|OECD headquarters at Château de la Muette, Paris|
OECD BEPS Tax Project: In a significant signal of the potential impact of the emerging changes in the international corporate tax regime, Amazon.com, the US e-commerce giant, has reverted to booking UK sales in the UK rather than in lower-tax Luxembourg, which it has been doing in recent years to avoid tax. Meanwhile, Australia has proposed up to 100% in penalties to curb tax avoidance by multinationals.
Last April a new UK diverted profits tax known as the "Google tax" took effect and it is targeted at large multinationals to address arrangements which avoid a UK permanent establishment (PE) and comes into effect if an activity in the UK in connection with supplies of goods and services is carried on by a non-UK resident company to customers in the UK. A 25% levy of profits leaving the UK is applied and from May 1, 2015, all retail sales made to Amazon customers in the UK are recorded through the UK branch and liable for tax by HMRC, the UK revenue and customs agency.
Google books most of its UK sales in Ireland. These sales account for more than 10% of its annual global revenues. Google typically books about 40% of its annual global revenues in Ireland
Last month Australia announced in its federal budget for 2015/16:
Approximately 30 large multinational companies are suspected of diverting profits using artificial structures to avoid a taxable presence in Australia.
Where the law applies, multinationals will be subject to the Government’s new doubled penalty regime for tax avoidance and profit shifting schemes.
This means that not only will tax avoiders need to pay the tax that they owe, they will also face penalties of up to 100% of the tax they owe and interest."
Joe Hockey, the Australian treasurer (finance minister), said members of the Australian Tax Office have been embedded in a number of multinational businesses to better understand their complex taxation arrangements.
Meanwhile more than half of all UK FTSE 100 companies now disclose information concerning their approach to taxation, according to research from Big Four accounting firm PwC
The action comes as businesses find themselves under increased scrutiny, following a wave of tax avoidance scandals — such as the Lux-leaks — last year.
PwC reported this month that 56 FTSE 100 businesses disclosed their approach to tax in 2014, increasing by seven from 2013. PwC also found that 40 FTSE companies were keen to report their total tax collection — up from 24 — while 50 firms disclosed their approach to tax governance, increasing by 13.
In 2013, the OECD (Organisation for Economic Co-operation and Development — the Paris-based think tank for the governments of 34 mainly developed countries, and G20 countries — comprising the world's 19 leading developed and emerging economies, working together on an equal footing, adopted a 15-point Action Plan to address what is termed BEPS (base erosion and profit shifting). See below for details on the 15 points.
There are 8 G20 countries that are not OECD countries — Argentina, Brazil, South Africa, Saudi Arabia, Russia, India, China and Indonesia.
In an interview with the Financial Times published today, Pascal Saint-Amans, head of tax at the OECD, said that the BEPS project was making “huge progress” on a substantial package of reforms that would close loopholes in the global corporate tax system.
The FT says companies are braced for changes as a result of the BEPS project. Nearly three out of five multinationals surveyed by Deloitte, the Big 4 firm, said the project would have greater impact on their organisations than originally thought.
Investment analysts at Citigroup said last month the project had progressed faster and further than expected, although they warned that obtaining international agreement on the most contentious issues might prove impossible.
“The tax environment has changed materially and is significantly less favourable for aggressive tax planning than previously,” the analysts said.
Recent developments and October 2015 deadline
On 8 October 2015, Angel Gurría, OECD secretary-general, is scheduled to present the consolidated BEPS deliverables to a meeting of G20 finance ministers. This comprises seven deliverables, which were presented to the G20 in Australia last year together with the eight new deliverables.
The BEPS Project sets out 15 actions, many of which cannot be tackled without amending bilateral tax treaties and given the sheer number of treaties in effect, implementing these changes on a treaty-by-treaty basis would be a very lengthy process.
Action 15 of the BEPS Project has analysed the possibility of developing a multilateral instrument in order to allow countries to swiftly amend their tax treaties to implement the tax treaty-related BEPS recommendations. The report "Developing a Multilateral Instrument to Modify Bilateral Tax Treaties" concluded that such a multilateral instrument is not only feasible but also desirable, and that negotiations for the instrument should be convened quickly. A mandate to set up an ad hoc group for the development of a multilateral instrument was developed by the OECD Committee on Fiscal Affairs and endorsed by the G20 finance ministers at their February 2015 meeting. It was agreed that it will not be compulsory to participate in developing the multilateral instrument or to sign it once it is finalised.
