Dodging Corporate Taxes Could Get More Difficult

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The Organization for Economic Cooperation and Development (OECD) has crafted a proposal to develop new rules over the next two years that would put an end to many of the tax avoidance gambits used by multinational companies to reduce their tax bills. The proposal is really a broad outline of system that the OECD would like to have its member nations adopt because the organization itself has no authority to impose it.

Some OECD members, like the United States and the United Kingdom, have been putting pressure on companies like Apple Inc. (NASDAQ: AAPL), Google Inc. (NASDAQ: GOOG), Starbucks Corp. (NASDAQ: SBUX) and others to explain their offshore tax policies. None of the practices by any of these countries has been found to be illegal, but governments are unhappy by the way companies take advantage of the tax laws the governments themselves have written. Go figure.

The OECD proposal does not fundamentally change the current approach taken by developed countries, which allows companies to allocate corporate income based on “arm’s-length” prices. This approach permits company subsidiaries in tax havens like Bermuda to pay low prices for items like intellectual property rights and move the profits offshore.

A competing approach, known as formulary apportionment, would allocate profit among countries based, at least in part, on sales within each country. The OECD does not believe that moving to such a system is possible. That may be true, given the tax systems in OECD member countries like Luxembourg, the Netherlands and Ireland, which are themselves tax havens.

Whatever happens will not happen quickly. It does seem likely though that increased scrutiny of corporate tax policies combined with slow-motion global economic growth eventually will lead to a changes.

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