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Making firms pay up

Chris CottrellOctober 8, 2015

G20 finance ministers meeting in Peru have discussed cracking down on tax-dodging multinationals. But advocates of global tax reform say their plans fall short on transparency and might even make things worse.

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Image: Fotolia/Trueffelpix

When the world's wealthiest countries announced an action plan earlier this week to stop major corporations from minimizing their tax bills, they also published a figure. A big figure, one to the tune of $240 billion (213 billion euros).

It represented how much money governments around the globe may be losing every year in potential tax revenue. What's more, the number crunchers added, it was a conservative estimate.

The number was part of a new report released by the Organization for Economic Cooperation and Development that outlined ways governments could overhaul their tax regimes to prevent evasion.

Meeting in Lima, Peru, G20 finance ministers signed off on the OECD's suggestions for getting companies to pay their tax bills in full. But while some observers cheered the moves as a solid first step, others say the suggested improvements leave much to be desired.

No more loopholes

The shortcomings of global tax policy were made blatantly clear in 2014, when a consortium of investigative journalists exposed hundreds of secret tax deals between Luxembourg and some of the world's largest companies.

The "LuxLeaks" revelations sparked a public outcry, coming at a time of economic stagnation and belt-tightening in many countries following the global financial crisis.

Now the aim is to close the loopholes that have allowed multinationals to shift around profits and debt between subsidiaries in various countries in order to pay fewer taxes.

"The whole point is that multinationals exploit differences within national tax regimes,” George Turner from the Tax Justice Network, a think tank, told DW. “The only real way to deal with the problem is to have countries cooperating with each other.”

At least on the surface, things now seem to be going in that direction. In addition to the OECD publishing its report, European finance ministers also agreed for the first time this week on a scheme that would see national authorities automatically exchange information on tax deals with multinationals.

Muddying the waters

Tove Ryding, a tax expert with the NGO Eurodad, said her organization had high hopes for the OECD report, but that ultimately she and her colleagues were disappointed at the complexity of the new rules. Ryding said they would only convolute an already overly complicated tax system.

“Complexity is one of the biggest problems,” she said. “Tax administrations are struggling to see what the law actually is.”

In addition to ambiguous legalese, Ryding lamented that the new rules would only require companies to provide a breakdown of their country-by-country earnings to tax authorities in the country where their operations are headquartered.

“The worst-case scenario that we see is that the companies will realize they're being watched in the rich countries,” she said. “But there's 100 developing countries that can't see what they're doing.”

'Obscurity facilitates abuse'

For their part, the authors of the OECD report hailed it as a fix that would stop some of the biggest companies in the world from paying virtually no taxes on their global revenues. In Europe, the deal to encourage more sharing information between tax authorities was similarly billed as a step toward more transparency.

The EU agreement “means an end to obscure tax agreements between companies and authorities, which can facilitate tax abuse,” said the union's economy commissioner, Pierre Moscovici.

But there are those who think that it's more than just obscure tax laws that allow companies to misbehave.

“The real problem is this ideology of competition or the idea that you can have competition in the tax system,” Turner said.

Governments that want to attract multinationals to their country feel like they need to offer some incentive. This may come in the form of a favorable tax agreement. The “LuxLeaks” revelations in 2014 about Luxembourg's surreptitious deal with around 340 corporations were prime example of such “sweetheart deals.”