Governments get ready to clamp down on major tech tax avoiders

A group of Western governments are ready to start formulating measures which will prevent major international tech companies from using loopholes to avoid paying taxes.

According to Reuters, the Organisation for Economic Co-operation and Development (OECD), a body which advises its mainly rich member states on fiscal and tax policy has been charged by the G20 group of nations with drawing up a draft policy to prevent big tech companies from shifting their profits into offshore tax-havens.

Tax avoidance became a hot button issue in late 2012 when it emerged that companies including Google, Apple and Amazon were paying tiny amounts of tax compared with the revenue they were making from the UK and other countries.

While apparently legal, the complex web of offshore accounts weaved by the tech giants had many questioning whether their operations were entirely ethical.

Take Google for instance. According to UK newspaper The Guardian, the internet giant defines its staff and operations in a number of countries as “service arms”, using its Irish subsidiary to collect advertising revenues. This subsidiary then funnels the funds through another subsidiary, which passes its payments to a holding company in the Netherlands with its tax base in Bermuda. This is a combination of two tax-avoidance strategies known as the “Double Irish” and “Dutch Sandwich“.

The OECD is therefore drawing up an “action plan” that will target these tax issues. In fact, reports Reuters, the organisation has already come up with a draft, highlighting areas of legislation that need to be targeted.

“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.

The draft plan apparently aims for OECD members and non-OECD G20 members to agree on specific changes to international tax rules in one to two years. That’s pretty quick by the standards of international tax diplomacy but with governments around the world facing struggling economies and popular action against the austerity measures many have introduced, it makes sense that they would want swift action.

It seems unlikely however that the countries involved will be able to make any real dent in the way major tech companies operate, especially given the number of other countries who will now be incentivized to let them keep operating the way they want.