PARIS — A sweeping overhaul of international company tax rules is urgently needed to stop savvy big companies escaping the payment of billions of euros to governments, the Organisation for Economic Co-operation and Development (OECD) said on Tuesday.
Cash-strapped governments face a growing outcry from voters to force big companies with extensive international business to pay more tax in the wake of mounting evidence that many use differences between different countries’ rules to reduce their tax.
The Paris-based OECD said multinational companies were increasingly reporting profits in different countries from where their revenues were generated to avoid taxes.
The trend comes against the backdrop of falling taxes on businesses as OECD governments have trimmed their statutory company income tax rates to an average of 25.4% in 2011 from 32.6% in 2000.
However, the effective tax rate paid by companies is often far lower due to deductions, allowances and a range of measures that firms use to reduce what they pay to the tax authorities.
In a report prepared for the Group of 20 economic powers ahead of a meeting of its finance ministers in Moscow this week, the OECD warned that governments were not alone in losing out.
"If you are a multinational you will be able to reduce your taxes substantially because the international tax architecture is completely out of date," OECD tax policy director Pascal Saint-Amans said.
"However, if you are a purely domestic business, then you will have a lot more difficult time and will be at a competitive disadvantage."
British MPs are mulling changing the law following revelations about how companies such as Starbucks, Apple, Google and Amazon use complex intercompany transactions to cut their tax bills.
UK legislators grilled senior tax officials from leading accounting firms PwC, Deloitte, KPMG and Ernst & Young last month over their role in helping big companies avoid tax.
France is also studying new ways to collect more tax from global internet firms, which often serve consumers in high-tax countries with subsidiaries in low-tax jurisdictions in order to reduce what they owe to governments.
Faced with challenges from online commerce, the OECD report called for a rethink of international rules that go back as far as the 1920s to overcome the constraints of the web of existing bilateral tax treaties.
"The idea is to come up with proposals that can be quickly implemented, perhaps a multilateral convention that could replace the 3,000 bilateral conventions," Mr Saint-Amans said.
He said support among governments was growing for a deep overhaul of international guidelines from the OECD for transfer pricing, which was how companies charged for services and goods among units in the same group.