Tax avoidance is one of the greatest threats to individual governments and the entire globe. In this post, OECD tax avoidance: What you need to know, we take a deeper look at the approach taken by OECD.
Why OECD is taking tax avoidance with extra focus ?
Tax avoidance denies governments billions of dollars and shifts the tax burden to ordinary citizens. It also causes distortion of competitiveness at the local and global level, overburdens local businesses, and causes legal uncertainty.
At the cross-border level, the problems become very complex because individual states cannot address it. OECD has established a comprehensive program to curb the problem of tax avoidance in order to guarantee all businesses a fair operational field. Please note that Hong-Kong signed the CRS with United Kingdom and Japan (= data exchange between these countries).
The main focus of OECD tax avoidance package
OECD is focused on three main things that will help individual nations and the entire globe.
- Effective taxation: This point seeks to ensure that all companies have to pay taxes when they make profits.
- Tax transparency: OECD targets emphasizing that every member state gets all necessary information to guarantee companies fair taxation.
- Clearing the problem of double taxation: This is considered very critical because companies that pay their taxes should not be penalized through double taxation.
OECD tax avoidance package will operate through the following elements
To address the problem of tax evasion, OECD proposes various legislative as well as non-legislative approaches through the following elements.
- Anti-tax avoidance directive: This will recommend some anti-tax avoidance measures that member states are required to implement.
- Recommendations on tax avoidance treaties: This element advises OECD members on methods of reinforcing tax treaties to avoid being abused by planners.
- Administrative Cooperation review: The review will seek to add state-by-state reporting mechanism on multinationals.
- External strategy for effective taxation: This element seeks to draw the right approaches that promote good tax governance.
- Staff working document: This is an explanation by OECD members demystifying individual efforts based on political and economic situations.
Are there risks of tax administration and corporates as a result of the new initiative?
OECD members have demonstrated the commitment to implementing improved standards on taxation because of the huge problem that tax avoidance presents to them.
By implementing the new OECD package measures; there will be enhanced transparency, better coordination between member states, and easier identification of firms trying to avoid paying taxes. Besides, the regulations create a roadmap for enhanced legal certainty and easing of administrative burden to compliant companies.
How OECD tax avoidance package will ensure better taxation
Many companies avoid taxation by hiding in target countries’ rules and then shifting all profits to the home country. Besides, some tax planners also hide in the national taxation loopholes to escape taxation. To help enhance taxation, the package will emphasise on cooperation between members to ensure no company avoids paying taxes and goes unnoticed.
There will be no place to hide. Besides, the package will also ensure that no profit is transferred from one member state to another without being taxed. Notably, all the members will easily get the info they need to identify tax avoidance schemes and dismantle them.
OECD tax avoidance scheme and individual countries’ right to set corporate tax rates
The OECD package is not in any way anticipated to interfere with sovereign rights of every country to set corporate taxes. But, every state also has a right for protecting tax bases against tax avoidance schemes.
If another country has policies such as no tax or very low tax rates that encourage tax avoidance schemes, the affected country has every right to take measures meant to protect its tax base. The focus is creating a platform that every country can tax all profits generated within its territory.
The role of Country-by-country reporting between tax administrations
OECD is very determined to take all the steps that can help to enhance transparency and information sharing to tackle the big problem of tax avoidance. Country-by-country reporting targets creating a uniform playing field to ensure that no profit goes untaxed. However, the country-by-country rules could be applied differently especially by non-OECD members.
How the new OECD package will make the playing field level for all
Levelling the playing field is the main objective of OECD under this new tax avoidance package. When the field is not level, domestic businesses shoulder 30% more tax burden compared to the multinationals that keep shifting profits. By ensuring that all the profits are taxed where they are made, the playing field will be levelled and the local business tax burden will get lighter.
Notably, OECD members who emphasize on equal taxation for all businesses are easily undermined by others that lack in such laws. Aggressive tax planners are fast to identify all loopholes for such companies to ensure they escape without paying taxes. The package puts members on the same level so that multinationals trying to avoid paying tax will find the same rules in every country.