OECD issues final proposals on landmark corporate tax reform
The Organisation for Economic Cooperation and Development (OECD), a think-tank for 34 mainly advanced country governments, today issued final proposals on corporate tax reform that are a landmark development since the evolution of international business tax rules, which evolved in the 1920s under the direction of the League of Nations.
These are proposals but defying sceptics, in just over two years in response to massive corporate tax avoidance and evasion, and with the support of the 19 governments of the world's biggest developed and emerging economies of the G-20, the OECD's tax experts have brought a project to conclusion that will impact international business for decades to come.
Governments may have the opportunity of recovering conservatively estimated revenues lost of 4-10% of global corporate tax revenues or $100bn to $250bn and Angel Gurría, OECD secretary-general, said he is hopeful that the rules will be implemented, given the strength of the political backing the process has received.
“There is enormous ownership, and the feeling of a very great, shared accomplishment,” he said. “The US has fully embraced this, from President Barack Obama downward.”
There are rules on transfer pricing that are aimed at ensuring that companies reflect the true cost of goods and services transferred between the countries in which they operate. For companies like Google and Facebook that book their sales in UK, Germany, France, Australia etc. in Ireland, there are requirements for to prove that it's local company is active or inactive in a country — this centres on what is called permanent establishment — which is designed to prevent patents, brands, licenses and other forms of intellectual property from being parked in a low tax jurisdiction, even when there maybe little or no research and development or other activity taking place there.
The new rules also seek to limit the use of complex financial instruments to minimise tax bills, as well as chains of loans between various parts of the same company that maximize the size of deductible interest payments.
The Paris-based body says global firms with annual revenues of more than €750m should report their activities on a country-by-country basis.
Krister Andersson, chairman of the tax policy group of the Brussels-based lobby firm Business Europe, said the new rules had been designed in the interests of the large countries that would make up the G-20, and would result in losses for smaller countries, including Sweden, Austria and the Netherlands.
“It’s very surprising and unbelievable that the whole project is being undertaken without an impact assessment,” he said.
Richard Collier, a partner at PwC, the professional services group, praised the OECD for achieving a larger degree of consensus than expected, according to the Financial Times.
Pascal Saint-Amans, the OECD’s head of tax, said the proposals are “a sea-change which is already having a significant behavioral impact on taxpayers." About two-thirds of businesses indicated plans to review their structures ahead of the Beps regulations, according to a recent survey across 35 countries by Thomson Reuters, the data provider.
The OECD/G-20 Base Erosion and Profit Shifting (BEPS) Project Action Plan, which was endorsed by the G-20 in July 2013, identified the following 15 key areas that were addressed in the final recommendations issued today. The final package of measures for a comprehensive, coherent and co-ordinated reform of the international tax rules to be discussed by G-20 finance ministers at their meeting on Thursday 8 Oct, in Lima, Peru, provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low/no tax environments, where little or no economic activity takes place.:
1. The Digital Economy
2. Hybrid Mismatch Arrangements
3. Controlled Foreign Company Rules
4. Interest Deductions and Other Financial Payments
5. Harmful Tax Practices
6. Tax Treaty Abuse
7. Permanent Establishment
8. Transfer Pricing of Intangibles
9. Transfer Pricing of Risks
10. Transfer Pricing of Other High Risk Transactions
11. Data Analysis
12. Disclosure of Aggressive Tax Planning
13. Transfer Pricing Documentation (including Country-by-Country Reporting)
14. Dispute Resolution
15. Multilateral Instrument
“Base erosion and profit shifting affects all countries, not only economically, but also as a matter of trust,” said Angel Gurría added. “BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide. The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century: they will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective,” Gurría said.
Following delivery of the BEPS measures to G-20 leaders during their annual summit on 15-16 November in Antalya, Turkey, the focus will shift to designing and putting in place an inclusive framework for monitoring BEPS and supporting implementation of the measures, with all interested countries and jurisdictions invited to participate on an equal footing.
The final package of BEPS measures includes new minimum standards on: country-by-country reporting, which for the first time will give tax administrations a global picture of the operations of multinational enterprises; treaty shopping, to put an end to the use of conduit companies to channel investments; curbing harmful tax practices, in particular in the area of intellectual property and through automatic exchange of tax rulings; and effective mutual agreement procedures, to ensure that the fight against double non-taxation does not result in double taxation.
The OECD headquarters is at the Château de la Muette, Paris.
The BEPS package also revises the guidance on the application of transfer pricing rules to prevent taxpayers from using so-called “cash box” entities to shelter profits in low or no-tax jurisdictions, and redefines the key concept of Permanent Establishment, to curb arrangements which avoid the creation of a taxable presence in a country by reliance on an outdated definition.
The BEPS package offers governments a series of new measures to be implemented through domestic law changes, including strengthened rules on Controlled Foreign Corporations, a common approach to limiting base erosion through interest deductibility and new rules to prevent hybrid mismatch arrangements from making profits disappear for tax purposes through the use of complex financial instruments.
Nearly 90 countries are working together on the development of a multilateral instrument capable of incorporating the tax treaty-related BEPS measures into the existing network of bilateral treaties. The instrument will be open for signature by all interested countries in 2016.
The BEPS measures were agreed after a transparent and intensive two-year consultation process between OECD, G-20 and developing countries and stakeholders from business, labour, academia and civil society organisations.
“Everyone has a stake in reversing base erosion and profit shifting,” Gurría said. “The BEPS Project has shown that all stakeholders can come together to bring about change. Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.”
The OECD/G-20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules, that currently allow corporate profits to “disappear” or be artificially shifted to low/no tax environments, where little or no economic activity takes place. See videos here:
See also the Finfacts article of 3 Oct which has links to past reports that have a relevance to Ireland:
Pic on top: Pascal Saint-Amans, the OECD’s head of tax, and Angel Gurría, OECD secretary-general, at the Paris headquarters.