OECD Enables Companies to Avoid $100 Billion in Taxes via Offshore Tax Havens

Register now

(Bloomberg) Headquartered in a former Rothschild chateau in an affluent Parisian neighborhood, the Organization for Economic Cooperation and Development is best known for earnest conferences on economic and social policy.

With little outside attention, it also plays a pivotal role enabling global corporations such as Google Inc., Hewlett- Packard Co. and Amazon.com Inc. to dodge taxes by shifting profits into offshore subsidiaries, costing the U.S. and Europe more than $100 billion a year.

OECD officials “have been digging themselves deeper and deeper into a hole by blindly pursuing a mistaken approach that allows multinationals to avoid taxes,” said Sol Picciotto, an emeritus professor of law at Lancaster University in the U.K.

A quasi-governmental body that helps some of the world’s biggest economies set tax policy, the OECD writes guidelines letting companies avoid taxes by moving income into tax havens, a practice it deems legal. The organization has long enjoyed a close relationship with industry. Its three top tax officials left in 2011 and 2012 to join firms that help companies avoid taxes by taking advantage of laws to move profits to locations such as Bermuda and Mauritius.

While its 34 member nations—primarily the U.S., Japan and European countries—underwrite the OECD’s $460 million annual budget, tax-planning firms that advise multinational companies have contributed hundreds of thousands of dollars to sponsor its conferences. A 2010 conference in Washington featured sponsors such as PricewaterhouseCoopers LLP and law firm Mayer Brown LLP, which consult with companies on offshore tax strategies.

Tax Integrity
Now, with a new team of tax officials in place, the OECD is taking the uneasy first steps toward reform—and alienating its industry allies. Last month, at the request of the Group of 20 nations, the OECD released a lengthy report criticizing corporate profit shifting.

“What is at stake is the integrity of the corporate income tax,” the OECD wrote. The organization is also pursuing new guidelines to make it harder for companies to dodge taxes by moving valuable patent rights to mailbox subsidiaries. It will submit an action plan to the Group of 20 by July, said Pascal Saint-Amans, who became director of the OECD’s Center for Tax Policy and Administration last year.

“Having all your profits located in Bermuda, you cannot justify it,” Saint-Amans said.

The tax division’s posture toward industry reflects the attitude of the OECD’s member governments, said Saint-Amans, who has been with the agency since 2007.

In the past “the governments did not ask for any change and there was no political push to move into the direction of addressing profit shifting,” he said.

Budget Deficits
Now the OECD is under growing pressure from governments, he said. Many of them are cutting services and raising taxes on working people to tame outsized budget gaps.

The EU’s 27 states had a combined 521.6 billion euro budget deficit as of the third quarter of 2012, according to Eurostat. The U.S. faces an $845 billion budget deficit in 2013, according to the Congressional Budget Office.

Since November, the U.K. Parliament has held two hearings on corporate tax dodging, grilling executives from Google, Amazon and Starbucks Corp., as well as tax officials from accounting firms Ernst & Young LLP, PricewaterhouseCoopers, Deloitte LLP and KPMG LLP. Executives from the companies and the accounting firms defended their practices and denied wrongdoing.

In December, the European Commission, the European Union’s executive body, advised member states to create tax-haven blacklists and adopt anti-abuse rules. Tax avoidance and evasion cost the EU 1 trillion euros a year, the commission said.

‘Doesn’t Work’
Last month, the finance ministers of Germany, France and the U.K. said in a letter to the Financial Times that “it cannot be right that larger companies can avoid paying tax, with families and small businesses ending up paying more.” With the OECD’s help, they said they were determined to tackle this problem.

“The real question is ’Are countries satisfied with existing rules?’” said Saint-Amans, who was an official in the French finance ministry before joining the OECD. “The response we hear from member countries is ’No, it doesn’t work.’”

Companies are pushing back. General Electric Co. has dispatched its top international tax official to lead an effort to change the OECD’s proposed guidelines on mailbox subsidiaries. In November, the OECD hosted public hearings in Paris, where one corporate tax representative after another objected to the plans. A French oil-services company executive said of the proposal: “The general tone is guilty until proven innocent.”

‘Haven Debacle’
Even with such opposition, the OECD plans to proceed if the member countries can agree, said Joseph L. Andrus, the official in charge of the effort. While companies’ input is taken into account, “they don’t get a vote,” he said in an interview.

The OECD’s new approach “correctly diagnoses the problems with current rules and says that substantive changes will be needed to end the tax-haven debacle,” said Michael C. Durst, an attorney who advised companies for 17 years on offshore tax arrangements.

“The big challenge, now, will be for OECD member governments to step up to the challenge of enacting laws that will, finally, protect the tax systems of countries around the world,” Durst said.

The OECD is descended from the Organization for European Economic Cooperation, which administered the Marshall Plan to reconstruct Europe after World War II. Membership is largely European, though it also includes the U.S.—its biggest funder—Japan, Australia, Canada, Korea and Israel, among others.

‘Peer Pressure’
The OECD’s tax division staff develops guidelines and hashes them out with delegates from tax agencies in member countries.

Although countries are free to follow their own standards and not conform to OECD guidelines, “peer pressure is very important,” said Vito Tanzi, an economist and former fiscal affairs director at the International Monetary Fund for 20 years, who regularly attended OECD tax meetings.
The OECD has traditionally been leery of reining in corporate tax avoidance. Although the OECD has published blacklists of “uncooperative tax havens,” it has done little to curb multinational companies dodging taxes, said Daniel Frisch, an economist at Horst Frisch Inc. in Washington.

