OECD signals the beginning of the end for tax havens

The Paris-based body has drawn up plans for a global crackdown on companies perceived as not paying enough tax - as Detroit hits rock-bottom.

by Emma Haslett
Last Updated: 19 Jul 2013

Tax campaigners, stand down. Go buy yourself a Starbucks latte. Re-open your Gmail account. Dust off your iPhone. Your work here is done. The end of tax havens is nigh. Possibly.

At a meeting of G20 finance ministers in Moscow this morning, Paris-based body the Organisation for Economic Co-operation and Development unveiled plans to crack down on companies which don’t pay enough tax.

When it comes to taxation, the problem is that whereas companies are multinational, governments are not. So when a company makes a lot of money in, say, the UK (where corporation tax is 23%), all it needs to do is shift funds to its operation in, say, Ireland (where corporation tax is a much lower 12.5%) – and there’s nothing the British government can do about it.

Under the OECD’s new plans, that’ll all change. Among its 15 proposals are ways to prevent businesses from artificially separating taxable income from the activities that generate it, as well as ideas to block gaps between national tax systems. It also suggests ways to prevent companies shifting cash between ‘group’ companies.

If the plans go ahead, it’ll impress consumers, who are becoming increasingly frustrated with businesses that don’t pay the right amount of tax. But multi-nationals will protest that they’ve never actually broken the law – and finding ways to pay less tax is simply a matter of getting the best value for shareholders.

Assuming they do get this off the ground, it’s debatable how effective the plans will be: the proposals only apply to OECD countries – and although the body has ‘invited’ companies from countries like India and China to sign up to the rules, the likelihood of them complying seems slim…

Nevertheless: countries need to find a way to keep up with business’ globalisation – otherwise they could end up like Detroit, which has just become the largest US city ever to file for bankruptcy.

The city, once known as Motor City because of the size of its car manufacturing industry, is in $18bn of debt.

This eventuality was, sadly, pretty inevitable: the city’s manufacturing industry has been in decline for years. These days, not only are its public services about to go bust, but 70,000 properties have been abandoned. According to the City of Detroit’s bankruptcy filing, the population has shrunk from two million in the 1950s to 713,000 today; 40% of street lights don’t work and only a third of the city’s ambulances are in service. Less than 53% of homeowners paid their property taxes in 2011.

The city’s unions aren’t pleased: they’ve called the filing, which will protect the city from its creditors (including public sector workers), a ‘power grab’.

‘This is not about fixing the city’s finances. It’s about the governor and his own agenda to take over the city of Detroit,’ protested union leader Ed McNeil.

But one of the city’s last remaining car manufacturers, General Motors, reckons the filing is the beginning of a fresh start.

‘GM is proud to call Detroit home and today’s bankruptcy declaration is a day that we and others hoped would not come,’ it said in a statement. ‘We believe, however, that today can also mark a clean start for the city.’

To be fair, GM knows what it's talking about: back in 2009 it filed for bankruptcy protection, and it emerged a stronger, leaner version of itself. Perhaps the same can happen in Detroit.

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