Moscow plays host today to the G20 Finance Ministers' meeting, the crowning jewel of which is the freshly unveiled Action Plan on Base Erosion and Profit Shifting. Released under the auspices of the Organisation for Economic Co-operation and Development (OECD), this document sets out 15 specific recommendations for national governments to implement in order to stem the widespread abuse of tax loopholes by multinational companies.
At the center of the issue has been the asymmetry between tightly integrated global corporations and the fragmented, piecemeal responses from individual states. One of the best known and most derided examples of this is the practice of setting up shell companies in low-tax jurisdictions like Ireland, which are then used to account for profits from higher-tax nations something that Google, Facebook, and Starbucks have all been accused of.
The new Action Plan tackles this issue head-on, by urging that tax should be paid in the territory where goods or services are sold, not where the company is based. That would thwart Amazon's practice of booking its Europe-wide profits in Luxembourg, forcing it to compete on the same terms as local retailers.
While the Action Plan is not legally binding in itself, it does represent the most coordinated international response to aggressive tax avoidance so far. Reaching a consensus on its prescriptions allows the finance ministers who've backed the agreement to go back to their countries and petition their governments to enact the changes.
Putting the strong words into real action will be no easy task, but the goal is to enact the Action Plan globally over the next two years. OECD Secretary-General Angel Gurría summarizes the need for change in stark terms:
"International tax rules, many of them dating from the 1920s, ensure that businesses dont pay taxes in two countries double taxation. This is laudable, but unfortunately these rules are now being abused to permit double non-taxation. The Action Plan aims to remedy this, so multinationals also pay their fair share of taxes."
The full set of OECD recommendations includes demands for greater transparency, less complexity, and the elimination of artificial corporate structures that exist purely to avoid incurring tax. Should the US government and its fellow members succeed in passing through the reforms, the G20 hopes that companies like Apple will feel compelled to repatriate their vast reserves of overseas cash or, at the very least, not add to them.
