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Friday, March 9, 2012

Aggressive Tax Planning on the Rise, Says OECD

"Aggressive tax planning," which I would characterize as  exploitation of tax differences between countries that sits on the edge of legal tax avoidance and illegal tax evasion, is on the rise among corporations, according to a new report by the Organization for Economic Cooperation and Development (via Reuters and Reuters Tax Break).

The OECD report notably states that "concerns about distortions caused by double taxation also apply to double non-taxation." It points to practices such as deducting the same expense in multiple countries and generating multiple tax credits for the same tax payment as ways to make income "disappear." As Palan et al. (2010) have argued, corporations largely don't care whether their practices are deemed legal or not, If they get away with it, great; if not, well, paying fines is just a cost of doing business. Clearly on net this aggression has saved more in taxes than it costs in fines, if such behavior is actually increasing, as the OECD says.

Bear in mind, too, that whether the transactions are technically legal or illegal, their effect in reducing the corporate tax burden and passing it on to other taxpayers is the same.

Confirming what I have written here before that untold billions are at stake, the new OECD report gives examples of billion-plus settlements of such tax disputes. One involved four New Zealand banks that had to pay the government NZD 2.2 billion (i.e., an average of NZD 550 million per bank), a dozen Italian cases settling for 1.5 billion euro, and, largest of all, eleven tax credit transactions in the U.S. "evaded" (OECD's term) $3.5 billion in taxes owed to the government. The OECD did not make an estimate of the total cost of corporate tax planning, though the Tax Justice Network has estimated worldwide tax evasion to be $3.1 trillion annually.

The report recommends that countries introduce new laws and regulations to deal with abusive linked transactions, share information among governments, and initiate new disclosure requirements for firms to catch these transactions. While this is a step in the right direction, the OECD proposals are not very specific. Forcing companies to publish country-by-country instead of consolidated accounts would make clear what transfer pricing abuses they are perpetrating and make it politically more feasible to address them.

1 comment:

  1. Where goes the border between tax planning and tax fraud, or is it constantly moving as laws are changing?