Governments need to modernise their tax systems to catch international companies that dodge paying corporation tax, the Organisation for Economic Co-operation and Development has warned.
The ease with which companies shift profits around the world to offshore havens shows that tax authorities need to step up their anti-avoidance efforts or risk losing billions of pounds in much-needed revenues, said the Paris-based thinktank in a report on Tuesday.
Angel Gurría, head of the OECD, said the G20 needed to act this year to combat avoidance, which he said was undermining the ability of governments to recover from the financial crisis. He said the failure to crack down on “the big guys” would leave small and medium-sized businesses and middle income taxpayers to pick up the tab for vital public services, reports The Guardian.
“Companies have a responsibility to pay corporation tax in the jurisdictions where they operate. Citizens are already losing faith in their banks and the financial system. If big corporations fail to pay tax and leave it to SMEs and middle income groups, it will undermine democracy. This is about the survival of democracy,” he said.
The report comes only months after Starbucks promised to pay £20m in corporation tax, despite making a loss in its UK subsidiary. Other foreign companies that pay little or no corporation tax, including Google and Amazon, have justified their stance, saying they use tax avoidance rules allowed under UK law.
The OECD said many countries had failed to update their tax rules to cope with the digital age.
Without an overhaul of the rulebook, multinationals would continue to shift profits abroad.
The OECD plans to hand its report, Addressing Base Erosion and Profit Shifting, to G20 finance ministers at the end of the week ahead of a leaders conference in Moscow in September. Gurría said member countries needed to co-operate to tackle avoidance or their plans would fail.
Offshore tax havens have become global financial centres in their own right and benefited from massive inflows of funds that previously went in tax payments to OECD member countries. The UK is at the centre of the debate after the OECD and International Monetary Fund found that former colonies and British crown protectorates were key destinations for funds that have avoided tax.
Figures show that, in 2010, Barbados, Bermuda and the British Virgin Islands received more foreign direct investment than Germany or Japan.
Not only do offshore havens act as a base for multinationals to deposit funds, the funds are recycled for further investment into developing nations. The British Virgin Islands was the second largest investor into China in 2010 after Hong Kong. The BVI accounted for 14% of all investments into China compared w 45% from Hong Kong. The US trailed with 4% of the total investment into China.
Cyprus is the top investor into Russia, with 25% of all foreign investment, while Mauritius accounts for a quarter of all foreign investment into India.
Gurría said: ” I think we have an attentive audience in the G20. Whether they act depends on whether they can see a way to address the problem because it does need a tremendous amount of co-operation.”
The Guardian was praised by the OECD in its report for the long-running Tax Gap campaign that has highlighted the techniques used by multinationals to avoid tax. Gurría said countries needed to go further than signing treaties with offshore havens to gain information about bank accounts and financial transactions and seek to tackle illegal capital flight.
Richard Murphy, the anti-avoidance tax campaigner, said the OECD report was a wakeup call for countries that have seen hundreds of billions of pounds in profits avoid tax.
He said: “The OECD has smelled the coffee and this report reflects the mood of the moment. Applauding newspapers like the Guardian and campaigners alike it says that unless there is fundamental reform, corporation tax on multinational companies will collapse and serious distortions in markets will result.
“The report does not set out an agenda of changes but it does make clear six key areas where changes are needed. The tone of the report is enough to suggest that mere tinkering on any of them will not be enough this time: the OECD realises fundamental reform is required. That’s a massive step forward for tax justice,” he said.
