G7 leaders Monday pledged to reform the international tax system by minimizing transfer pricing, according to Public Finance International. Transfer pricing involves internal transactions between a large company’s subsidiaries for items such as supplies or branding, but it can also be used to move revenues to low-tax jurisdictions.
Such practices can lead to revenues not being taxed where they are generated, called “base erosion” or “profit shifting.” Nick Bryer, head of UK campaigns for Oxfam International, told PFI that multinational companies, many with headquarters in G7 countries, were “cheating” African countries out of billions of dollars in vital tax revenues that could be used for health care and education.
“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,” Bryer said.
The G7 nations signed a summit declaration that they would work to achieve a fair and modern international tax system that was “essential to fairness and prosperity for all.” That partly entails developing an action plan to require companies to do country-by-country reporting by year-end, under a proposal put forward by the Organisation for Economic Co-operation and Development (OECD).
Under the proposal, multinational firms would be required to provide information on the global allocation of income and taxes paid in each jurisdiction where they do business. This would 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.
“Going forward, it will be crucial to ensure [the new reporting structure’s] effective implementation, and we encourage the G20 and the OECD to establish a targeted monitoring process to that end,” the leaders wrote in the declaration.
“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,” the leaders also wrote. “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.”