Minter Ellison tax partner Bill Thompson says BEPS will be key focus at G20 Summit

According to Bill Thompson, tax partner at Minter Ellison, Base Erosion and Profit Shifting (BEPS) — the base erosion referred to as the tax base and its implications for future tax structures — will be a key focus at the G20 Summit in Brisbane, with possible rapid changes to the global and local Australian tax regime to follow.

Thompson said the concerns around BEPS have arisen not only through developed tactics but also through changes in the nature of industries and shifts in economies from being manufacturing based to being much more based around intellectual property and intangible assets.

Speaking ahead of the G20 Summit, he said: ‘There is great value in these sorts of assets. The tax base of developed economies is seemingly weakened by transactions or structures that global companies are able to legally enter into under international tax treaty structures that have prevailed around the world for many decades.’

He noted that while such assets included the type of intellectual property rights owned by large technology and communications companies and their service systems, the rights held by companies in service industries, such as their brands, are also very valuable.

In the case of countries that are parties to double tax treaties, low rates of tax apply on royalties where intellectual property is provided from a parent company to a related company — as long as there is not a permanent place of business in the related company’s jurisdiction.

Thompson said: ‘It has been quite common for loans to be made within company groups and for profits to be moved by way of interest payments rather than dividends, and there has been a more favourable withholding tax regime applicable to interest and royalty payments.

‘So it is possible within this framework — and particularly given the modern digital economy in which we are operating, where intangible property is much more valuable than it ever was before — to effectively either shift profits quite legally or not enter the company into the taxation net of another country.’

He said the world should expect governments to try to move very quickly to bring in a number of changes to the international tax regime.

He added: ‘Expect to see a tightening up of existing transfer pricing laws. We predict transfer pricing will be a very important focus at G20 and beyond.

‘We also expect changes around the arrangements for taxing interest and royalties between related parties internationally and the tightening up of that.’

Another likely change would be improved transparency — with more formal information exchange arrangements between the revenue authorities in different countries. A result would be that the Australian Taxation Office will have much greater access — and more timely access — to information from other authorities if these types of changes go through.

Thompson said: ‘It would be about putting in place a much simpler, speedier, real-time provision of information about companies’ profitability and where their profits are. There are literally thousands of these double tax treaties between countries around the world. They are all bilateral treaties.’

He warned it would be a nightmarish scenario — and the aims of the G20 and the OECD would never be realised — if each of these treaties had to be individually amended.

Thompson said: ‘There is talk of a Kyoto-type protocol — as there was with climate change — where all countries adopt a protocol and put through a uniform set of changes in their bilateral treaties.

‘A one-off change to these treaties could be quite difficult to negotiate. Who knows if everyone would agree? But it makes sense to aim for it in order to deliver balance and transparency in tax treatment across borders.’