In a sign of growing anxiety about tax competition that costs governments billions of dollars a year, international economic policymakers are exploring the need for a global crackdown on tax loopholes.
Experts at the Organisation for Economic Co-operation and Development are examining tactics that companies employ to exploit differing tax treatments between countries. And they are assessing past efforts to rein in tax arbitrage.
Angel Gurría, the OECD secretary-general, has urged the world’s biggest economies to consider how “to limit the scope for gaming the system with multiple deductions, the creation of untaxed income and other unintended consequences of international tax arbitrage.”
The OECD is worried about the impact of tax arbitrage on competition, transparency and fairness, as well as lost revenues. This year Jeffrey Owens, the director of the OECD’s Centre for Tax Policy and Administration, called for co-operation in dealing with the “the most costly and destabilising instances of international tax arbitrage’’ which he said can lead to “lost government revenues, wasted resources, increases in borrowing to finance the arbitrage and increased complexity.’’
Past efforts to crack down on arbitrage have been controversial, with big companies accusing governments of trying to act as “global tax policemen.”
In 2001, the business-friendly Bush administration criticised an OECD initiative to address what it termed “harmful tax practices,’’ saying it interfered with the right of countries to structure their own tax rules.
In December 2008, after the financial crisis dawned, the US Internal Revenue Service signalled a shift in attitude. IRS Commissioner Douglas H. Shulman, noted in a series of speeches over the following year that a “dizzying global environment” in tax arbitrage was challenging regulators. One of the speeches came at a meeting of the OECD, whose 34 member states include Europe’s strongest economies, the US, Japan and Korea.
“All countries with real economies and real tax systems have a shared interest in reducing the kind of arbitrage that makes income disappear from the tax systems where the economic activity is taking place,” Mr Shulman told an audience at George Washington University in 2009.
The term “tax arbitrage” encompasses a wide range of complex practices companies employ to achieve tax credits or savings, often by shifting income among subsidiaries in different countries. Their use has mushroomed in the increasingly globalised economy, although it dimmed somewhat in the wake of the 2007-08 global financial crisis, which hit international capital flows.
Still, an appetite for aggressive tax planning remains. Earlier this year, the UK Treasury announced laws to close down “an aggressive tax avoidance scheme’’ of “contrived circular transactions’’ by a dozen large businesses unidentified by the government. Hundreds of millions of pounds of tax revenue was at risk, the UK government said at the time. For confidentiality reasons, the UK doesn’t disclose taxpayer identities or offer details about such cases.
The OECD last year highlighted its fears about the ability of banks to use losses accumulated since the financial crisis – calculated by the OECD to be worth $700bn – as a tool for aggressive tax planning. Among the concerns is “loss trafficking’’– schemes in which losses are sold to other companies to reduce their tax payment. In a report published in August, the OECD also warned about aggressive tax planning concerning the carry-forward of “vast’’ corporate losses than can be as high as 25 per cent of gross domestic product in some countries.
The OECD has also said that multibillion-dollar deals aimed at generating foreign tax credits encouraged a build-up of leverage and led to tax distortions. The concern was raised in a 2009 report by then-adviser Geoff Lloyd that pointed to the complex structures involving low-cost loans at the heart of some tax arbitrage arrangements. Such financing provided “an unintended subsidy for cheap cross-border lending at the expense of the lender’s home state exchequer,” according to the report.
Owens, sees tax distortions as possibly stoking financial instability. Speaking at a Brussels conference in March, he said: “Tax was not among the root causes of the financial crisis. But tax measures may contribute in exacerbating non-tax incentives to financial instability in the form of greater leverage, greater risk-taking and to a lack of transparency.”
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