Governments pledge to stop tech giants exploiting tax loopholes

Plan for specific changes to tax diplomacy for G20 countries

Western governments have pledged to stop technology giants including Google, Apple and Amazon using tax loopholes, according to a new draft action plan.

The plan, seen by Reuters, was written up by the Organisation for Economic Co-operation and Development (OECD), an economic and tax policy advisory group for G20 countries.

In the past year, the issue of corporation tax avoidance has sparked a massive political debate. Companies including Starbucks, Apple and Google have been heavily criticised for the aggressive way they seek to minimise the amount of tax they pay.

The OECD has identified a number of the schemes that the technology giants have had in place to shift profits.

"Domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income," the draft said.

The OECD is to present an action plan that will be discussed at a G20 meeting later in July.

The plan calls for OECD members and non-OECD G20 members to agree on specific changes to international tax rules in one to two years - a faster time frame than usual for international tax diplomacy.

The OECD said that companies should avoid creating a taxable residence in a market where they have major activities. Lobby groups have questioned whether companies do engage in activities to shift profits to tax havens and whether there is a need for rule changes.

The draft plan includes the examination of the avoidance of tax residence, or permanent establishment "through the use of commissionaire arrangements", which Reuters suggests is a mechanism used by companies like Dell to avoid reporting revenues in countries where they have major sales.

Another area under scrutiny is "specific activity exemptions", which have been used by Amazon to enable it to operate major retail businesses in the UK and Germany without creating tax residences.

In May, Apple CEO Tim Cook defended his company against charges of aggressive tax avoidance in a hearing in front of a Congressional committee in the US Senate. A Senate report claimed that Apple avoided paying $9bn in taxes in 2012 alone using three offshore entities with no "residence" for tax purposes.

Cook hit back saying that his company paid nearly $6bn in tax to the US government in 2012, and that it expects to pay even more in 2013.

In the same month, Google chairman Eric Schmidt told BBC Radio 4 that his firm would pay more taxes if future changes to British tax law required it to do so.

None of the companies mentioned has broken any law, and many industry insiders point out that it is a corporate executive's duty to shareholders to minimize their company's tax bill.