Moscow/New Delhi: Countries need to strengthen their taxation rules to prevent companies from abusing provisions, including those in bilateral treaties, to artificially reduce their taxes, according to Paris-based think tank OECD.
'Action Plan on Base Erosion and Profit Shifting (BEPS)' report, prepared at the request of G-20 grouping that includes India, comes against the backdrop of rising concerns that many corporates are paying lower taxes, compared to their earnings.
"National tax laws have not kept pace with the globalisation of corporations and the digital economy, leaving gaps that can be exploited by multi-national corporations to artificially reduce their taxes," the Organisation for Economic Co-operation and Development (OECD) said today.
The elaborate report, being presented at the G-20 finance ministers' meeting starting today in Moscow, suggests 15-point action plan that would give governments the domestic and international instruments to prevent corporations from paying little or no taxes.
Among the actions suggested are prevention of abuse of taxation treaty between countries, making entities disclose their aggressive tax planning arrangements and the need to address the challenges of digital economy.
OECD has called for developing model treaty provisions with respect to design of domestic rules to prevent granting of treaty benefits in inappropriate circumstances.
"Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the taxa policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country," the report said.
India is in discussions with many countries, including Mauritius, to re-work existing bilateral tax treaties amid concerns that entities are misusing them to escape taxes.
"Closer international co-operation will close gaps that, on paper, allow income to 'disappear' for tax purposes by using multiple deductions for the same expense and 'treaty-shopping'.
"Stronger rules on controlled foreign companies would allow countries to tax profits stashed in offshore subsidiaries," OECD noted.
OECD Secretary General Angel Gurria said international tax rules are now being abused to permit double non-taxation.
"International tax rules, many of them dating from the 1920s, ensure that businesses don't pay taxes in two countries -- double taxation," he added.
Describing the plan as a "turning point in the history of international tax co-operation", Gurria also said it would help countries to prepare co-ordinated and comprehensive standards to prevent base erosion and profit shifting.
First Published: Friday, July 19, 2013, 18:27