The European Union and the Group of Seven nations recently announced they would take steps to ensure that multinational countries pay their fair share of taxes to countries where they do business.
The G7 – which comprises Canada, France, Germany, Italy, Japan, the United Kingdom and the United States – announced it would finalize recommendations made by the G20 nations and the Organization for Economic Cooperation and Development, reported Accounting Today.
The European Commission recommends consolidating the EU’s tax system into one.
The European Commission, the executive body of the EU, recommends consolidating the union’s tax system into one, simplifying its tax base and ensuring the EU would receive the correct amount of taxes owed to it by companies that generate profit in member countries.
Following OECD’s lead
The G7 announced June 8 that it would promote the automatic exchange of tax information and tax rulings to discourage multinational corporations from moving profits from one country to another with more favorable tax rates.
In a statement, the G7 nations also said they would finalize recommendations made by G20 finance ministers and the OECD’s Base Erosion and Profit Shifting Action Plan by the end of the year. The BEPS Action Plan identifies key areas to combat corporate tax avoidance.
While the plan was to ensure that nations received the appropriate amount of tax revenue generated within their borders, the G7 nations also addressed the issue of double taxation. In the event of a tax dispute between nations, The G7 wants those nations to submit to binding and mandatory arbitration, the statement said. Such arbitration would prevent the kind of overtaxation that could hinder trade and economic development.
One system fits all
Meanwhile, the European Commission announced in late May it wants to restructure the EU’s tax system to prevent similar issues of tax avoidance.
To do so, the commission has proposed a Common Consolidated Corporate Tax Base. The Guardian reports that Valdis Dombrovskis, the commission’s vice-president, said during a May 27 press conference the CCCTB would conceivably create one set of rules so that companies would file one tax return instead of having to file separately with each individual EU country. This would be particularly beneficial to companies with holdings throughout the EU.
Dombrovskis said, “We agreed on the need to combat tax avoidance by re-establishing the link between taxation and where the company actually does business,” The Guardian reported.
The details of how the system would function have yet to be determined, as would how to divide the tax revenue among EU nations, Dombrovskis said. However, companies’ participation would be mandatory.
The proposed changes to the tax system come after the EU announced it was investigating the relationship between several multinational corporations and some member countries. The union announced the investigation in summer 2014 and that it would include six countries. But the Wall Street Journal reported June 8 that the investigation had broadened to include 15 additional countries.
Offshoring of corporate profits erodes the U.S. tax base as well. In a report issued by Citizens for Tax Justice, the U.S. loses an estimated $90 billion annually when corporations shift profits to countries with more favorable tax rates.