of tax at the right time and in the right place” (“Base Erosion and Profit Shifting”, World Commerce Review, June 2012, page 52).
—Sally P. Schreiber (sschreiber@aicpa.org) is a CGMA Magazine senior editor.
