Over the last few years, large corporation's tax bills have come into more and more public focus. Both Google and Apple have been called in front of Congress to explain their low rate and the overall tax plan of both corporations has become public knowledge. These revelations are occurring at a time when the global tax base is being eroded as companies are shifting more and more of their income and assets to low-tax countries. As a result, the OECD has issued a report titled, "Action Plan on Base Erosion and Profit Shifting."
Let's first look at a brief history of the OECD-tax haven conflict to provide historical perspective, starting with this question: why are the tax rates in tax havens so low? There are two inter-related answers: they have a tiny geography and small population. The Cayman Islands is a mere 264 square km in size with a population of 53,737. Looking at these two inter-related factors from a governing perspective, there is little need for a massive infrastructure system or social safety net programs and hence, little to no need to tax. The exact opposite is true for OECD countries, who have large land masses and large populations.
Compounding this difference between large, populous countries and small less populated island nations is that businesses which require far more paper-work than physical product are easily moved to tax havens. The first and most obvious example of this is financial services, an industry dominated by ledgers and accounts, not physical products. The digital age has exacerbated this phenomena as web pages replace physical storefronts, thus enabling transactions to occur in cyberspace which can be located on a computer server rather than a bricks and mortar locale. We can also place non-physical assets such as intellectual property into corporations located in these offshore jurisdictions and establish an intra-company payment system where a company will pay its offshore subdivision for usage of the company's intellectual property. As a result of all these developments, more and more actual economic activity can be moved to these low-tax jurisdictions, thereby eroding the tax base of larger countries.
The OECD started to target offshore activity in the late 1990s with the issuance of the report "Harmful Tax Competition: An Emerging Global Issue." In effect, the report argued the combination of banking secrecy and low taxes was eroding the OECD's tax base, leading the group to begin a lobbying campaign with these jurisdictions to both lift the secrecy veil and raise their taxes. Little happened on this front until 9/11, which added further strength to the OECDs anti-secrecy arguments. Now, more and more offshore jurisdiction are signing "mutual assistance" treaties which allow coordination of tax prosecutions with treaty signatories in certain situations. From a macro perspective, these developments are leading to a slow end to the age of banking secrecy, which will probably disappear for the most part by the end of my lifetime.
However, the issue of offshore tax arbitrage is still alive and well, hence the talk of a new global crackdown:
Britain has taken a lead in pressing for reform of the international tax rules after a wave of public anger over the low tax bills paid by some large multinationals. An action plan on tackling base erosion and profit shifting is due to be presented to the G20 by the Paris-based Organisation for Economic Co-operation and Development on Friday.
We have no idea where this will end -- or if it will get anywhere in the first place. However, I do think with the heightened spotlight on low multi-national tax bills and increasing number of cross-border tax arrangements, this might have legs.