Tax experts responsible for the G20-led shakeup of international tax rules are discussing radical measures to bar global corporations from using internal loans, that bear no relation to their borrowing needs, in order to avoid tax.
If adopted, the move could wipe out vast swaths of the financial industry at a stroke in countries such as Switzerland and Luxembourg, which have for years courted the intra-group financing offices of multinational firms by operating friendly local tax regimes.
Raffaele Russo, one of the OECD tax experts leading the reform programme that has come in response to increasingly aggressive tax planning by multinationals, told the Guardian that if the proposals were backed, “this will be the end of [tax] base erosion and profit shifting using intra-group financing”.
Measures to tackle multinationals taking large tax deductions for interest payments on loans within the same group are hinted at in a report published in September.
It said: “A formulary type of approach which ties the deductible interest payments to external debt payments may lead to results that better reflect the business reality of multinational … groups.”
While other measures are also on the table, pressure to take radical steps to stamp out intra-group loans contrived for tax avoidance has grown this week after revelations about tax agreements rubber-stamped by the Luxembourg tax office.
Luxembourg finance minister Pierre Gramegna used a public session during a meeting of European finance ministers in Brussels to deliver a statement in reaction to this week’s revelations about tax agreements with multinationals.
“My country [has] come under scrutiny in the latest days. The rulings of Luxembourg are being done according to the national laws of Luxembourg and also according to international conventions. What is being done is totally legal.”
He acknowledged rulings and weak tax treaties had led to “situations where companies are paying no taxes or very little taxes [which] is obviously not a good result”.
He noted, however, that many other EU countries offered companies advance tax agreements for their tax structures, but said that more must be done to coordinate global efforts led by the G20.
“If we want to change [the] legal framework we will have to do it all together.” The Guardian this week published an investigation into several multinational companies with large intra-group lending activities based out of Luxembourg.
The investigation was part of a wider analysis, involving journalists in more than 20 countries, scrutinising hundreds of ATAs awarded by the local tax office.
Among the findings was an internal financing company within drug group Shire, best known for its treatments for ADHD. The tiny lending unit – with staff costs last year of less than $50,000 – lent more than $10bn to other group companies, sometimes at 8% or 9% interest.
Neither the scale of lending nor the interest rates charged bore much relation to Shire’s global borrowing needs.
The Guardian investigation showed, however, that Shire’s controversial structures had allowed the lending unit to amass more than $1.9bn in interest income over five years while incurring tax of less than $2m for four of the years.
Asked why Shire’s Luxembourg unit had made large loans to sister companies and charged high rates of interest – neither seemingly reflecting the group’s overall borrowing needs or financial strength – the drugs firm declined to comment.
In a statement, it said its Luxembourg lending unit was “part of our overall treasury operations”, adding “we have a responsibility to all our stakeholders to manage our business responsibly; this includes managing our tax affairs in the interests of all stakeholders”.
Tax advisers Grant Thornton set out the benefits of Luxembourg in a presentation last year saying the Grand Duchy was “pre-eminent within the financial sector … often used as a treasury/financing location”.
The presentation continued: “Luxembourg’s government understands the need for a close working relationship with business.” It added: “It is possible for companies to obtain an advance tax agreement [ATA] … commonly obtained for financing structures.”
More than 40 nations, representing over 90% of the world’s economy, are signed up to the G20-led reform agenda.
They acknowledge that multinationals and their tax advisers have stretched current rules to breaking point and that there is an “urgent need” to rein in the avoidance industry, which was draining tax receipts and threatening the authority of governments.
Tasked with leading the reform project, the Paris-based Organisation for Economic Cooperation and Development (OECD), in September published the first wave of proposals, which have been agreed.
A second wave – expected to include measures to tackle excessive interest deductions – is expected in the autumn of 2015. The use of intra-group loans is commonplace in the tax planning activities of multinationals.
One of the most dramatic examples occurred at Vodafone, which in 2000 channelled £42.5bn of intra-group loans through the Swiss branch of one of its Luxembourg subsidiaries.
