As major nations learn of the tax loss caused by legal tax provisions exercised and optimized by Big Business such as Apple, Dell and Google, the G20 has requested measures to stop companies from shifting profits into tax haven countries.
The Group of 20, or G20, is a group of countries representing 90 percent of global GDP and 80 percent of international global-trade, working together to address issues such as global economic growth, international finance matters and reformation of international financial institutions.
The G20 recently charged the Organisation for Economic Co-operation and Development (OECD) with the task of developing a plan to end the corporate tax avoidance that has been revealed in the past year.
The OECD is expected to present its action plan of general changes later this month when the G20 meets. Several profit shifting schemes have already been identified by the OECD and a draft was released in May of this year highlighting recommended changes.
For example, the draft indicated that domestic and international tax rules should be modified to move closely align the allocation of income of a company with the economic activity that generates the income, which mirrors comments from politicians in the United States and Europe in the past year.
In many cases, companies are eliminating or significantly reducing their tax bills while operating legally under the tax laws of the United States and of foreign nations. Current tax laws allow corporations to minimize tax liability and maximize shareholder profits. Recommendations by the OECD may result in an end to these favorable tax laws.
Large deficits play a key role in the need to change laws as governments struggle to recover from recent financial crises. The draft plan calls for countries to agree on specific changes to international tax rules within two years. A key area of change is ending the ability for companies to avoid creating a tax home, or taxable residence, in markets where major activities occur. For example, Google has been accused of avoiding having a taxable residence in the UK by directing its revenues to Ireland and then Bermuda. Dell uses other legal arrangements to avoid reporting revenues in markets where it has major sales. Amazon has enjoyed its "specific activity exemption" that allowed it to operate major retail businesses in certain countries like Britain and Germany without creating a tax residence.
Businesses taking advantage of dual residency in countries with treaties designed to avoid double taxation are also arrangements which are targeted by the OECD. Companies like Apple may no longer be able to register in Ireland but then manage the company from the United States, thereby having no tax residence anywhere and thus sheltering billions of dollars from income tax. Or, an arrangement where a company like Microsoft can allocate profits from research conducted in the United States to a unit in Ireland, to avoid income tax.
The OECD's presentation to the G20 is expected later this month.