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OECD Enables Companies to Avoid $100 Billion in Taxes - Bloomberg

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OECD Enables Companies to Avoid $100 Billion in Taxes
By Jesse Drucker - Mar 18, 2013

Headquartered in a former Rothschild chateau in an affluent Parisian neighborhood, the Organization for Economic Cooperation and Development is best known for earnest conferences on economic and social policy. With little outside attention, it also plays a pivotal role enabling global corporations such as Google Inc. (GOOG), Hewlett- Packard Co. and Inc (AMZN). to dodge taxes by shifting profits into offshore subsidiaries, costing the U.S. and Europe more than $100 billion a year. OECD officials “have been digging themselves deeper and deeper into a hole by blindly pursuing a mistaken approach that allows multinationals to avoid taxes,” said Sol Picciotto, an emeritus professor of law at Lancaster University in the U.K. A quasi-governmental body that helps some of the world’s biggest economies set tax policy, the OECD writes guidelines letting companies avoid taxes by moving income into tax havens, a practice it deems legal. The organization has long enjoyed a close relationship with industry. Its three top tax officials left in 2011 and 2012 to join firms that help companies avoid taxes by taking advantage of laws to move profits to locations such as Bermuda and Mauritius. While its 34 member nations -- primarily the U.S., Japan and European countries -- underwrite the OECD’s $460 million annual budget, tax-planning firms that advise multinational companies have contributed hundreds of thousands of dollars to sponsor its conferences. A 2010 conference in Washington featured sponsors such as PricewaterhouseCoopers LLP and law firm Mayer Brown LLP, which consult with companies on offshore tax strategies.

Tax Integrity
Now, with a new team of tax officials in place, the OECD is taking the uneasy first steps toward reform -- and alienating its industry allies. Last month, at the request of the Group of 20 nations, the OECD released a lengthy report criticizing corporate profit shifting. 3/18/2013

” the OECD wrote. they said they were determined to tackle this problem. as well as tax officials from accounting firms Ernst & Young LLP. faces an $845 billion budget deficit in 2013. grilling executives from Google. Parliament has held two hearings on corporate tax dodging. who has been with the agency since 2007.” Saint-Amans said. Budget Deficits Now the OECD is under growing pressure from governments.” he said.K. said in a letter to the Financial Times that “it cannot be right that larger companies can avoid paying tax.” With the OECD’s help. the commission said. said said Pascal Saint-Amans. http://www. according to the Congressional Budget Office. the finance ministers of Germany. The organization is also pursuing new guidelines to make it harder for companies to dodge taxes by moving valuable patent rights to mailbox subsidiaries. advised member states to create tax-haven blacklists and adopt anti-abuse rules. Amazon and Starbucks Corp. Tax avoidance and evasion cost the EU 1 trillion euros a year. In the past “the governments did not ask for any change and there was no political push to move into the direction of addressing profit shifting.Bloomberg Page 2 of 7 “What is at stake is the integrity of the corporate income tax. the European Commission. ‘Doesn’t Work’ Last month. the European Union’s executive body.. who became director of the OECD’s Center for Tax Policy and Administration last year. according to Eurostat. The tax division’s posture toward industry reflects the attitude of the OECD’s member governments. he said.6 billion euro budget deficit as of the third quarter of 2012. 3/18/2013 . It will submit an action plan to the Group of 20 by July. In December.K.. The U. with families and small businesses ending up paying more. PricewaterhouseCoopers. the U.OECD Enables Companies to Avoid $100 Billion in Taxes . The EU’s 27 states had a combined France and the U. Many of them are cutting services and raising taxes on working people to tame outsized budget gaps. you cannot justify it. Deloitte LLP and KPMG LLP.. “Having all your profits located in Bermuda. Executives from the companies and the accounting firms defended their practices and denied wrongdoing. Since November.