“Industry successfully leans on the OECD,” Frisch said. Horst Frisch advises businesses and governments on tax practices.

Outsized Profits
The OECD has issued reams of guidelines to promote “transfer pricing” —paper transactions between corporate subsidiaries that allow them to push profits into tax havens by allocating income to different countries.

Guidelines promoted by the OECD call for “arm’s-length” prices, or the amounts that would be paid between unrelated parties. The standard, followed by the U.S. and most developed countries, lets subsidiaries in tax havens pay unrealistically low prices for patent rights, leading to disproportionate profits offshore, critics say.

A contrasting approach, which the EU has been considering since 2004, would allocate companies’ income based on measures such as actual sales in a given country.

The OECD is “too much in the pocket of arm’s length,” said H. David Rosenbloom, director of the international tax program at New York University’s law school and an attorney at Caplin & Drysdale in Washington. “They’re kind of ludicrous on it.”

‘Step Backwards’
In 2010, the OECD announced that it would “address” some transfer-pricing arrangements. In the end, it issued guidelines that let companies such as Google and Yahoo! Inc. continue avoiding taxes by stating that profit is generated in Bermuda and Mauritius—not the countries of actual sales, like the U.K. or France.

Those recommendations “gave no real guidance to governments,” said Durst, the former transfer-pricing adviser. “The practical effect of the 2010 guidelines, unfortunately, was to ratify rather than challenge the movement of income to tax havens. That was a big step backwards.”

A year after the OECD issued those guidelines, the official who oversaw the effort, Caroline Silberztein, left to join the transfer-pricing practice at law firm Baker & McKenzie. The firm has been involved in numerous recent high-profile transfer- pricing disputes, including Internal Revenue Service cases involving Symantec Corp., Abbott Laboratories and Amazon.

Industry Candidates
Silberztein’s OECD boss, Mary Bennett, also joined the same practice at the law firm. Bennett had worked at Baker before her stint at the OECD, where she headed the transfer-pricing unit. She also solicited corporate-sponsorship contributions, including one from Frisch’s firm, he said.

As Bennett was on her way out, she encouraged a tax official at an industry trade association to nominate potential replacements at the OECD, according to an e-mail reviewed by Bloomberg News.

“I contacted Mary and she is encouraging us to encourage strong candidates,” Carol Doran Klein, vice president and international tax counsel for the U.S. Council for International Business, wrote to her colleagues.

Both Silberztein and Bennett attended the OECD public hearing in November on mailbox subsidiaries.

Silberztein didn’t respond to repeated requests for comment. Bennett also didn’t respond to requests for comment. A spokesman for Baker declined to comment.

Triple Exit
Seven months after Silberztein and Bennett left the OECD, so did their boss, Jeffrey Owens, who headed the tax division for 11 years. He went to work part-time for Ernst & Young, the accounting firm that has advised multinational companies such as Google and Hewlett-Packard on their offshore tax strategies.

He joined Ernst & Young to foster understanding between industry and governments, he said. “My career was trying to span communities and this is a continuation of that,” he said.

Owens defended the 2010 guidelines, which he said prompted legislation adopted in Germany and Australia. He acknowledged they probably “came too late— by the time of the project, a lot of the” offshore arrangements had already been put into place. Although Ernst & Young has promoted transfer-pricing strategies to avoid taxes, he said companies were adopting them for other reasons, which he didn’t specify.

University Role
If a company puts such an arrangement in place “just for tax reasons it ain’t going to be in business for very long,” said Owens, who is also advising governments in developing countries on tax policy and directing a tax policy center at Vienna University of Economics and Business. He asked that his comments be attributed to him in his role at Vienna, rather than Ernst & Young.

The OECD’s relationship with business was appropriate, Owens said.

“If you are going to find solutions in the tax area you need to talk to all the players, whether it’s academics or business,” Owens said. “You want solutions that will work for business and will work for government.”

Even with the new focus on profit shifting, old attitudes die hard: In June, the OECD is holding a tax conference in Washington.

Sponsors paying as much as $20,000 to have their firms’ names displayed prominently include Ernst & Young and law firm Bingham McCutchen LLP, whose attorneys represented GlaxoSmithKline Plc in a transfer-pricing dispute with the IRS, which the drug company agreed to settle for $3.4 billion.

Conference Sponsors
Another sponsor is Microsoft Corp., which holds $60.8 billion offshore that is untaxed by the U.S., mostly in tax- haven subsidiaries.

Amy Call Well, an Ernst & Young spokeswoman, said the firm sponsors OECD conferences to “support open dialogue about international taxation.”

The U.S. Council for International Business, an affiliate of the International Chamber of Commerce, selected the sponsors, according to a trade association official and Saint-Amans. The OECD will no longer permit tax advisory firms to sponsor the transfer-pricing conferences at its Paris headquarters, he said.

In another sign that the OECD’s new regime hasn’t entirely shed its corporate-friendly past, Saint-Amans co-authored an article last month on his division’s profit-shifting efforts with William Morris, General Electric’s senior international tax counsel. Morris said he is heading efforts by a business coalition to seek “clarity” on the OECD’s initiative to clamp down on profit-shifting into tax havens.

GE is “known as being aggressive in tax planning,” Saint- Amans said. “I thought it was important to show that this project is not about disregarding what industry thinks.”

—With assistance from Giovanni Salzano in Rome. Editors: Daniel Golden, Lisa Wolfson

For reprint and licensing requests for this article, click here.
Tax practice Tax planning