Can an international agreement stop the global taxation shell game?

What countries are dealing with. (OECD)
What countries are dealing with. (OECD)

A few months ago, a Senate committee grilled Apple CEO Tim Cook over the company's creative accounting strategies, accusing it of cheating the U.S. Treasury by stashing away billions of dollars that live in no tax jurisdiction at all. The company didn't dispute the truth of the accusations, but blamed the United States for building a tax system that makes bringing overseas earnings back to the United States very expensive, and proposed simplified rules that would make it cheaper to do so.

The problem isn't unique to the U.S. Over the past few decades, as corporations have gotten more multinational and earned more money from intangible goods, it's become easier to shift profits around the world to achieve the lowest possible tax rates. That leads to "base erosion," wherein cash-strapped countries have less economic value around to tax. And it's a really hard problem for one country to solve by itself: Tightening tax rules for the purpose of capturing more revenue will only incentivize companies to pick up their headquarters and leave, not unlike the quandary states must face when deciding whether to raise tax rates above their neighbors'.

The percentage of corporate taxes as a percentage of GDP in OECD countries reflects a gradual lowering of corporate tax rates, as well as the increasing share of corporate income in national GDPs. (OECD)
The percentage of corporate taxes as a percentage of GDP in OECD countries reflects a gradual lowering of corporate tax rates, as well as the increasing share of corporate income in national GDPs. (OECD)

The 34-member Organization for Economic Co-operation and Development has been working on this problem for a while now. In February, they issued a comprehensive report on how companies have found ways to game the international tax system (also known as "aggressive tax planning"). And last week, they marched forward with an "Action Plan" that sets out 15 steps for stopping it.

They're hardly concrete proposals, so it's difficult to say what exactly they would mean for American companies (and indeed, they would affect different industries in different ways). But here are a few of the major ones, with the help of a PricewaterhouseCoopers analysis to sort out the tax policy gobbledegook:

  • Eliminate double non-taxation: Sure, taxation by multiple countries that claim the same chunk of a company's profits is a headache. But so is double non-taxation, where a company finds a way to shift revenue untaxed by its home country to a country that also doesn't tax it, in what's called a "hybrid mismatch." The OECD thinks countries should harmonize their tax systems to make sure that doesn't happen.
  • Marry "intangibles" to the profits they generate: The assets of a company like Apple are largely vested in its intellectual property, which it's been able to store in low-tax jurisdictions. Tying them more closely to the jurisdictions where they're earning money would slow the "race to the bottom."
  • Root companies somewhere: Some companies have found ways to avoid being "permanently established" in any one jurisdiction, allowing them to avoid income taxes. A solid definition of permanent establishment and a transparent accounting of who exists where could help stop that.
  • Sunlight everything: The plan recommends that corporations be required to disclose their accounting practices, so that tax administrations can understand their global value chains.
  • Make it easier for countries to resolve disputes: Since countries already have bilateral treaties that conflict with those of others, a "multilateral instrument" to amend them would avoid years of complex negotiations and likely stalemates.

With the blessing of the G20 finance ministers, the OECD wants to finish up a more concrete plan within two years. Then comes the hard part: Getting as many countries as possible to sign on to a series of standards that require changes to their domestic tax codes. It's a big collective action problem, because any country that holds out might reap the benefits of maintaining loose tax rules while everyone else's tighten.

"There's a certain tension involved in this report," says PricewaterhouseCoopers analyst David Ernick. "There's an idea running through it that you need to change the rules, and the result of that change would be more corporate tax revenue. But there's also the idea that the OECD will be unable to make a big change, because countries recognize that tax competition is not going away. Countries are worried about being the first one to move here."

On the other hand, companies could benefit from a more uniform global tax system, since it would make doing business all over the world easier to navigate. "The big concern that companies have is they want to make sure they know what the rules are," Ernick says. "There's always the concern about change, but the big concern here is this is a very ambitious project. If the OECD isn't successful, countries go home, go their separate ways, and come up with conflicting systems."

Nonetheless, multinational companies might benefit more from nothing happening, and are likely to come up with lots of rebuttals to the OECD's proposals, which Martin Sullivan of Tax Analysts forecasts here.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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