An international effort has started to prevent multinational corporations from avoiding their fair share of taxes in the respective countries where they do business. On July 19, the 34-member Organization for Economic Cooperation and Development announced a 15-point action plan on “base erosion and profit shifting.”

The OECD member countries and eight emerging economies — including Russia, China and India — will spend up to 2½ years to work out specific recommendations for domestic rules and international treaties aimed at preventing multinational corporations from taking advantage of different tax systems and rates among countries to greatly reduce their tax burden.

The problem of international tax avoidance is related to issues of countries, on one hand, trying to squeeze as much tax revenue as they can from businesses and, on the other, trying to attract influential companies with low corporate tax rates.

The OECD’s attempt to involve developed as well as emerging economies in international efforts to close loopholes in tax systems among countries of different interests is commendable.

In June the Group of Eight summit held in Northern Ireland also took up the issue of international tax avoidance and agreed to create a framework under which various countries would share information on the bank accounts of multinational corporations.

The methods used by multinational corporations include maximizing the advantages of different national tax systems and establishing subsidiaries in tax havens to greatly reduce their tax burden or even achieve double non-taxation.

Tax strategies used by such companies as Google Inc., Apple Inc. and Yahoo! Inc. have become the subject of legislative hearings. In Britain, consumers protested against the strategy used by Starbucks Coffee Co. to avoid taxes.

The OECD’s action plan includes the call for an international standard to cope with attempts to reduce taxable profit, such as the method of selling the right to a brand to a subsidiary in a low-tax country and then paying a large amount of money to the subsidiary to use the brand in a high-tax country.

Another proposal is to change the current system in which a country cannot levy a tax on a company engaged in electronic commerce such as music distribution if the company has not installed a server in the country.

The action plan also considers ways to have companies provide reporting of profits to tax authorities of each country concerned to make it difficult to shift profits generated in one country to another where tax rates are low or almost zero.

The finance ministers and central bankers of the Group of 20 countries who met in Moscow on July 19-20 fully endorsed the OECD’s action plan. Multinational corporations should heed what the G-20 said after its meeting: “Ensuring that all taxpayers pay their fair share of taxes is a high priority in the context of fiscal sustainability, the promotion of growth, and the needs of developing countries to build capacity for financing development.”

Domestic companies and ordinary individuals should not be subjected to a higher tax burden than are multinational corporations.

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