Global tax changes ‘will hit British companies’

The Organisation for Economic Co-operation and Development announced guidelines yesterday to equip the global tax system for the digital world and to crack down on companies such as Google, Starbucks and Amazon that have been accused of abusing tax loopholes.

The proposals are the culmination of three years’ work to update an out-of-date rulebook that the OECD claimed was costing governments as much as $240 billion each year in lost corporation tax revenues, reports The Times.

Among the proposals is a global standard on the deductibility of interest payments from profits before tax. The OECD has recommended capping the limit at 30 per cent of operating profits, in line with German standards. There is no limit in Britain.

Stella Amiss, international tax partner at PwC, said that the rule “could be quite big for the UK . . . It potentially could hit UK companies that are heavily debt-financed.” Private equity models tend to use large amounts of debt.

The OECD said that its recommendations were a fundamental shift to catch up with clever accounting by multinationals. Pascal Saint-Amans, head of tax policy at the OECD, said: “We are moving into this new era where massive tax planning, massive tax avoidance is over. It will be much more difficult, much more costly.”

The OECD made 15 recommendations to stop profits being moved artificially from high-tax to low-tax jurisdictions. The core principle is that profits should be taxed where the activity took place. At the moment, multinationals are able to book profits in “shell companies with few employees and little or no economic activity”, the OECD said.

Finance ministers of the world’s G20 group of leading nations, which have been co-ordinating with the OECD on the changes, are expected to sign up to the guidelines this week. The next stage will be changing domestic tax rules.

Chris Sanger, head of tax policy at EY, said: “Where we are is the end of the beginning. Now we can expect this to be picked up by individual countries.”

He added that George Osborne was likely to use the autumn statement to announce how Britain would implement many of the changes, including the rule on interest deductions.

The most fundamental change was a new disclosure rule, he added. Companies will have to reveal to the taxman their earnings and activities by jurisdiction.

  • A multinational can move profits to low-tax countries through intra-company loans or by charging for a service. Starbucks UK, which has since changed its practices, previously made payments to its Dutch business for using the brand, bought coffee beans from Switzerland and paid interest to other parts of the business similarly subject to low-tax regimes.
  • The OECD rules will ensure that marketing in Britain counts as brand activity, so limiting the amount that would be remitted to the Netherlands. The Swiss division would not be able to charge a mark-up on coffee beans and the debt rules make intra-company loans less attractive for profit shifting. Tougher disclosure requirements will help governments to identify how much profit has been moved overseas.