G8 to Formulate Strict Tax Avoidance Rules

The Group of Eight (G8) Industrialized Nations is planning to create and implement rules and regulations in order to prevent multinational companies from getting away with shocking tax avoidance strategies.

The G8 is expected to come up with an agreement on this matter when the G8 summit is held at the United Kingdom on June 17-18, 2013. The G8 consists of the the United States, the United Kingdom, Canada, Germany, France, Italy, Russia, and Japan.

What’s being done with intangible assets?

Many of the G8 nations have been experiencing financial strife in recent years. In the wake of bailouts and instability they are intent on forming stronger international cooperation. They also want to make a stand against tax avoidance schemes that are popular amongst huge IT-related companies.

In order to decrease tax burdens many of these companies have utilized offshore strategies, particularly with regard to their intangible assets. Intangible assets owned by global IT companies still produce profits. Examples of this type of assets are computer software, brand rights, patents, management and advertising know-how. Some companies transfer such assets to an offshore location where corporate tax is lower than in their home country where they are headquartered. The Cayman Islands is a popular tax haven for these global IT companies. Earnings transferred to these tax shelters give these companies the means of avoiding huge amounts of tax payments.

Making a stand

Three of the biggest countries of the European Union (EU) have expressed their concern on the issue of corporate tax avoidance by multinational firms during a recent energy and tax policy summit. These EU countries are currently undergoing a lot of spending cuts just to address serious debt and deficit issues. There have been a number of cases that involve US tech giants, the most recent of which is the Senate inquiry on Apple, Inc. It was reported that Apple only paid 2% tax on overseas income amounting to $74 billion. According to the Senate report, the company allegedly exploited a loophole in the existing tax code of Ireland.

Britain and France push for reforms

President Francois Hollande of France said that it is unacceptable that companies escape tax payments in this way. He proposes to harmonize rules and coordinate “at a European level” in order to formulate strategies that will put an end to the practice.

Prime Minister David Cameron of the United Kingdom is also keen on fortifying the coordination between nations. He believes that only “international action” can fully resolve the issue. The Prime Minister intends to secure a deal at the upcoming summit and if this fails, global companies would be asked to be “more transparent” in reporting their actual profits.
The need for implementing rules and regulations

Situations such as the recent Apple tax debacle are the ones in particular that G8 leaders intend to address. During the summit, it is expected that the leaders would be working towards creating international rules that cover critical areas such as the definition of intangible assets as well as fair market valuation methods. The Organization for Economic Cooperation and Development is already working out measures to address tax avoidance issues. The G8 is expected to make the request to the organization to work out the details.

Photo Credit: G8 Leaders Confer