The arrangement was the subject of a lengthy dispute with HRMC, ending in a £1.25bn settlement in 2010, which was heavily criticised by tax campaigners and politicians.
theguardian.com
If adopted, the move could wipe out vast swaths of the financial industry at a stroke in countries such as Switzerland and Luxembourg, which have for years courted the intra-group financing offices of multinational firms by operating friendly local tax regimes.
Raffaele Russo, one of the OECD tax experts leading the reform programme that has come in response to increasingly aggressive tax planning by multinationals, told the Guardian that if the proposals were backed, “this will be the end of [tax] base erosion and profit shifting using intra-group financing”.
Measures to tackle multinationals taking large tax deductions for interest payments on loans within the same group are hinted at in a report published in September.
It said: “A formulary type of approach which ties the deductible interest payments to external debt payments may lead to results that better reflect the business reality of multinational … groups.”
While other measures are also on the table, pressure to take radical steps to stamp out intra-group loans contrived for tax avoidance has grown this week after revelations about tax agreements rubber-stamped by the Luxembourg tax office.
Luxembourg finance minister Pierre Gramegna used a public session during a meeting of European finance ministers in Brussels to deliver a statement in reaction to this week’s revelations about tax agreements with multinationals.
“My country [has] come under scrutiny in the latest days. The rulings of Luxembourg are being done according to the national laws of Luxembourg and also according to international conventions. What is being done is totally legal.”
He acknowledged rulings and weak tax treaties had led to “situations where companies are paying no taxes or very little taxes [which] is obviously not a good result”.
He noted, however, that many other EU countries offered companies advance tax agreements for their tax structures, but said that more must be done to coordinate global efforts led by the G20.
“If we want to change [the] legal framework we will have to do it all together.” The Guardian this week published an investigation into several multinational companies with large intra-group lending activities based out of Luxembourg.
The investigation was part of a wider analysis, involving journalists in more than 20 countries, scrutinising hundreds of ATAs awarded by the local tax office.
Among the findings was an internal financing company within drug group Shire, best known for its treatments for ADHD. The tiny lending unit – with staff costs last year of less than $50,000 – lent more than $10bn to other group companies, sometimes at 8% or 9% interest.
Neither the scale of lending nor the interest rates charged bore much relation to Shire’s global borrowing needs.
The Guardian investigation showed, however, that Shire’s controversial structures had allowed the lending unit to amass more than $1.9bn in interest income over five years while incurring tax of less than $2m for four of the years.
Asked why Shire’s Luxembourg unit had made large loans to sister companies and charged high rates of interest – neither seemingly reflecting the group’s overall borrowing needs or financial strength – the drugs firm declined to comment.
In a statement, it said its Luxembourg lending unit was “part of our overall treasury operations”, adding “we have a responsibility to all our stakeholders to manage our business responsibly; this includes managing our tax affairs in the interests of all stakeholders”.
Tax advisers Grant Thornton set out the benefits of Luxembourg in a presentation last year saying the Grand Duchy was “pre-eminent within the financial sector … often used as a treasury/financing location”.
The presentation continued: “Luxembourg’s government understands the need for a close working relationship with business.” It added: “It is possible for companies to obtain an advance tax agreement [ATA] … commonly obtained for financing structures.”
More than 40 nations, representing over 90% of the world’s economy, are signed up to the G20-led reform agenda.
They acknowledge that multinationals and their tax advisers have stretched current rules to breaking point and that there is an “urgent need” to rein in the avoidance industry, which was draining tax receipts and threatening the authority of governments.
Tasked with leading the reform project, the Paris-based Organisation for Economic Cooperation and Development (OECD), in September published the first wave of proposals, which have been agreed.
A second wave – expected to include measures to tackle excessive interest deductions – is expected in the autumn of 2015. The use of intra-group loans is commonplace in the tax planning activities of multinationals.
One of the most dramatic examples occurred at Vodafone, which in 2000 channelled £42.5bn of intra-group loans through the Swiss branch of one of its Luxembourg subsidiaries.
The arrangement was the subject of a lengthy dispute with HRMC, ending in a £1.25bn settlement in 2010, which was heavily criticised by tax campaigners and politicians.
theguardian.com
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