End in sight for multinational tax rorts?

A two-year effort to clamp down on multinational tax rorts will come to a head in Paris overnight.

The Organisation for Economic Cooperation and Development will finalise recommendations on its 15-point “Beps” action plan, ahead of a meeting of G20 finance ministers in Lima in Peru that starts on Thursday.

The goal of the Beps (Base Erosion and Profit-Shifting) initiative is to ensure that multinationals can’t continue exploiting differences in countries’ tax laws to avoid paying tax on their profits.

Companies including Google, Apple and Amazon have been accused of using creative accounting techniques with comical names such as the “double Irish” and “Dutch sandwich” to move profits around the world and build up billions of dollars of cash reserves in tax havens.

Will the new rules make any difference or will these companies just find new tax loopholes?

Time will tell, but they should make a difference. The OECD has been single-mindedly focused on changing the rules and encouraging the exchange of information between tax authorities, so multinationals have to pay tax on their profits somewhere.

What is being proposed is the biggest shake-up of the international tax system since the 1920s.

So does this mean multinationals will pay more tax in New Zealand?

Don’t expect a big effect immediately, but it could have that effect over time. The fundamental principle will remain that companies will pay company tax where they do their work, not where they sell their goods.

So if Google and Amazon don’t employ many people in New Zealand or do much research and develop here, there is no reason why they will suddenly pay much more tax here either.

But if it becomes harder for multinationals to move their profits to tax havens from countries like Ireland, then it may make more more sense for them to spread out their operations geographically; which could mean more jobs and tax revenues for New Zealand in the long run.

Why has this all taken so long?

The international political will to crack down on multinational tax rorts only hardened when the Global Financial Crisis started impacting governments’ coffers in 2008-09.

The goal of the Beps project has been straightforward – to eliminate non-taxation – but tax rules are complicated, so that involves a lot of paperwork. The recommendations that will be released by the OECD overnight are expected to run to about 2000 pages.

The Beps project has been led by the OECD’s charismatic tax policy director, Frenchman Pascal Saint-Amans, who has met his deadlines.

Deloitte tax partner Bruce Wallace says it will take time for the OECD’s rules to be implemented by individual governments, so it may still be a few years before we can fully judge the success of these reforms.

Does this mean countries will stop using low company tax rates to compete to attract multinationals to base operations within their borders?

No. Saint-Amans said last year that he expected that competition to continue. Ireland’s company tax rate is 12.5 per cent while New Zealand’s is 28 per cent. His view is such “competition” is fine; so long as multinational profits are taxed where those profits are earned.

Some countries may be tempted to use new tricks to get an advantage. For example, a number of European countries have been looking at “patent box” tax concessions that offer lower rates of tax on profits that companies derive from patents.

Viewed from one angle these could encourage “innovation”, but they could also open the door to a new range of abuses.