Recent revelations that many companies pay vanishingly little corporate tax have laid bare serious shortcomings in the international tax system. This has created a groundswell of demands for reform that politicians, struggling to make ends meet in a post-crisis world, are readier to meet. The plan produced by the OECD for the Group of 20 leading economies is an attempt to translate clamour into action.
The OECD is right about the need for change. Existing international tax rules were designed decades ago in an era before tax havens and the digital economy. They have not kept up as the world has changed around them. Creative use of transfer pricing and the ambiguity surrounding the location of transactions in cyber space has enabled multinationals to book ever more of their profits in low-tax jurisdictions. Companies have become expert at exploiting the cracks between different systems to take charges against tax in one place while incurring no corresponding cost in another.
Diagnosing the problem is easier than solving it. Notwithstanding the loss of public confidence, there is a free-rider problem: each country would like everyone else to stamp out avoidance without having to touch its own companies.