Rules on tax-dodging multinationals must be thoroughly implemented
International cooperation must be bolstered to close tax loopholes that can be exploited by multinational business corporations.
The Group of 20 major economies and the Organization for Economic Cooperation and Development have worked out new international taxation rules to clamp down on the excessive tax avoidance tactics by multinational firms.
The pillar of the new rules is to make it mandatory for multinationals with annual sales of €750 million (about ¥100 billion) or more to report to the tax authorities of their home countries the value of taxes they pay and their lines of business in foreign countries where they operate. The information thus collected is shared by member nations.
A tax penalty will be levied on multinationals if they are found to be involved in the practice of reducing their tax burdens considerably by curbing their profits, through such tactics as exploiting transactions with their subsidiaries operating in other countries.
Tax revenues lost worldwide due to such tax dodges amount to as much as ¥30 trillion a year, according to an OECD estimate.
There has been a series of cases of tax avoidance in recent years committed by multinationals of Europe and the United States that exploited the differences in taxation systems among the countries where they conduct business. Although their practices are not illegal in terms of tax law, a situation cannot be overlooked in which firms posting a huge amount of profits are allowed to pay less than an appropriate amount of taxes.
In the case of U.S. firms Google Inc. and Starbucks Corp., they are said to have employed such tactics as having their subsidiaries in low-tax countries hold patents and trademarks, with their parent companies paying high royalties to them.
Regarding other tactics, they are said to have inflated expenses by paying excessive interest and material procurement costs to related companies in other countries where their subsidiaries operate.
Fairness and justice
Tax avoidance through deals that are considerably removed from authentic corporate activity should not be left unchecked. Such practices shake the fundamental principle of fairness and justice in the taxation system and increase discontent among businesses that pay due taxes.
It is reasonable for the tax authorities of countries concerned to try to comprehend the actual financial conditions of multinationals and aim to prevent them from resorting to excessive tax avoidance tactics.
Many tax dodging cases involve three or more countries, making it difficult to deal with them under conventional bilateral treaties. New rules are likely to be introduced by more than 40 countries, including Japan, the United States, European nations and China.
It is of no small significance that many industrialized countries and emerging economies, whose tax systems are greatly different from each other, have cooperated to devise the common rules.
But the new rules are nothing but an agreement by the G-20, and have no binding force. The challenge is how to enhance their practical effectiveness.
Revision of relevant domestic laws and establishment of a multinational agreement in line with the rules must be done promptly.
If the level of legal compliance differs from country to country, there is concern that it will be exploited by multinationals with the intention of tax avoidance. It is important to establish a system aimed at monitoring each other, to observe such things as how strictly each member nation asks multinationals to submit their business information.
Efforts are also necessary to increase the number of countries introducing the new international taxation rules.
As a check on multinationals that try to devise new ways of tax avoidance, it is essential for the countries concerned to cooperate more closely by exchanging information and revising the rules expeditiously if needed.
(From The Yomiuri Shimbun, Oct. 16, 2015)