The G-20 (Group of 20) comprising the world's 19 biggest advanced and
emerging economies, is expected to support a major reform of international
corporate taxation designed to eliminate loopholes that enable many companies to
keep their tax bills low. The 15-point action that has been developed by the
Organisation for Economic Cooperation and Development (OECD), will be discussed
by finance ministers from the G-20 at their meeting in Moscow on Friday and
Saturday. Pascal Saint-Amans, director of OECD’s Centre for Tax Policy and
Administration, at the Paris-based think-tank for 34 mainly developed
countries, said the response to a public outcry against giant companies such as
Apple, Google and Microsoft, paying little or no corporate taxes in countries
where they have large sales, would force up tax rates for multinationals that
organise their affairs so they paid little tax. He said: “They know the golden
age of ‘we don’t pay taxes anywhere’ is over.”
National tax laws have not kept pace with the globalisation of corporations
and the digital economy, leaving gaps that can be exploited by multi-national
corporations to artificially reduce their taxes.
OECD’s Action Plan on Base
Erosion and Profit Shifting (BEPS) offers a global roadmap that will allow
governments to collect the tax revenue they need to serve their citizens. It
also gives businesses the certainty they need to invest and grow.
The plan proposes updating rules on how services and goods transferred
between units of a company located in different countries are priced to reflect
the fact that many are now "intangible," and take the form of licenses and the
use of branding. It includes measures to widen legislation that allows
governments to tax profits that have been shifted to low-tax jurisdictions,
eliminate opportunities for avoiding tax through the use of complex financing
structures, and the use of contracts to avoid having a taxable presence in a
country in which a company operates.
“This Action Plan, which we will roll out over the coming two years, marks a
turning point in the history of international tax co-operation. It will allow
countries to draw up the co-ordinated, comprehensive and transparent standards
they need to prevent BEPS,” said Angel Gurría., OECD Secretary-General,
“International tax rules, many of them dating from the 1920s, ensure that
businesses don’t pay taxes in two countries – double taxation. This is laudable,
but unfortunately these rules are now being abused to permit double
non-taxation. The Action Plan aims to remedy this, so multinationals also pay
their fair share of taxes.”
The Action Plan recognises the importance of addressing the digital economy,
which offers a borderless world of products and services that too often do not
fall within the tax regime of any specific country, leaving loopholes that
allow profits to go untaxed.
The Action Plan will develop a new set of standards to prevent double
non-taxation. Closer international co-operation will close gaps that, on paper,
allow income to ‘disappear’ for tax purposes by using multiple deductions for
the same expense and “treaty-shopping”. Stronger rules on controlled foreign
companies would allow countries to tax profits stashed in offshore subsidiaries.
Domestic and international tax rules should relate to both income and the
economic activity that generates it. Existing tax treaty and transfer pricing
rules can, in some cases, facilitate the separation of taxable profits from the
value-creating activities that generate them. The Action Plan will restore the
intended effects of these standards by aligning tax with substance – ensuring
that taxable profits cannot be artificially shifted, through the transfer of
intangibles (eg patents or copyrights), risks or capital, away from countries
where the value is created.
Greater transparency and improved data are needed to evaluate, and stop, the
growing disconnect between the location where financial assets are created and
investments take place and where MNEs report profits for tax purposes.
Requiring taxpayers to report their aggressive tax planning arrangements and
rules about transfer pricing documentation, breaking-down the information on a
country-by-country basis, will help governments identify risk areas and focus
their audit strategies. And making dispute resolution mechanisms more effective
will provide businesses with greater certainty and predictability.
The actions outlined in the plan will be delivered in the coming 18 to 24
months by the joint OECD/G20 BEPS Project, which involves all OECD members and
G20 countries on an equal footing. To ensure that the actions can be
implemented quickly, a multilateral instrument will also be developed for
interested countries to amend their existing network of bilateral treaties.
The Wall Street Journal says
the plan will receive the public backing of
finance ministers from the UK, Germany, France and Russia at a joint news
conference in Moscow, but the OECD believes it has the support of all G-20
Pascal Saint-Amans said it also has the support of OECD members such as the
Netherlands and Ireland, countries which are host to many multinational
companies seeking to minimise their tax bills.
The G-20 is set to back an ambitious, two-year timetable for putting the
action plan in place. Saint-Amans said that while businesses will be consulted
on the development of new rules affecting the tax they pay, they won't formally
be part of any of the task forces that will develop those rules.
Address the tax challenges of the digital economy
Identify the main difficulties that the digital economy poses
for the application of existing international tax rules and develop detailed
options to address these difficulties, taking a holistic approach and
considering both direct and indirect taxation. Issues to be examined include,
but are not limited to, the ability of a company to have a significant digital
presence in the economy of another country without being liable to taxation due
to the lack of nexus under current international rules, the attribution of value
created from the generation of marketable location-relevant data through the use
of digital products and services, the characterisation of income derived from
new business models, the application of related source rules, and how to ensure
the effective collection of VAT/GST with respect to the cross-border supply of
digital goods and services. Such work will require a thorough analysis of the
various business models in this sector.
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