Global Economy
G-20 to support major corporate tax reform; 'Golden age' of no taxes over
By Michael Hennigan, Finfacts founder and editor
Jul 19, 2013 - 11:57 AM

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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 members.

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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