In a sign of growing anxiety about tax competition that costs governments billions of dollars a year, international economic policymakers are exploring the need for a global crackdown on tax loopholes.
Experts at the Organization for Economic Co-Operation and Development are examining tactics that companies employ to exploit different tax rules among countries and are assessing past efforts to rein in the practice known as tax arbitrage.
Angel Gurría, the OECD secretary-general, recently urged the world’s biggest economies to consider how “to limit the scope for gaming the system with multiple deductions, the creation of untaxed income and other unintended consequences of international tax arbitrage.”
The OECD is worried about the impact of tax arbitrage on competition, transparency and fairness, as well as lost revenue.
Earlier this year, Jeffrey Owens, the OECD's top tax official, called for cooperation in dealing with “the most costly and destabilizing instances of international tax arbitrage,” which he said can lead to “lost government revenues, wasted resources, increases in borrowing to finance the arbitrage and increased complexity.”
Past efforts to crack down on arbitrage have been controversial, with big companies accusing governments of trying to act as “global tax policemen.” In 2001, the business-friendly Bush administration criticized an OECD initiative to address what it termed “harmful tax practices,” saying it interfered with the right of countries to structure their own tax rules.
In December 2008, after the financial crisis struck, the Internal Revenue Service signaled a shift in attitude. IRS Commissioner Douglas H. Shulman noted in a series of speeches over the following year that a “dizzying global environment” in tax arbitrage was challenging regulators.
One of the speeches came at a meeting of the OECD, whose 34 member states include Europe’s strongest economies, the United States, Japan and South Korea.
“All countries with real economies and real tax systems have a shared interest in reducing the kind of arbitrage that makes income disappear from the tax systems where the economic activity is taking place,” Shulman told an audience at George Washington University in 2009.
“Tax arbitrage” encompasses a wide range of complex practices that companies employ to achieve tax credits or savings, often by shifting income among subsidiaries in different countries.
Arbitrage generally has mushroomed in the increasingly globalized economy, although it dimmed somewhat in the wake of the 2007-08 global financial crisis, which hit international capital flows.
Still, an appetite for aggressive tax planning remains.
Earlier this year, the U.K. treasury announced laws to close down “an aggressive tax-avoidance scheme” of “contrived circular transactions” by a dozen large businesses unidentified by the government. Hundreds of millions of pounds of tax revenue were at risk, the government said in a news release at the time.
For confidentiality reasons, the U.K. doesn’t disclose taxpayer identities or offer details about such cases.
The OECD last year highlighted its fears about the ability of banks to use losses accumulated since the financial crisis—an estimated $700 billion, according to the OECD—as a tool for aggressive tax planning.
Among the concerns is “loss trafficking”—schemes in which losses are sold to other companies to reduce their tax payments. In an August report, the OECD also warned about aggressive tax planning that involves the carrying forward of “vast” corporate losses as high as 25 percent of the gross domestic product of some countries.
The OECD has also said that multibillion-dollar deals aimed at generating foreign tax credits encouraged a general buildup of leverage and led to tax distortions.
The concern was raised in a 2009 report by then-adviser Geoff Lloyd that pointed to the complex structures involving low-cost loans at the heart of some tax-arbitrage arrangements. Such financing provided “an unintended subsidy for cheap cross-border lending at the expense of the lender’s home state exchequer,” according to the report.
The OECD's Owens sees tax distortions as possibly stoking financial instability.
Speaking at a Brussels conference in March, he said: “Tax was not among the root causes of the financial crisis. But tax measures may contribute in exacerbating non-tax incentives to financial instability in the form of greater leverage, greater risk-taking and to a lack of transparency.”