G-20 agrees on push to close tax loopholes, make multinationals pay

SYDNEY (REUTERS) - The world's top economies agreed on Sunday to develop stricter rules on cross-border taxation to close loopholes that have allowed multinationals such as Starbucks Corp, Google Inc, Apple Inc and Amazon.com Inc to avoid paying taxes.

The Group of 20 endorsed a set of common standards for sharing bank account information across borders with automatic exchange of information among its members to take effect by the end of 2015.

"Some multinational companies aren't paying their fair share of tax anywhere," Australian Finance Minister Joe Hockey, who hosted the meeting of G20 finance ministers and central bankers in Sydney, said at the close of the gathering. "We want a global response."

Reports of profit shifting by companies away from high tax countries to more relaxed tax regimes have sparked public inquiries in the United States and Britain.

Global tax evasion could be costing more than US$3 trillion (S$3.8 trillion) a year according to researchers from Tax Justice Network, while as much as US$32 trillion - twice the size of US gross domestic product - could be stashed away in tax havens.

Tightening tax loopholes has gained urgency in the aftermath of the global financial crisis when developed nations' efforts to avert economic meltdown left them with gaping budget holes and record debt.

The Organization for Economic Cooperation and Development has targeted fiscal consolidation as a key part of its growth strategy for the G20, but that will be hard to achieve if tax bases are eroded further.

Corporate tax evasion is also a challenge for poor countries, which typically have the least developed tax systems and enforcement. Around US$160 billion each year fail to reach developing nations because of multinationals' tax avoidance, according to a recent report by Christian Aid. That is more than they receive in aid from rich nations.

The push on tax reform at the Sydney G20 meeting was firmly backed by Washington and Australia and the United States signed a deal on the eve of the meeting under the US Foreign Account Tax Compliance Act that targets "non-compliant" taxpayers using foreign bank accounts.

Tightening the tax rules would prevent so-called Base Erosion and Profit Shifting by multinationals that exploit gaps and mismatches in national tax rules to make profits "disappear"from high tax regimes and shift to low tax locations.

"What we are doing is not to say, well, we need to close down Bermuda," Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, told reporters.

"There will be a neutralisation of these types of schemes and that is what we are doing and that where we think we can succeed, because if you try to dictate to countries what they have to do domestically, if you try to impede on their sovereignty, you cannot succeed."

French Finance Minister Pierre Moscovici said he intended to make Europe a leader in such efforts with France ready to sign agreements with Germany, Italy, Spain and Britain, within the next few weeks.

Divisions remain within the G20 on issues such as whether technology companies should be taxed at the source country, where the customer is and value is created, or at the residence country, where the product originated. But Australia's Hockey said there was consensus that companies had to pay.

The push also has some business support.

"The Amazons of the world that operate in other countries don't pay taxes in Australia and don't employ people in Australia; those things concern me," said Richard Goyder, Chief Executive of Australian retail giant Wesfarmers Ltd and president of the B20 Australia forum of business leaders that liaises with the G20.

The OECD standard builds on US rules, which ask foreign financial institutions to report on all accounts held by US citizens, or pay a punitive 30 per cent withholding on all US income.

Quentin Grafton, a professor of economics at the Australian National University in Canberra, welcomed the G20 commitment, but warned that achieving a global standard would be difficult given tax havens like Bermuda and Ireland are not part of the grouping.

"This is a win-lose proposition, so that makes it a difficult proposition," he said. "Those countries that will lose out will try and oppose it."

Mr Grafton said the OECD has been trying for more than a decade to bring about tax reform and the next test would come in September when it reports on planned actions.

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