The Organization for Economic Cooperation and Development is pointing to wide disparities in the low tax rates paid by many multinational corporations compared to the taxes paid by individuals and small businesses.
A new OECD study commissioned by the G-20, "Addressing Base Erosion and Profit Shifting", finds that some multinationals use strategies that allow them to pay corporate taxes as low as 5 percent, while smaller businesses are forced to pay up to 30 percent.
The study, which was released Tuesday, comes amid growing outcry in Europe over the low taxes paid by multinational corporations such as Amazon, Google and Starbucks, many of which are based in the U.S.
OECD research also shows that some small jurisdictions act as tax haven conduits, receiving disproportionately large amounts of foreign direct investment compared to large industrialized countries and investing disproportionately large amounts in major developed and emerging economies.
“These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system,” said OECD Secretary-General Angel Gurría in a statement. “As governments and their citizens are struggling to make ends meet, it is critical that all tax payers - private and corporate - pay their fair amount of taxes and trust the international tax system is transparent. This report is an important step towards ensuring that global tax rules are equitable, and responds to the call that the G-20 has made for the OECD to help provide solutions to the global economic crisis.”
In his State of the Union address on Tuesday evening, President Obama also called for higher taxes on corporations to help mitigate the deep spending cuts required by the upcoming budget sequester, which would require cuts to programs that help senior citizens and school children (see Obama Pushes for Tax Reform in State of the Union). “Why would we choose to make deeper cuts to education and Medicare just to protect special interest tax breaks?” he asked. “How is that fair? Why is it that deficit reduction is a big emergency justifying making cuts in Social Security benefits but not closing some loopholes? How does that promote growth? Now is our best chance for bipartisan, comprehensive tax reform that encourages job creation and helps bring down the deficit.”
On Monday, a pair of Senate Democrats, Carl Levin, D-Mich., and Sheldon Whitehouse, D-R.I., introduced legislation designed to reduce tax breaks that benefit multinational corporations, such as setting up shell companies in foreign tax havens (see Senate Democrats Introduce Legislation to Eliminate Corporate Tax 'Loopholes').
Many of the existing rules that protect multinational corporations from paying double taxation too often allow them to pay no taxes at all, the OECD study pointed out. These rules do not properly reflect today’s economic integration across borders, the value of intellectual property or new communications technologies, according to the OECD.
These gaps enable multinational companies to eliminate or reduce their taxation on income, giving them an unfair competitive advantage over smaller businesses. The disparities also hurt investment, growth and employment and can leave average citizens footing a larger chunk of the tax bill, according to the OECD research.
The practices used by multinational enterprises to reduce their tax liabilities have become more aggressive over the past decade, the study pointed out. Some, based in high-tax regimes, create numerous off-shore subsidiaries or shell companies, each time taking advantage of the tax breaks allowed in that jurisdiction. They also claim expenses and losses in high-tax countries and declare profits in jurisdictions with a low or no tax rate.
The OECD report does not recommend any specific optimal tax rates for corporations, as each government must decides its own tax rates. In the coming months, however, the OECD plans to draw up an action plan, developed in co-operation with governments and the business community, which will further quantify the corporate taxes lost and provide concrete timelines and methodologies for solutions to reinforce the integrity of the global tax system.