Treat multinationals as single firms to minimise tax evasion, says OECD

Experts involved in the review of taxation of international transactions have proposed that large multinationals be considered as single firms rather than separate ‘fictitious entities’ to reduce tax evasion.

Treating the corporate group of a global firm as a single company would make it possible to assess its economic activities in various jurisdictions, and ensure its tax base is attributed according to real activities in each country.

The experts appointed by the G20-controlled Organisation for Economic Cooperation and Development (OECD), called the Base Erosion and Profit Shifting Monitoring Group (BMG), Monday presented proposals following a two-year study on tax avoidance and evasion.

“Some of the proposals do mark a significant step forward, enabling the MNE [multinational enterprise] to be considered as a single firm and to ensure profits relate to economic activity,” said the BMG in a report released Monday.

An MNE with its head offices in London and with operations in Kenya will, for instance, be required to provide a breakdown on how its revenues are generated and how much in taxes it has paid Kenyan revenue authorities.

Presently, such corporations use subsidiaries in countries perceived to be tax-friendly to channel their profits, ending up with minimal tax liabilities in Kenya and their home countries. Estimates indicate that Kenya loses more than Sh100 billion a year to such aggressive tax planning structures.

OECD is the foremost agency that makes guidelines for international trade and taxation.

The professionals advising the OECD also faulted the various tax treaties entered by different countries.

“The aim of tax treaties has too long been regarded as only the prevention of double taxation, disregarding the equally important purpose of ensuring appropriate taxation, which we proposed should be an explicit provision in all treaties.”

The BMG says new laws should be put in place to ensure big corporations do not abuse double tax treaties, which are drafted to cushion firms from paying taxes in more than one jurisdiction on the same revenues.

Value addition

Free information exchange between various countries would also help tax authorities to verify declared taxes, and match them to the value addition within different countries.

Civil societies involved in fighting tax evasion have said the proposals brought to the OECD would significantly help combat tax cheating, especially in poor countries.

“Tax avoidance is deeply embedded in the business models of most multinational companies,” said John Christensen, the director of the Tax Justice Network. “We welcome measures that will increase corporate transparency, for example, through country-by-country reporting.”

He, however, faulted the lower threshold for information exchange, currently at revenues of Sh75 billion ($750 million) and above.