G7 leaders set tax reform deadline

9 Jun 15

The leaders of the G7 group of developed countries have reiterated their commitment to reform the international tax system and pledged to come forward with “concrete and feasible recommendations” for change later this year.

The declaration signed by the leaders of the group at the end of the summit in Germany yesterday said they were committed to clamping down on tax avoidance by multinational companies through transfer pricing.

This is the process by which large companies complete internal transactions between subsidiaries for items such as supplies or branding, but can be used to move revenues to low-tax jurisdictions. This can lead to revenues not being taxed where they are generated, so-called base erosion and profit shifting, which Oxfam calculated cost African countries $6bn in 2010 from G7 countries alone.

In the summit declaration, the G7 – Canada, France, Germany, Italy, Japan, the UK and the United States – said achieving a fair and modern international tax system was “essential to fairness and prosperity for all”.

The group would examine the proposal put forward by the Organisation for Economic Co-operation and Development and develop an action plan to move to new country-by-country reporting for firms “by the end of this year”, they added.

“Going forward, it will be crucial to ensure its effective implementation, and we encourage the G20 and the OECD to establish a targeted monitoring process to that end,” the leaders stated.

“We reiterate our commitment to work with developing countries on the international tax agenda and will continue to assist them in building their tax administration capacities. Moreover, we will strive to improve existing international information networks and cross-border cooperation on tax matters, including through a commitment to establish binding mandatory arbitration in order to ensure that the risk of double taxation does not act as a barrier to cross-border trade and investment.”

The OECD set out the plans for the country-by-country reporting standards on yesterday. These changes are intended to allow tax administrations obtain a complete understanding of the way multinational firms structure their operations, including use of transfer pricing.
Under the proposals, multinational firms will be required to provide information on the global allocation of income and taxes paid in each jurisdiction where they do business. This will be accompanied by other indicators, such as of the location of economic activity within the group, in an attempt to highlight cases of profit shifting.

Responding to the plan, Oxfam's head of UK campaigns Nick Bryer said multinational companies, many with headquarters in G7 countries, were “cheating” African countries out of billions of dollars in vital tax revenues. This could be used to provide healthcare and boost education, he said.
“To fund the fight against poverty and to tackle worsening extreme inequality, we need action to ensure big companies pay their fair share, here and in the world's poorest nations.”

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