It just got a little harder for multinationals to dodge taxes in the countries where they operate.
This week Canada was among 60 OECD countries that signed a multilateral agreement that helps individual countries to beef up current tax treaties and include new language in them to prevent profit shifting. “This is a significant progress in the fight against corporate tax-dodging,” says Dennis Howlett, executive director of Canadians for Tax Fairness. “Canada can’t fight this one on its own and neither can any other country. By banding together this could make billions of dollars difference in the tax revenues – and the well-being of citizens in developed and developing countries.”
At the heart of the OECD project is the principle that multinationals should pay corporate taxes in the jurisdictions where profits are made. It has been termed Base Erosion and Profit Shifting – BEPS. For instance, some Canadian-based mining companies will use the resources of a developing country but shift the profits to a low-tax jurisdiction such as Barbados or Cayman Islands to avoid the taxes. The result is a depletion in the capacity of a developing country to provide the services (education, public health, transportation) to its citizens. Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues. The new convention, which is the first multilateral treaty of its kind, allows jurisdictions to integrate results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties.
“Individual or biliateral tax treaties have created a maze and encouraged a race to the bottom,” says Howlett. “This latest development strengthens the multilateral aspect of tackling the problem.”
By signing the agreement Canada has committed to an improved level of exchange of tax ruling information and country-by-country reporting. “The signing of this multilateral convention marks a turning point in tax treaty history,” said OECD Secretary-General Angel Gurría. “We are moving towards rapid implementation of the far-reaching reforms agreed under the BEPS Project in more than 1,100 tax treaties worldwide, and radically transforming the way that tax treaties are modified. Beyond saving signatories from the burden of re-negotiating these treaties bilaterally, the new convention will result in more certainty and predictability for businesses, and a better functioning international tax system for the benefit of our citizens. Today’s signing also shows that when the international community comes together there is no issue or challenge we cannot effectively tackle.”