The group began work last month.
On Monday this week the OECD released a package of measures for the implementation of a new Country-by-Country Reporting plan developed under the OECD/G20 BEPS Project.
The OECD said the Country-by-Country Reporting Implementation Package will facilitate a consistent and swift implementation of new transfer pricing reporting standards developed under Action 13 of the BEPS Action Plan, ensuring that tax administrations obtain a complete understanding of the way multinational enterprises (MNEs) structure their operations, while also ensuring that the confidentiality of such information is safeguarded.
Action 13 of the BEPS Action Plan recognised that enhancing transparency for tax administrations, by providing them with information to assess high-level transfer pricing and other BEPS-related risks, is crucial for tackling base erosion and profit shifting.
Country-by-country reporting requirements will require MNEs to provide aggregate information annually, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNE group, as well as information about which entities do business in a particular jurisdiction and the business activities each entity engages in.
The new implementation package consists of model legislation requiring the ultimate parent entity of an MNE group to file the country-by-country report in its jurisdiction of residence, including backup filing requirements when that jurisdiction does not require filing. The package also contains three Model Competent Authority Agreements to facilitate the exchange of country-by-country reports among tax administration. The model agreements are based on the Multilateral Convention on Administrative Assistance in Tax Matters, bilateral tax conventions and Tax Information Exchange Agreements (TIEAs).
The package was approved by the countries participating in the OECD/G20 BEPS Project at the last meeting of the OECD Committee on Fiscal Affairs, held on 27-28 May. It follows from the publication of the reportGuidance on Transfer Pricing Documentation and Country-by-Country Reporting in September 2014 and of the Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting Proposals in February 2015.
In advance of a tax conference on the BEPS project which opens in Washington DC today, Senator Orrin Hatch, Senate Finance Committee chairman, and Paul Ryan, House Ways & Means Committee chairman, sent a letter Tuesday to Jack Lew, US Treasury secretary. They said that they were troubled by some positions that the Treasury Department appears to be agreeing to:
For example, we are concerned about the country-by-country (CbC) reporting standards that will contain sensitive information related to a US multinational’s group operations. We are also concerned that Treasury has appeared to agree that foreign governments will be able to collect the so-called 'master file' information directly from US multinationals without any assurances of confidentiality or that the information collection is needed. The master file contains information well beyond what could be obtained in public filings and that is even more sensitive for privately-held multinational companies. We are also concerned about interest-deductibility limitation proposals on the basis of questionable empirics and metrics...We also have significant concerns about many of the provisions included in several other proposals of the BEPS project, including, among others, modifying the permanent establishment (PE) rules, using subjective general anti-abuse rules (GAAR) in tax treaties, and collecting even more sensitive data from US companies to analyze and measure base erosion and profit shifting. These are but a few of the areas where we recommend that we work together to find consensus and identify a path forward for consideration as part of the BEPS negotiations and, if necessary, Congressional actions."
From the left in an op-ed in The New York Times, Michael Mandel, the chief economic strategist at the Progressive Policy Institute, warns that the Obama administration signed on to the BEPS Project "in the expectation that it would strengthen the American tax base and enable Washington to hold on to more corporate tax revenues. But as the project heads for its end-of-year deadline and the basic shape of the BEPS principles becomes clear, nobody in Washington is paying attention to a simple fact: The United States lost, and lost big." Mandel warns:
unless Congress acts quickly to reform the ossified American corporate tax system, the BEPS rules have the potential to turn into an enormous job-and-revenue grab by Europe, and an enormous loss of jobs and revenues by the United States.
How does this work? The BEPS rules would do two things. First, they would close the most egregious international tax loopholes. Most multinationals would end up paying more taxes to someone, somewhere. That’s good. But the project also changes the international tax rules by forcing companies to pay corporate taxes according to the location of the economic activity and value creation generating their profits. At first blush, that would seem to benefit the United States, home to much of the world’s innovation and many innovative companies. Certainly the Obama administration seems to think so, because it continues to support the BEPS effort...Remember that most European countries already have substantially lower corporate tax rates than the United States does. Britain, for example, has a national corporate tax rate of 20 percent, compared with a marginal rate of 35 percent in the United States. Increasingly countries, including Britain, have also instituted what are known as patent boxes, or I.P. boxes, offering tax rates of 10 percent, or less, for companies that create their intellectual property in that country. This difference in tax rates is huge."
