OECD Takes Aim at Improper Profit Shifting
The Organization for Economic Cooperation and Development recommended Tuesday changes to international tax rules that could stop U.S. multinationals from shifting revenues and profits overseas.
A total of 44 large economies, including the U.S., China and Japan, agreed with the new guidelines, but each country must change their laws and may not do that uniformly or adopt all of the measures.
“Everybody has the same objective, but implementing on a country-by-country basis is extremely difficult,” said Ryan Dudley, a partner at accounting firm Friedman LLP.
The changes are intended to curb controversial tax practices, such as moving patents and licenses to low-tax countries like Ireland, Switzerland and Puerto Rico. They also aim to end profit shifting between countries that artificially eliminate taxes. The third main change could require companies to disclose more fully their revenues by country and the scope of the operations that support them.
The OECD also said e-commerce and traditional businesses should be treated equally tax-wise.
“It is not possible to ring-fence the digital economy for tax purposes,” the head of the OECD program to revamp the recommendations, Raffaele Russo, said on a conference call. “The digital economy is the economy itself.”
Sen. Carl Levin, the Michigan Democrat who chairs the Permanent Subcommittee on Investigations, has publicly upbraided several large U.S. firms, including AppleInc.AAPL +0.21%, Microsoft Corp.MSFT +0.34% and Caterpillar Inc.CAT +0.34%, for international tax strategies that slashed their bills.
However, Republicans critical of the senator’s hearings say an onerous and antiquated U.S. tax code, not legal corporate tax planning that complies with it, is to blame.
Experts agree that, although it is unlikely for the U.S. to make every OECD recommendation into law, U.S. multinationals will be beholden to the rules if they are adopted by other major countries.
Most U.S. finance departments probably don’t feel threatened by the OECD recommendations, but there are “repercussions we need to be very cautious about,” Mr. Dudley said.
Companies may start moving staff or operations to other countries, or using foreign subsidiaries for acquisitions, if any new rules make that the only way to keep preferential tax treatment, he said.
In any event, Manal Corwin, head of the international tax practice for KPMG LLP, said, “There’s going to be impact on U.S. multinationals whether or not Congress acts.”
“If the U.S. doesn’t make changes,” Ms. Corwin said it may put U.S. companies on uneven footing when it comes to international tax disputes. “Another country may lay claim to those revenues.”
