US pivotal to OECD tax plan

IT’S BECOMING increasingly apparent that the OECD’s plan to reduce tax base erosion and profit-shifting, as laudable as it is, is hugely reliant on the US making significant and drastic alterations to its corporate regime if it is to be successful.

The cases of Starbucks and Google have shown us that US multinational companies will circle funds between subsidiaries around the world, but stop short of repatriating the cash, instead allowing it to accumulate on a sun-kissed Caribbean island with favourable tax rate.

There is a very simple reason for this: the US’s 35% corporate tax rate, alongside other levies imposed upon the repatriation of the funds. The unattractiveness of that rate essentially creates a roadblock, impeding the movement of capital and distorting the global tax system, such as it is.

Lowering that rate, though, is unlikely to be politically palatable to most senators in the US – certainly not before Barack Obama leaves office at any rate – but should more American companies take a leaf out of Pfizer’s book and look to the UK or other nations as a tax base, then it’s conceivable the move might gain more political drive.

As it stands, however, there is little sign of that happening in the near future. In the final two years of Obama’s premiership neither he, the Democrats, nor the Republicans are likely to focus on anything other than vote-winning policies. In most circles, lowering taxes on multinationals seldom falls into that bracket.

But, as one US contact told Accountancy Age this week, it’s not as if political discussions have been devoid of tax cut considerations, but for now the issue will sit on the back burner.

In the meantime, of course, the UK coalition government is happy to engage in tax competition, advertising the UK’s 20% rate and generous tax incentives while simultaneously berating companies for their seemingly low corporation tax bills. Of course, there are plenty of other nations, such as Ireland, France, and Germany with their own particular and very different brands of tax arbitrage, too.

Progress, of course, has been made with the proliferation of bilateral treaties and FATCA-style deals, but they add to the level of tax complexity, and as long as there are differences between different countries’ jurisdictions, there will always be a degree of base erosion and profit-shifting.

All those factors considered, then, the OECD’s plans begin to look somewhat a side show, with the US’s role increasingly important in its success, whether or not the White House chooses to take any interest.

And that is the salient point. Corporate tax avoidance might matter to the UK, Europe and the G20, but the vagaries of American politics could supersede it at any point, rendering it redundant and forgotten in the US agenda.

The outcome of the Pfizer/AstraZeneca deal is crucial. If it goes through, Washington may just sit up and take note of the millions of dollars sitting off its south-east coast. If not, the inertia may simply continue.