On Monday, October 5, the OECD published a new package of international corporate tax standards that is expected to be approved by the G-20 nations. One of the main goals of the new standards is to limit “profit shifting”, which occurs when companies develop legal structures to report profits in the lowest tax jurisdictions available. If the new standards are enacted by the G-20, it is estimated that governments around the world will recover between $100 and $240 billion in lost revenue per year.
Large-scale tax avoidance by massive companies was a key reason behind the overhaul. Treaties initially signed to limit the double taxation of company profits had become outdated and were being taken advantage of by large companies. Some of the notable changes to the tax rules include stricter standards related to transfer pricing, tougher rules regarding permanent establishment, and more stringent policies related to inter-company loans.
So far, there have been critics of several elements of the new rules. Chief among these critics have been executives in the technology industry who believe the new rules make it possible for multiple governments to attempt to tax the same profit. Additionally, these critics argue that the dispute resolution process is insufficient and may lead to lengthy periods of uncertainty regarding tax liabilities.
Without a doubt, the majority of companies make a concerted effort to pay as little in taxes as possible. With corporate tax rates in different countries varying by up to 35%, large companies can save billions of dollars per year by reporting income in low tax jurisdictions. The question remains - will these new standards be successful in closing tax loopholes and limiting tax havens or will companies find ways to circumvent them? Feel free to leave a comment below expressing your opinion on how effective these new standards will be.