The Organisation for Economic Co-operation and Development (OECD) announced this week that a series of measures may soon be introduced to curtail the practice of legal tax avoidance by major corporations.

The new rules announced yesterday, ahead of the G20 meeting in Australia, follow widespread media coverage of action taken by big companies to mitigate their taxes by legally moving profits to lower tax jurisdictions via offshore or subsidiary companies.  Google, Amazon and Starbucks were arguably the highest profile firms that have been in the firing line for legitimately reducing their tax bills in this way.

Taking Google’s situation as an example, the multinational firm currently benefits from tax agreements in place allowing it to direct £ 4.94 billion in untaxed profits out of the EU and Asia, and into a Bermuda-based subsidiary company, where there is no income tax.  This is completely legal practice, and according to Google Chairman, Eric Schmidt, by forcing the company to pay more corporation tax, innovation would suffer the most.

The OECD’s measures, to my mind, could have severe, inadvertent consequences.  Naturally, governments strive to do anything possible to increase their revenues, and as attractive as it may sound to many individuals that big businesses could be forced to pay more tax, by supporting such rules, the repercussions will be widespread.

Should corporation tax increase, this in turn will lead to lower returns for investors; employees may have to burden a reduction in salaries; and consumers could be faced with price hikes.

However, by allowing major corporations to continue legally reducing the amount of tax payable, they will be in a much stronger position to be able to generate employment, invest and reduce prices, which will subsequently increase the tax base and revenue received.

As businesses are becoming more repelled by uncompetitive and anti-business corporation tax rates, and punished for acting wholly legally, the consequences of these rules proposed by the OECD could in due course prove to be ubiquitously destructive and utterly contradict their purpose.

Nigel Green deVere Group

Blog written 17th September