OECD releases final tax avoidance recommendations

The Organization for Economic Cooperation and Development on Monday rolled out a sweeping set of final recommendations to battle offshore tax avoidance costing countries across the globe billions of dollars a year.

A group of almost three dozen advanced economies, the OECD kicked off its efforts two years ago, seeking to update tax rules for corporations that had not kept up with the digital era and to restore people’s trust in their tax systems. 

{mosads}The condensed two-year sprint to craft the 15 recommendations produced a “consistent, comprehensive, holistic package,” Pascal Saint-Amans, the director of the OECD’s tax policy center, told reporters on Friday in advance of the plan’s release.

“We have an agreement which is a real agreement, which is not a lukewarm compromise,” Saint-Amans said, later adding:  “Doing this in two years’ time was just insane.”

The planks in the OECD’s Base Erosion and Profit Shifting (BEPS) project take aim at strategies employed by multinationals to shift profits to low-tax countries or tax havens, in a way the group says deprives other countries of much-needed revenue.

They include new minimum standards to boost country-by-country reporting by forcing companies to detail their global business operations to their country’s revenue collector, for a “master file” that will be available to other tax administrations. 

The aim of that recommendation, and others in the OECD’s plan, is to make sure that economic activity is taxed where it occurs.

Other recommendations battle the use of treaty shopping, in which international business transactions are often funneled into a third country to lower the tax impact, It also seeks new limits on a technique called transfer pricing, in which corporations move assets between subsidiaries, and artificial methods that companies use to avoid having a permanent base in a country.

The OECD has long insisted that the increasingly technological nature of the global economy has increased the challenge for tax administrators, but that it’s impossible to “ring-fence” the digital economy for tax purposes. OECD officials have also stressed that they’re fighting to avoid allowing multiple countries to tax companies for the same economic activity, as they seek to ensure that activity is taxed somewhere.

The Treasury Department will be able to implement some of the OECD recommendations on its own, while other parts of the profit shifting plan would need congressional approval. The OECD will deliver the recommendations to the Group of 20 finance ministers in Peru this week.

Saint-Amans said his group’s proposals were largely consistent with American efforts to overhaul its corporate tax system, which he called “precisely the type of system you don’t want.” Saint-Amans specifically referenced the U.S.’s high corporate rate of 35 percent and what he called “major international loopholes,” issues that Washingotn policymakers have a problem with as well. 

But both Senate Finance Chairman Orrin Hatch (R-Utah) and House Ways and Means Chairman Paul Ryan (R-Wis.) have said they’re worried about the BEPS project. The two chairmen have questioned whether Treasury has the authority to implement the country-by-country reporting methods, and say they’re concerned that other countries will simply use BEPS to grab revenue from U.S. multinationals. 

“In the actual BEPS deliberations, all the decisions are being made by unelected bureaucrats in Paris, and not by anyone from the Senate or House of Representatives,” Hatch complained in July.

Grace Perez-Navarro, the deputy director of the OECD’s tax policy center, insisted that there would be yet-to-be detailed monitoring requirements to ensure that countries don’t view the project as an excuse for a tax grab.

“This will help ensure that we don’t have renegades, if you will, go off and try to interpret these rules in a way that wasn’t intended or agreed by the large number of countries who have participated in this work,” Perez-Navarro said.

This post was updated at 11:34 a.m.