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Glasgow
+44 (0)141 221 2984

Edinburgh
+44 (0)131 225 6366

Stirling
+44 (0)1786 451745

Dumbarton
+44 (0)1389 765238

Hamilton
+44 (0)1698 459444

French Duncan

OECD and reform of international tax rules

02 November 2015

The Organisation for Economic Co-operation and Development (OECD) has drawn a line in the sand over corporate tax avoidance.

The international organisation has presented a final package of measures for a comprehensive reform of international tax rules. The Base Erosion and Profit Shifting (BEPS) project is the culmination of two years of work and was commissioned by the G20 group of leading industrial economies. It offers governments solutions for closing gaps in established international rules.

The term ‘base erosion’ is used to describe the damage to national tax bases by corporate tax avoidance. ‘Profit shifting’ refers to the legal structures and practices designed to record profits in the lowest tax jurisdictions, regardless of where they are generated.

Examples of profit shifting include selling intellectual property rights to subsidiary companies and transferring profits to tax havens. The OECD’s proposals will make this more difficult as firms will have to prove their base is a “permanent establishment”. Intercompany loans and transfer sales will also be on the OECD’s radar and corporations will also have to provide more clarity on where they make their profits and sales using country-by-country reporting.

Revenue losses are estimated to be roughly $100 to $240 bn (£65 to £156 bn) every year, amounting to anywhere from 4 to 10% of global corporate tax revenues.

It is important to note that some of the reforms will be optional, such as the proposals concerning how to tax multinationals diverting profits to controlled foreign companies (CFCs).

Tax avoidance is clearly not just a focus for the UK government.

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