Remember how embarrassed Apple was when a Senate investigation revealed a disproportionate share of its profits accrued to an Irish subsidiary with no employees? Me neither.
Apple defended the practice as a perfectly legal arbitrage of tax systems in the United States and Ireland that ensured its global competitiveness, similar to the strategy used by many multinational companies. But in the age of austerity, that may be too much of a burden on domestic businesses and cash-strapped governments.
A club of the world’s wealthiest countries, the Organization for Economic Cooperation and Development, agreed over the weekend to adopt new rules (pdf) that make it harder for companies, especially online companies, to perform that kind of arbitrage. The OECD touted it as the one of the first coordinated efforts to modernize the tax system and to close the offshore whirlpool sucking away all that tax revenue.
These are important discussions—but implementation is going to be a very long haul indeed. What we’re talking about are rules designed to increase transparency—no more US companies “checking the box” to remove foreign subsidiaries from scrutiny; more accurately measuring where value is added by counting employees and profits by country; and rules designed to make it harder companies to transfer valuable intellectual property abroad, away from the taxman.
Critics of tax avoidance say these are good ideas, even if they don’t fundamentally change the incentives of companies to keep money overseas. But as is often the case, the OECD prescriptions are vague, bordering on maddening: “Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense…” reads one proposal. And the timeline for these discussions runs through 2015—then, governments will have to actually pass laws to implement these rules.
Despite the popular notion that the current US tax code sprung fully formed from Ronald Reagan’s head in 1986, it’s not the case that companies are simply obeying some natural law of taxes. They lobby actively to shape the tax code in their favor, and you can expect they’ll continue to do so; there are already reports that the US Treasury—occupied by the most pro-corporate tax administration in decades—put the kibosh on European plans for a more aggressive proposal.
In the US, changes like these are a very hard political lift because so many American corporations benefit from these rules. Similar proposals from US Senator Carl Levin and the Obama administration have languished, with little will to enact them outside of a major tax overhaul that is under discussion but certainly on the back-burner in Congress. And because of the importance of US companies to this debate, it’s likely America will need to act decisively to garner global support, just as as its efforts to force individuals to disclose their offshore accounts became a model for other advanced countries. These talks, on the other hand, may just provide another few years of employment for lawyers and lobbyists.