The OECD says global solutions are needed to ensure that tax systems do not unduly favour multinational companies, leaving citizens and small businesses with bigger tax bills.

This is backed by an OECD report commissioned by the G20 - Addressing Base Erosion and Profit Shifting (BEPS) - which found that multinationals are using strategies that allow them to pay as little as 5% in corporate taxes when smaller businesses are paying up to 30%.

The OECD research also showed that some small jurisdictions act as conduits, receiving disproportionately large amounts of foreign direct investment compared to large industrialised countries and investing disproportionately large amounts in major developed and emerging economies.

The report states that there is a need for increased transparency on effective tax rates of multinational enterprises, and key pressure areas include:

• International mismatches in entity and instrument characterisation including hybrid mismatch arrangements and arbitrage;
• the application of treaty concepts to profits derived from the delivery of digital goods and services;
• the tax treatment of related party debt-financing, captive insurance and other inter-group financial transactions;
• transfer pricing, in particular in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group, and transactionsbetween such entities that would rarely take place between independents;
• the effectiveness of anti-avoidance measures, in particular GAARs, CFC regimes and thin capitalisation rules; and
• the availability of preferential regimes for certain activities.

It concludes that the major challenge is not only to identify appropriate responses. But also the mechanisms to implement them in a streamlined manner, in spite of the well-known existing legal constraints, such as the existence of more than 3000 bilateral tax treaties. It is therefore essential that countries work in together in a co-ordinated approach and consider innovative approaches to implement comprehensive solutions.

OECD secretary-general Angel Gurrua said: 'These strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system.

'It is critical that all tax payers - private and corporate - pay their fair amount of taxes and trust the international tax system is transparent. This report is an important step towards ensuring that global tax rules are equitable, and responds to the call that the G20 has made for the OECD to help provide solutions to the global economic crisis.'

In the coming months, the OECD will draw up an aAction plan to quantify the corporation taxes lost and provide concrete timelines and methodologies for measures to reinforce the integrity of the global tax system.

The report is available from the OECD