From the right, the Cato Institute warns that global tax competition is under threat and while tax rates have come down, the overall tax burden actually has increased.
The folks there want the US to withdraw from the OECD.
China was pushed into launching the Asian Infrastructure Investment Bank by US lawmakers’ refusal to give China greater clout in existing multilateral institutions, Ben Bernanke said in Hong Kong in early June.
“The US Congress is largely at fault for all that’s happening,” the former chairman of the Federal Reserve said.
The AIIB, which will be capitalised at $100bn, now has 57 members including most big European economies and in The Washington Times, Richard W. Rahn, a senior fellow at the Cato Institute and chairman of the Institute for Global Economic Growth foolishly writes: "The OECD has morphed into something that is dangerous and destructive to our pocketbooks and liberty. It would be grossly irresponsible for Congress to continue to fund it."
It's almost 30 years since there has been any significant tax reform in the US and the funny thing about the Cato criticism is that the individuals should wonder why a so-called "Google tax" is law in conservative-ruled UK and a similar tax has been proposed in conservative-ruled Australia?
Finfacts made a submission to the OECD in April 2014.
The 15 Actions to address BEPS
ACTION 1 – 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.
ACTION 2 – Neutralise the Effects of Hybrid Mismatch Arrangements. Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g., double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on co-ordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be co-ordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping.
ACTION 3 – Strengthen CFC Rules. Develop recommendations regarding the design of controlled foreign corporation rules. This work will be co-ordinated with other work as necessary.
ACTION 4 – Limit Base Erosion via Interest Deductions and Other Financial Payments. Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments. The work will evaluate the effectiveness of different types of limitations. In connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements. The work will be co-ordinated with the work on hybrids and CFC rules.
ACTION 5 – Counter Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance. Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.
ACTION 6 – Prevent Treaty Abuse. Develop model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances. Work will also be done to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country. The work will be co-ordinated with the work on hybrids.
ACTION 7 – Prevent the Artificial Avoidance of PE Status. Develop changes to the definition of PE to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions. Work on these issues will also address related profit attribution issues.
ACTION 8, 9, 10 – Assure that Transfer Pricing Outcomes are in Line With Value Creation
Action 8 – Intangibles. Develop rules to prevent BEPS by moving intangibles among group members. This will involve: (i) adopting a broad and clearly delineated definition of intangibles; (ii) ensuring that profits associated with the transfer and use of intangibles are appropriately allocated in accordance with (rather than divorced from) value creation; (iii) developing transfer pricing rules or special measures for transfers of hard-to-value intangibles; and (iv) updating the guidance on cost contribution arrangements.
Action 9 – Risks and Capital. Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules or special measures to ensure that inappropriate returns will not accrue to an entity solely because it has contractually assumed risks or has provided capital. The rules to be developed will also require alignment of returns with value creation. This work will be co-ordinated with the work on interest expense deductions and other financial payments.
Action 10 – Other High-Risk Transactions. Develop rules to prevent BEPS by engaging in transactions which would not, or would only very rarely, occur between third parties. This will involve adopting transfer pricing rules or special measures to: (i) clarify the circumstances in which transactions can be recharacterised; (ii) clarify the application of transfer pricing methods, in particular profit splits, in the context of global value chains; and (iii) provide protection against common types of base eroding payments, such as management fees and head office expenses.
ACTION 11 – Establish Methodologies to Collect and Analyse Data on BEPS and the Actions to Address It. Develop recommendations regarding indicators of the scale and economic impact of BEPS and ensure that tools are available to monitor and evaluate the effectiveness and economic impact of the actions taken to address BEPS on an ongoing basis. This will involve developing an economic analysis of the scale and impact of BEPS (including spillover effects across countries) and actions to address it. The work will also involve assessing a range of existing data sources, identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and micro-level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses.
ACTION 12 – Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements. Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. One focus will be international tax schemes, where the work will explore using a wide definition of “tax benefit” in order to capture such transactions. The work will be co-ordinated with the work on co-operative compliance. It will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations.
ACTION 13 – Re-examine Transfer Pricing Documentation. Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.
ACTION 14 – Make Dispute Resolution Mechanisms More Effective. Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be denied in certain cases.
ACTION 15: Develop a Multilateral Instrument. Analyse the tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested Parties will develop a multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution.