05/02/2013 10:40 am ET Updated Jul 02, 2013

G-20 Proposal to End Tax Evasion Won't Work

The G-20 just proposed that countries automatically exchange tax-relevant bank data to help stop international tax evasion. International tax evasion is a serious problem. But the proposal, strongly supported by Treasury, will not work to prevent the biggest source of tax evasion -- multinational corporations use of transfer pricing to shift of profits to low or no tax countries -- and Treasury knows it and, indeed, has opposed OECD efforts to close that loophole.

Over $1.7 trillion (yes, that's right, trillion) of multinational corporations' profits have been shifted offshore to various no or low tax havens and are not subject to U.S. taxes until they are "repatriated" to the US. They do this by using a transfer pricing system that every IRS Commissioner who has ever testified on the subject has admitted they cannot police. And, the policing is going to get even more difficult given the cutbacks in the IRS budget. Its like policing the New Jersey Turnpike on a bicycle.

Adopting the G-20 proposal will help stop money laundering and some individual tax evasion, but it will also act as an excuse not to focus on the largest form of tax evasion. More importantly, it will act as an excuse not to focus on the multinational corporations surreptitious push for territorial taxation which would exempt all their "foreign" profits from taxation. They would only be taxed on their profits they couldn't shift offshore. Jesse Drucker has documented time and again how multinational corporations like Apple have shifted huge amounts of their profits to countries in which they have very little real activity but whose tax rate is low or non existent Yet, Dave Camp the Chairman of the Ways and Means Committee, has publicly proposed at least three variations of a territorial system.

We need real reform to raise needed revenue, help domestic corporations compete with multinational corporations, and, counter-intuitively, probably increase dividends. There are two ways to do it. One would be to eliminate tax deferral on "foreign" income while allowing a credit for the taxes the multinationals do pay to foreign countries and eliminate the "check the box" provisions that allow the multinationals to minimize taxes by ignoring their corporate structure. The second would be to adopt a worldwide allocation system that in its simplest form would allocate profits by sales. For example, if a corporation like GE had 60% of its worldwide sales in the US, it would pay taxes on 60% of its worldwide profit, rather than claiming, as it has, that it earned almost nothing in the U/S.

Martin Lobel is a lawyer in Washington, D.C. and Chairman of the Board of Tax Analysts, although the views he expressed are his own.