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Global corporate tax avoidance crackdown on the way

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Global corporate tax avoidance crackdown on the way.

Larry Williams:
At the recent G20 meeting in Peru there were some pretty significant moves aimed at cracking down on global corporate tax avoidance. What's this about?

Roger Garrett:
The world's leading Governments announced plans to change the rules on how corporate profits of large multinational companies such as GE and Apple are taxed. In the press release they announced that the proposed changes to tax rules for these large companies represent the first major overhaul of the rules taxing global profits in nearly 100 years which is pretty amazing.

The aim of these changes is to improve transparency of corporate reporting, restrict the use of tax havens and close tax loopholes so pretty normal stuff.

Larry Williams:
It's been 100 years since the last overhaul, so why now?

Roger Garrett:
The initiative for this stemmed from a G20 meeting held a couple of years ago in Russia largely in response to public anger over corporate tax avoidance.

Around this time in the UK there was a lot of publicity over companies like Starbucks and Amazon who generated strong revenue yet paid no taxes. In fact, there was a parliamentary review as to how Starbucks could generate nearly 4 billion pounds in sales over 15 years in the UK yet not turn a profit and therefore pay no tax. So it was essentially this public outrage that started the whole process that these large multinationals companies were not paying their fair share.

Larry Williams:
How were these companies able to essentially run decent business yet make no profit?

Roger Garrett:
In many ways. In the case of Starbucks they made massive royalty payments to a lower tax country (in this case it was the Netherlands). Starbucks actually denied any aggressive tax policies and basically said they stuffed up; blaming poor management and strategic mistakes on the losses which obviously begs the question of why they did business in the UK for so long if they couldn't turn a profit.

Google, on the other hand, were quite up front. They claimed they avoided tax in order to maximise returns.

Either way the public backlash over the unfairness of this was the catalyst behind these measures. These measures are essentially designed to reduce their ability to avoid tax.

Larry Williams:
Can you put this into perspective? How much are we talking about here?

Roger Garrett:
The OECD suggests that up to $240 billion a year is lost in corporate tax avoidance or up to 10% of global corporate tax revenues so it is not small change.

Larry Williams:
Are the measures expected to change the behaviour of these multinational companies?

Roger Garrett:
This is a difficult question to answer and probably depends on the characteristics of individual companies.

The proposed changes are seen as pretty comprehensive and will lead to more transparent reporting by companies so tax authorities and the public will be able to see where revenue is earned and how much tax is paid by tax jurisdiction. It will also limit or make it harder for companies to shift profits to countries or havens with significantly lower tax rates.

How companies react — whether they continue to game the system is difficult to predict.

Larry Williams:
So a step in the right direction?

Roger Garrett:
Yes, I think so, as long as it doesn't lead to increased tax complexity and compliance for companies. In terms of the implications, many large multi nationals with low current tax rates may have larger tax bills in the future.

 

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