(GE) has dispatched its top international tax official to lead an effort to change the OECD’s proposed guidelines on mailbox subsidiaries. “peer pressure is very important.. which administered the Marshall Plan to reconstruct Europe after World War II.S. finally. an economist and former fiscal affairs director at the International Monetary Fund for 20 years.its biggest funder -. Although the OECD has published blacklists of “uncooperative tax havens. The OECD’s new approach “correctly diagnoses the problems with current rules and says that substantive changes will be needed to end the tax-haven” it has done little to curb multinational companies dodging taxes. the official in charge of the effort. who regularly attended OECD tax meetings. where one corporate tax representative after another objected to the plans. In November. who was an official in the French finance ministry before joining the OECD. ‘Peer Pressure’ The OECD’s tax division staff develops guidelines and hashes them out with delegates from tax agencies in member countries.’” Companies are pushing back.” said Michael C. said Daniel Frisch. A French oil-services company executive said of the proposal: “The general tone is guilty until proven innocent. Membership is largely European. -.” Durst said. 3/18/2013 .” ‘Haven Debacle’ Even with such opposition. The OECD is descended from the Organization for European Economic Cooperation. “The big challenge. the OECD plans to proceed if the member countries can agree. among others.. though it also includes the U. in Washington. said Joseph L. an economist at Horst Frisch Inc. the OECD hosted public hearings in Paris.Japan. Korea and Israel.OECD Enables Companies to Avoid $100 Billion in Taxes . Canada. Although countries are free to follow their own standards and not conform to OECD guidelines. it doesn’t work. Andrus. an attorney who advised companies for 17 years on offshore tax arrangements. While companies’ input is taken into account. now.Bloomberg Page 3 of 7 “The real question is ’Are countries satisfied with existing rules?’” said Saint-Amans. protect the tax systems of countries around the world.” he said in an interview. http://www. will be for OECD member governments to step up to the challenge of enacting laws that will. Australia. “they don’t get a vote.” said Vito Tanzi. The OECD has traditionally been leery of reining in corporate tax avoidance. “The response we hear from member countries is ’No. General Electric Co.

The firm has been involved in numerous recent high-profile transfer.pricing disputes.OECD Enables Companies to Avoid $100 Billion in Taxes . the OECD announced that it would “address” some transfer-pricing arrangements.” said H. director of the international tax program at New York University’s law school and an attorney at Caplin & Drysdale in Washington.paper transactions between corporate subsidiaries that allow them to push profits into tax havens by allocating income to different countries.S. leading to disproportionate profits offshore. and most developed countries.” said Durst. like the U. http://www. Those recommendations “gave no real guidance to governments. unfortunately. Outsized Profits The OECD has issued reams of guidelines to promote “transfer pricing” -. it issued guidelines that let companies such as Google and Yahoo! Inc. including U. left to join the transfer-pricing practice at law firm Baker & McKenzie. the official who oversaw the effort. Horst Frisch advises businesses and governments on tax practices. which the EU has been considering since 2004.” ‘Step Backwards’ In 2010. or the amounts that would be paid between unrelated parties. Abbott Laboratories (ABT) and Amazon. the former transferpricing adviser.” A year after the OECD issued those guidelines. (YHOO) continue avoiding taxes by stating that profit is generated in Bermuda and Mauritius -. David Rosenbloom.” Frisch said. would allocate companies’ income based on measures such as actual sales in a given country. or France. Internal Revenue Service cases involving Symantec Corp. (SYMC). “They’re kind of ludicrous on it. critics say. “The practical effect of the 2010 guidelines. A contrasting approach. 3/18/2013 . Guidelines promoted by the OECD call for “arm’s-length” prices. The OECD is “too much in the pocket of arm’s length.S. The In the end.K.not the countries of actual sales. Caroline Silberztein. lets subsidiaries in tax havens pay unrealistically low prices for patent rights. That was a big step backwards.Bloomberg Page 4 of 7 “Industry successfully leans on the OECD. was to ratify rather than challenge the movement of income to tax followed by the U..

who headed the tax division for 11 years. he said companies were adopting them for other reasons. he said. He joined Ernst & Young to foster understanding between industry and governments. where she headed the transfer-pricing unit. also joined the same practice at the law firm.S. which he didn’t specify. University Role If a company puts such an arrangement in place “just for tax reasons it ain’t going to be in business for very long. wrote to her colleagues. who is also advising governments in developing countries on tax policy http://www. which he said prompted legislation adopted in Germany and the time of the project. Owens defended the 2010 guidelines.” Carol Doran Klein.Bloomberg Page 5 of 7 Industry Candidates Silberztein’s OECD boss.” said vice president and international tax counsel for the U. he said. “My career was trying to span communities and this is a continuation of that. Triple Exit Seven months after Silberztein and Bennett left the OECD. the accounting firm that has advised multinational companies such as Google and Hewlett-Packard on their offshore tax strategies. Bennett also didn’t respond to requests for comment. Council for International Business. “I contacted Mary and she is encouraging us to encourage strong candidates. Jeffrey Owens... 3/18/2013 . Silberztein didn’t respond to repeated requests for comment. she encouraged a tax official at an industry trade association to nominate potential replacements at the OECD.” he Bennett had worked at Baker before her stint at the OECD. Both Silberztein and Bennett attended the OECD public hearing in November on mailbox subsidiaries. Mary Bennett. according to an e-mail reviewed by Bloomberg News. As Bennett was on her way out.OECD Enables Companies to Avoid $100 Billion in Taxes . He went to work part-time for Ernst & Young. She also solicited corporate-sponsorship contributions. A spokesman for Baker declined to comment. He acknowledged they probably “came too late -. Although Ernst & Young has promoted transfer-pricing strategies to avoid taxes. including one from Frisch’s firm. a lot of the” offshore arrangements had already been put into place. so did their boss.

The OECD will no longer permit tax advisory firms to sponsor the transfer-pricing conferences at its Paris headquarters. General Electric’s senior international tax he said. In another sign that the OECD’s new regime hasn’t entirely shed its corporate-friendly past.” Owens said. SaintAmans co-authored an article last month on his division’s profit-shifting efforts with William Morris. the OECD is holding a tax conference in Washington. Sponsors paying as much as $20. whose attorneys represented GlaxoSmithKline Plc (GSK) in a transfer-pricing dispute with the IRS.000 to have their firms’ names displayed prominently include Ernst & Young and law firm Bingham McCutchen LLP. Morris said he is heading efforts by a business coalition to seek “clarity” on the OECD’s initiative to clamp down on profit-shifting into tax havens. rather than Ernst & Young. according to a trade association official and Council for International Business. Conference Sponsors Another sponsor is Microsoft Corp. “You want solutions that will work for business and will work for government.S.Amans said.” To contact the reporter on this story: Jesse Drucker in New York at jdrucker4@bloomberg.” Saint. old attitudes die hard: In June.Bloomberg Page 6 of 7 and directing a tax policy center at Vienna University of Economics and Business. “I thought it was important to show that this project is not about disregarding what industry thinks.. He asked that his comments be attributed to him in his role at Vienna. which holds $60. whether it’s academics or business. Amy Call Well.4 billion. said the firm sponsors OECD conferences to “support open dialogue about international taxation. an Ernst & Young spokeswoman.” Even with the new focus on profit shifting. which the drug company agreed to settle for $3. an affiliate of the International Chamber of Commerce. The OECD’s relationship with business was appropriate. GE is “known as being aggressive in tax planning.OECD Enables Companies to Avoid $100 Billion in Taxes . selected the sponsors. “If you are going to find solutions in the tax area you need to talk to all the players. 3/18/2013 . mostly in tax.8 billion offshore that is untaxed by the U.S. Owens said.. (MSFT).” The U.haven http://www. Enables Companies to Avoid $100 Billion in Taxes .net ®2013 BLOOMBERG L.. 3/18/2013 ALL RIGHTS RESERVED.Bloomberg Page 7 of 7 To contact the editor responsible for this story: Dan Golden at dlgolden@bloomberg. http://www.