A number of multinational companies have found themselves in headlines recently because of tax. In Europe, the European Commission has investigated Amazon, Starbucks, Fiat, and Apple and many other companies.
The 2008 financial crisis was followed by sluggish economic growth and austerity policies which lead to collecting more taxes from global companies making healthy profits.
The Organization for Economic Co-operation and Development (OECD), which is a leading economic think-tank, has come up with three issues.
What is changing
The first issue involves transfer pricing. The OECD has established new guidelines ensuring a connection between a company’s business operations, the value it generates, and then where it books its profits.
The second change is country-by-country reporting requiring companies to report to the tax authority where they are headquartered: the number of employees, their profits, the tax they pay, along with other financial information.
While the information is never released to the public, tax authorities from other countries are permitted to request it. Country-by-country reporting came in to play from January this year for UK-based multi-national companies.
The third case was to tackle how to change so-called ‘”sweetheart deals” that are approved on a case-by-case basis between the tax authority and the company, so that any arranged individual deals will be available to other tax authorities that wish to scrutinize them.
Are the EU rules going further?
The EU Commission says that the EU governments have not yet approved the proposals that been built on the OECD reforms.
Big multinationals with annual global revenues that are higher than €750m (£599m; $853m) would be forced to open their accounts to not just tax authorities but also to public scrutiny. That would include the giant corporations like Starbucks and Google.
They would be requires to report their EU profits for each individual country. For those who operate in tax havens, or as the Commission so eloquently stated, “jurisdictions that don’t abide by international good governance standards on tax,” these same reporting rules would also apply.
Some business groups are complaining that these measures will force companies to reveal commercial information that is highly sensitive.
So that will solve the problem?
There is important political will behind these changes and there are 31 countries that have signed up for these country-by-country reports starting in January. All the G20 leaders and finance ministers have agreed to the 15-point plan of the OECD, at least in principle. This includes the USA and China.
One international tax expert reported that it appears that China plans to completely implement the proposals, but that they were about six months behind the current pace. However, progress is being made.
There has been changes in how the global tax system works and there have been responses by the companies. One tax expert who is an adviser to some of the largest companies in Britain said:
“It’s going to change things massively. I talk to these companies on a daily basis about what they need to do to meet this new standard and they are really taking it seriously. They know this is the landscape now. This is the way things are, and none of them wants to be the company that ends up on the front page of a newspaper for failing to comply with the rules.”