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Last year G20 group of leading developed and emerging economies tasked the Organisation for Economic Co-operation and Development - - the Paris-based think-tank for 34 mainly developed countries - - to produce proposals for reform of global corporate tax rules and today the OECD released its first recommendations for a co-ordinated international approach to combat tax avoidance by multinational enterprises, under the OECD/G20 Base Erosion and Profit Shifting Project designed to create a single set of international tax rules to end the erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax. It's the biggest reform program of global business tax rules since their development in the 1920s.
The task of Pascal Saint-Amans, director of the Centre for Tax Policy and Administration and his team was to modernise a system that in recent decades has been massively abused to shift profits to pay little or no tax. With the development of the Internet, multinational companies got new opportunities to avoid tax.
The proposals have been agreed by the Committee on Fiscal Affairs (CFA), which includes representatives from the 34 OECD countries two candidate nations, and eight large emerging economies, including China, India, Brazil, Russia, Indonesia and South Africa. The CFA plans to produce a second, and final set of proposals next year.
Pascal Saint-Amans told a press conference in Paris that the that the 44 countries had delivered on time and across a range of complex tax issues underlined how committed they were to closing loopholes that have allowed companies to minimise their tax payments.
"This is extremely ambitious," Saint-Amans said. "We are delivering. As soon as they are published, they will have an impact. They reflect very strong agreement."
However, 4 of the 44 countries believed to be UK, Luxembourg, the Netherlands and Spain, according to the Financial Times could not agree on the design of a measure aimed at curbing unfair competition for patent income, which is widely viewed as contributing to the problem of tax avoidance.
The bid to crack down on patent boxes follows fears they would lead to a “race to the bottom” and poach revenue from other countries. Germany last year described them as being at odds with the “European spirit”.
The UK and other opponents of this plan argue that the proposal, which would stop companies claiming the tax break if they outsource research to other parts of their group, breaches European law. They pushed for an alternative approach but this was rejected.
Presenting the OECD’s recommendations, Angel Gurría, secretary-general, said: “The G20 has identified base erosion and profit shifting as a serious risk to tax revenues, sovereignty and fair tax systems worldwide. Our recommendations constitute the building blocks for an internationally agreed and co-ordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment.”
At the request of the G20 leaders, the OECD’s work is based on a BEPS Action Plan setting out the 15 key elements to be addressed by 2015. The project aims to help governments protect their tax bases and offer increased certainty and predictability to taxpayers, while guarding against new domestic rules that result in double taxation, unwarranted compliance burdens or restrictions to legitimate cross-border activity.
In order to implement BEPS measures in a fast and effective manner, the BEPS Action Plan provides for the development of a multilateral instrument. After consultation with public international law and international taxation experts, the CFA has concluded that a multilateral legally binding instrument to achieve this is feasible and could be developed soon to at least incorporate tax treaty related BEPS measures.
Tackling treaty shopping and other forms of treaty abuse will be addressed; abuse of transfer pricing rules in the key area of intangibles will be greatly minimised; country-by-country reporting will provide governments with information on the global allocation of the profits, economic activity and taxes of multinational enterprises (MNEs).
The OECD said that in a major step forward in transparency, improved and better coordinated transfer pricing documentation has been agreed, which will increase the quality of information provided to tax administrations and limit the compliance burden on businesses. In addition to a master file and local files to be provided by multinational companies, a template for country-by-country reporting to tax administrations has been agreed. The country-by-country reporting will provide a clear overview of where profits, sales, employees, and assets are located and where taxes are paid and accrued. The country-by-country reporting template provides enough flexibility to limit compliance costs, while ensuring that tax administrations will have a very useful tool for risk assessment. The CFA has also agreed to review the adequacy of the scope of the information required no later than the end of 2020.
It has been agreed that because the digital economy is increasingly becoming the economy itself, it would be difficult, if not impossible, to ring-fence the digital economy from the rest of the economy for tax purposes. However, it is also recognised that the business models and key features of the digital economy exacerbate BEPS risks and therefore must be addressed. It is expected that the other actions will address these risks but at the same time a number of specific issues have been identified which must be taken into account when doing the work (permanent establishment issues, importance of intangibles and use of data and possible need to adapt CFC\ rules and transfer pricing rules to the digital economy).
A number of broader direct tax challenges have also been analysed, such as 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 and further work will be carried out to evaluate their scope and urgency and potential options to address them. Finally, challenges in the area of indirect taxes in relation to business to consumer transactions have also been identified and will be addressed by 2015.
The first 7 elements of the Action Plan released today focus on helping countries to:
ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralise hybrid mismatch arrangements (Action 2);
Globalisation has offered multinational enterprises ever-increasing opportunities to reduce their taxes, often by moving profits to offshore financial centres. The OECD/G20 Base Erosion and Profit Shifting Project aims to provide governments the building blocks for a clear international solution to corporate tax planning strategies that exploit loopholes in the current legal framework.