Osborne to net billions as huge global crackdown on multinational tax avoidance begins

The world’s richest nations will launch a huge crackdown on multinational tax avoidance on Monday as part of the biggest shake-up of international tax rules for decades.

The move could lead to a multi- billion pound gain for Chancellor George Osborne and higher tax bills for a raft of blue-chip companies.

The Paris-based Organisation for Economic Co-operation and Development is due to make sweeping changes to the way profit is apportioned by big companies, restricting their ability to direct profit to subsidiaries in tax havens where they can pay rock-bottom tax rates.

Oil giant Shell has already indicated the changes could raise its tax rate by several per cent, potentially costing it hundreds of millions of pounds. The exchequer is likely to rake in several billion pounds more in corporation tax, experts say.
The change is likely to hit tax arrangements which have attracted widespread anger – including those used in the past by Starbucks, Apple and Google. But it will also affect property companies, oil giants and others.

A focus of concern is a change to interest rules. The 34-member OECD could suggest that firms cannot offset all of the interest they pay on debt against their profit to reduce tax bills.

Critics of the multinationals say they load subsidiaries in high-tax countries with debt from other parts of the group to minimise tax bills there.

Tom McFarlane, a director at City-based tax adviser Alvarez & Marsal Taxand, said: ‘Companies who are highly indebted are likely to see their effective tax rate increase significantly.

‘We don’t know what actions governments will implement.’

The UK has always allowed interest to be offset against profit and has one of the most generous regimes for this, so may choose to opt out of the OECD restriction.

The new rules will also see a crackdown on ‘cashboxes’. These are firms that technically own the legal rights to brands but are nothing more than brass plates on a building often in a low-tax regime. Bill Dodwell, a tax adviser at accountancy firm Deloitte, said: ‘Profits will need to be allocated to where people are carrying out valuable functions, rather than a company with legal rights but no staff.’

Shifting a brand name offshore has been a widely used manoeuvre. The rights to Walkers Crisps were moved to Switzerland when it was bought by PepsiCo, while Starbucks for a long period held its intellectual property rights in the Netherlands. Moves to toughen up rules about whether a firm has a ‘permanent establishment’ in a country are also likely. Existing rules allow firms with warehouses in a country to claim they merely provide a service to an offshore firm rather than operate in the place they are located.

Online retailers including Amazon set up complex tax structures taking advantage of this, with all profits reported at its Luxembourg arm, where it employed a few hundred staff, and not its UK business where it employed thousands. Amazon is since reported to have changed the structure, creating a ‘branch’ of its Luxembourg company in the UK to transact with customers.

There will also be a move to reduce the use of ‘hybrid’ or ‘nowhere’ structures. Sometimes firms create complex financing arrangements that allow a loan between two subsidiaries to fall between the tax rules of two countries, meaning the money is not taxed anywhere. The UK has already moved to crack down on these structures ahead of the OECD’s recommendations.

The changes will affect companies differently but Dodwell believes tax rates for many multinationals will rise by several percentage points. That would see the UK’s tax take increasing by billions of pounds.

The OECD review has been running since 2013, after uproar over some of the structures used by multinationals to cut their tax bills.

Starbucks, Amazon and Google all faced public grillings by the MPs on the Public Accounts Committee amid revelations of their arrangements. Starbucks, which has always denied avoiding tax, was buying its coffee from a Swiss subsidiary and paying royalties for the use of its brand to a Luxembourg arm.

Google conducts all of its transactions with UK advertisers from an Irish subsidiary and argues that UK staff merely provide an outsourced service to the Irish business.

The Chancellor introduced what was dubbed a ‘Google Tax’ in this year’s Budget to stop firms diverting profits offshore. Some criticised the move for pre-empting the decisions of the OECD. But others have issued dire warnings about the OECD’s changes. Shell’s chief financial officer, Simon Henry, said earlier this year that the tax hikes could reduce world trade.

‘I am not being apocalyptic but you don’t have to change the psychology too much to have a big impact on the willingness to carry out cross-border investment and trade,’ he said.

Osborne is likely to trumpet the OECD moves in a speech to the Conservative party conference tomorrow. Whether they will be enough to head off the worst abuses of multi-nationals – and the public anger about them – remains to be seen.