The G20 Summit has endorsed a proposal aimed to plug tax loopholes used by giants such as Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) to avoid billions of dollars in taxes.

Apple

According to Jesse Drucker & Rainer Buergin of Bloomberg, the Organization for Economic Cooperation and Development has proposed a blueprint to rein in tax-dodging strategies adopted by companies such as Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), and Yahoo! Inc. (NASDAQ:YHOO).

The 40-page report is intended to rein in companies avoiding billions in taxes by attributing profits to mailbox subsidiaries in places like Bermuda and the Cayman Islands.

‘Double Irish’ loophole

Apple Operations International is an Ireland-based entity that enables Apple Inc. (NASDAQ:AAPL) to pay a very low international tax rate. The Ireland tax law tags only companies that are managed and controlled in the country as tax residents. However, U.S. tax laws are based on where the company is incorporated.

This differing tax code allows companies like Apple Inc. (NASDAQ:AAPL) Operations International to pay zero taxes.

Using the ‘Double Irish’ method, companies like Apple Inc. (NASDAQ:AAPL) can avoid paying domestic taxes on international sales. For this purpose, companies set up two Irish companies, one to own the intellectual property rights and another to license those rights and keep profits low. This arrangement would allow the second company to get taxed at a modest 12.5 percent, or nearly a third of the 35 percent international tax rate imposed by the U.S. government.

Apple did not pay taxes in the U.K.

Recently, it has been reported that Apple managed to avoid paying taxes in the U.K. during the fiscal year ended September 2012 by using tax deductions from shares it awarded to its employees. This arrangement enabled Apple to erase its tax liability in the U.K. for the entire year, besides earning a tax credit for future years.

Apple Inc. (NASDAQ:AAPL)’s CEO Tim Cook, in his testimony before the U.S. Senate in May, contended that the company had not broken a single law in its fight to pay as little tax as possible. He stressed that Apple Inc. (NASDAQ:AAPL) kept both the spirit and the letter of the law in its tax dealings.

Earlier, Google also was reportedly in trouble with U.S. and European regulators about the way that the company pays taxes. It turns out that Google Inc (NASDAQ:GOOG) has been following in the footsteps of Apple Inc. (NASDAQ:AAPL) in running its money through Ireland in order to avoid paying taxes in other jurisdictions.

According to Jesse Drucker & Rainer Buergin of Bloomberg, the recent G20 Summit proposal is aimed at developing rules over the next two years that will prevent companies from escaping taxes by putting patent rights into shell companies, and taking interest deductions in one country without reporting taxable profit in another.  It will also force companies to disclose to regulators where they report their income around the world.