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Rediff.com  » Business » Net closes on tech giants use of loopholes to avoid taxes
This article was first published 10 years ago

Net closes on tech giants use of loopholes to avoid taxes

July 09, 2013 08:37 IST

Image: Apple Store in New York City's Grand Central Station.
Photographs: Mike Segar/Reuters Gernot Heller and Tom Bergin in Berlin/London


Western governments are set to target a range of tax loopholes used by technology giants, including Apple, Amazon, as part of an international drive to tackle corporate tax avoidance, says a draft action plan seen by Reuters.

The Organisation for Economic Co-operation and Development, which advises its mainly rich nation members on economic and tax policies, has been charged by the G20 group of countries with formulating measures to stop big companies shifting profits into tax havens.

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Net closes on tech giants use of loopholes to avoid taxes

Image: Amazon's logistics centre in Graben near Augsburg in germany.
Photographs: Michael Dalder/Reuters

Corporate tax avoidance has become a hot political issue following public outrage over revelations in the past year that companies such as Apple and Google had used structures US and European politicians said were designed to minimise the amount of taxes paid.

The OECD is now due to present an "action plan" highlighting broad areas where changes will be discussed to a G20 meeting later in July. A preliminary draft of the plan, dated May 27, seen by Reuters, shows the organisation has already identified a number of specific profit shifting schemes.

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Net closes on tech giants use of loopholes to avoid taxes

Image: Google's office in Zurich, Switzerland.
Photographs: Courtesy, Camenzind Evolution

"Domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income," the draft said, echoing comments from politicians in the United States and Europe in the past year.

Business lobby groups have questioned whether companies do engage in activities to shift profits to units in tax havens and whether there is a need for rule changes. But as governments struggle with large deficits following the financial crisis, lawmakers have said enough is enough.

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Net closes on tech giants use of loopholes to avoid taxes

Image: A man pushes a trolley full of Dell computers at the company's factory in Sriperumbudur Taluk, in Kancheepuram district, Tamil Nadu.
Photographs: Babu/Reuters

The draft plan aims for OECD members and non-OECD G20 members to agree on specific changes to international tax rules in one to two years - fast by the standards of international tax diplomacy. Among the areas the draft said the OECD would seek to address are situations where companies avoid creating a taxable residence in a market where they have major activities.

British lawmakers have accused Google of using certain arrangements to avoid creating a tax residence in the United Kingdom.

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Net closes on tech giants use of loopholes to avoid taxes

Image: Apple Store on the East Balcony in New York City's Grand Central Station.
Photographs: Mike Segar/Reuters

Its low tax bill is a result of channelling revenues through Ireland, from where most revenue is sent to Bermuda, with next to taxes being paid anywhere in the chain. The action plan said the OECD would also examine the avoidance of tax residence, or permanent establishment "through the use of commissionaire arrangements" - a mechanism used by companies including Dell to avoid reporting revenues in markets where they have major sales.

Also up for possible revision are long-standing "specific activity exemptions" which have been used by Amazon to enable it operate major retail businesses in countries like Britain and Germany without creating tax residences for these businesses.

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Net closes on tech giants use of loopholes to avoid taxes

Image: Amazon's warehouse in Dunfermline, Scotland.
Photographs: Russell Cheyne/Reuters

The OECD draft also said it would target arrangements where treaties designed to avoid double taxation of corporate profits are abused through the use of "dual resident entities" to ensure no taxation whatsoever is paid.

A US Senate Committee in May said Apple had created companies which were registered in Ireland and managed from the United States, and thereby qualified as being tax resident nowhere, enabling the company to shelter billions of dollars income from tax.

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Net closes on tech giants use of loopholes to avoid taxes

Image: Google's office in Zurich, Switzerland.
Photographs: Courtesy, Camenzind Evolution

The OECD also has its sights set on arrangements where companies allocate profits to tax haven units on the basis these units funded research or bore business risks related to transactions elsewhere in the group.

Microsoft uses such arrangements to allocate profits derived from research conducted in the United States to a unit in Ireland, a US Senate investigation last year showed. There is no suggestion that any of the companies have broken any law and analysts in the investment community say corporate executives have a duty to shareholders to minimise their companies' tax bills.

Dell was not immediately available for comment. All the companies said they follow the tax rules in the countries where they operate.

Source: REUTERS
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