“Profit Shifters” Face Global Crackdown

A new global tax plan from the OECD could eventually hinder multinationals from moving profits overseas to benefit from low-tax jurisdictions.
Kathy HoffelderApril 22, 2013

U.S. multinational companies that routinely allocate their profits to other countries to benefit from low-tax jurisdictions may soon need to change their tactics.

The Organisation for Economic Co-operation and Development (OECD) is developing a global tax action plan, scheduled to be released in July, that targets transfer pricing (pricing among entities of a company) aimed at tax avoidance. In February, the Group of 20 nations urged the OECD, comprised of 34 countries including the United States, to develop the plan to help solve some of the tax inequities that exist globally.

Sean Foley, principal in charge of KPMG’s global transfer pricing services practice in the United States, says the action plan is very important. “It’s the first time the G20 asked the OECD to give them an action plan. That’s never happened before.”  

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

According to the OECD, the action plan will consist of “comprehensive, coordinated strategies for countries concerned with BEPS [base erosion profit shifting].” (BEPS is the OECD’s term for the problem.)

While it is unclear what specific strategies the plan may contain, Michiko Hamada, senior director at accounting advisory BDO, says it could include more detailed information about the home country (or the one with higher taxes) being compensated for the loss when a tax base moves to another country. This could be done through an “exit charge.” The current transfer pricing guidelines, which were last updated in 2010, do not have specific details on compensation for the country that loses tax dollars.

The United States government has a lot to gain from such a plan if it helps prevent corporate profits from moving to lower tax jurisdictions. Transfer pricing has enabled U.S.-based firms such as Apple, Google, and General Electric to pay less taxes in the U.S. 

As Hamada explains, “there’s that tension point because shareholders really want the effective tax rate to be lower, but tax authorities want to make sure that their tax base is at least stable.”

To date, the OECD’s suggestions have been accepted by most industrialized nations. The U.S. is likely to back the OECD’s action plan when it is published. “I think there could be changes in the U.S. rules to accommodate the view of the OECD,” says Foley.

At a New York University/KPMG tax lecture series last week, Danielle Rolfes, international tax counsel in the Office of Tax Policy for the U.S. Department of the Treasury, said that “although we may not agree with other jurisdictions on all of the solutions that have been put forward, a starting place is that there is something wrong with the status quo in terms of how our international tax rules have evolved and how our domestic policy implementing those rules has evolved.”

She added, “We do see substantial income in jurisdictions that does not align with the activity.”

Eventually, CFOs of multinational corporations may have to adjust their current transfer pricing practices. “I am on calls every week with CFOs of Fortune 50 and Fortune 250 companies asking, ‘Where do we think this is going? What should we be doing now?’” says Foley. “When the report comes out in July, everyone’s going to have to be all over this and see what the implications are.”

As Hamada notes, there are efficiencies that can be realized through transfer pricing that make absolute sense, but “transfer pricing should never be the tail that wags the dog.” To her, CFOs need to be thinking about their business goals and objectives and their tax goals and objectives. “Moving things around doesn’t work all the time for every client,” she says.

The OECD is also expected to commit to further analysis on the topic of profit shifting and to put out additional reports and recommendations over the next year.