Taxing multinationals: tackling aggressive tax planning through international co-operation
Updated 1 March 2016
The UK rules for taxing multinational businesses are based on a commonly-agreed set of international standards developed by the League of Nations in the 1920s.
These standards have not kept pace with globalisation and the ways in which multinationals are structured and operate. Some multinationals are using aggressive tax planning to gain an unfair advantage over their competitors so they can pay little or no tax on their profits.
This briefing explains how we are working with other countries to change the international tax rules and ensure multinationals pay the right amount of Corporation Tax on their UK profits.
1. Working globally to tackle aggressive tax planning
In an increasingly globalised world businesses operate across many countries, all with slightly different tax rules – making it easier for businesses to structure their tax affairs to reduce taxable profits. Tax avoidance and aggressive planning is an international problem and requires an international solution.
The international community are co-operating to come up with solutions, develop best practice and share expertise on combatting aggressive tax planning. Increasingly, countries are exchanging information about their multinational businesses to build a global picture of tax risk and identify challenges to aggressive tax planning.
There have been a number of important developments leading to greater co-operation between countries to improve their ability to tackle tax risk.
1.1 Base Erosion and Profit Shifting (BEPS) Project
HMRC works closely with international bodies such as the Organisation for Economic Co-operation and Development (OECD), the United Nations and the European Commission to monitor developments in tax avoidance, promote strong international tax rules and encourage tax authorities to work together in tackling avoidance. As part of this, the OECD / G20 launched the Base Erosion and Profit Shifting (BEPS) project in 2013. BEPS are tax planning strategies used to artificially shift profits to low or no tax locations where there is little or no economic activity. The BEPS proposals address these and also situations where businesses obtain multiple tax deductions for the same economic cost to reduce the enterprise’s overall tax liability.
The UK, along with other members of the OECD, the G20 group of countries and a number of developing countries have worked together to reform the international tax framework to ensure that profits are reported where economic activities are carried out and value created. The final BEPS report was published in October 2015 and the UK will continue to work on implementing the BEPS recommendations into national and international law.
1.2 Country-by-country reporting
One of the key BEPS recommendations relates to country-by-country reporting by large multinationals. Once implemented, this will require multinationals to make a report to the tax authority, usually of the country in which they are headquartered. This report will contain standardised information on revenues, profits, assets, capital, employees and taxes paid on a country-by-country basis for each country in which the enterprise has a resident entity or permanent establishment. Tax jurisdictions will automatically exchange country-by-country reports with the tax authorities in the countries in which those enterprises operate where this reporting has been introduced. As a first step to implementing country-by-country reporting the UK, together with 30 other countries, signed an agreement in January 2016 to exchange reports from 2017.
1.3 Joint International Tax Shelter Information Collaboration (JITSIC) Network
The UK has one of the largest networks of tax treaties and tax information exchange agreements in the world, which allows us to get tax information from more than 125 countries to build a better picture of UK tax risk and combat cross-border avoidance and aggressive tax planning.
One of the key ways that we share information with other jurisdictions is via the JITSIC Network, which facilitates the sharing of information between tax authorities so we can identify and curb abusive tax arrangements and aggressive tax planning. In April 2015, the network was expanded to 30 countries that share expertise, intelligence and common projects within the framework of international tax sharing agreements.
An example of how JITSIC operates was the ‘E6’ project announced by the government in March 2015. The E6 project targets tax avoidance by multinational digital businesses. Collaborating with other tax authorities to share information and intelligence about the way multinational digital businesses operate significantly strengthens our hand in dealing with aggressive tax planning. Information from this project helped in the development of the Diverted Profits Tax.
1.4 Exchange of tax rulings
Recent changes to EU law and new international agreements reached within the BEPS project reports will dramatically increase the number of cross-border tax rulings that tax authorities are required to exchange. This will allow them to better understand the global tax treatment of cross-border transactions, detect abusive tax practices and challenge aggressive tax planning.
This unprecedented level of transparency will make it significantly harder for non-compliant multinationals to try to play tax authorities off against each other or try to make deals with tax authorities in one country that create tax risks for other countries. The UK fully supports these initiatives which will provide HMRC with further tools to detect and tackle aggressive tax planning.
2. More information
Find out more about what HMRC is doing to tackle tax avoidance.