Tax Havens in Reverse

When the OECD joined the G20 crackdown on tax havens during the economic crisis in 2009, its longstanding work helped to curb this harmful tax practice and implement a global standard of bank transparency. Now the organisation is focusing on another time-honoured malpractice: that of slipping taxable income through fiscal loopholes. Some call this creative accounting, the OECD calls it aggressive tax planning, and because it is hurting government revenue, it is hurting entire economies as well.

In a study of 17 countries, Corporate Loss Utilisation through Aggressive Tax Planning focuses on the losses–real or unreal–that companies claim on tax forms. Due to the financial crisis, global corporate losses have increased significantly, so the numbers at stake are vast, with companies bringing losses forward to future years' profits in order to reduce tax liability. Such loss carry-forwards are as high as 25% of GDP in some countries, the OECD reports. The book addresses both real and artificial losses, as well as the issue of multiple deductions of the same loss, typically by juggling dual-residency status, double-dip leases, or other mismatch arrangements.

Countries have also seen loss-making companies acquired solely to be merged with profit-making companies, and loss-making financial assets artificially allocated to high-tax jurisdictions. This shifting of losses is a case of tax havens in reverse, in which corporations, especially banks, juggle international borders to their advantage. “Losses are of no value in a country with no taxes”, Reuters journalist David Cay Johnston wrote, “but if they can be slipped to a high-tax country where profits are actually earned through economic activity, then the losses are imbued with value.”

How can this be stopped? Early detection via audits, special reporting obligations on losses, mandatory disclosure rules and co-operative compliance programmes can pay off. For instance, the OECD reports that the UK was able to cut off £12 billion in “avoidance opportunities”, thanks to its early disclosure rules.

Among other recommendations, the OECD urges governments to introduce policies restricting multiple use of the same loss and to revise restrictions on the use of certain losses in the context of mergers, acquisitions or group taxation regimes. In short, firm creativity should be directed at business models, and not at the balance sheet.

Click here to see an overview of the report

How to obtain this publication

ISBN 978-92-64-11921-5

©OECD Observer No 286 Q3 2011