OECD Beps: Biggest corporate tax reform plan since 1920s
On Monday (5 Oct) the Paris-based Organisation for Economic Cooperation and Development (OECD) will present its final Base Erosion and Profit Shifting (Beps) project corporate tax reform proposals and on Tuesday the Ecofin council of EU finance ministers, is expected to agree on the exchange of tax rulings between member countries. These commitments or so-called letters of comfort to multinational companies typically confirm the limits or exceptional tax advantages that they can be assured of in a particular country.
The aim of the Beps project is 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.
Finance ministers of the G-20 (Group of 20) 19 largest advanced and emerging economies will discuss the proposals on Thursday 8 Oct in Lima Peru, before the week-end semi-annual IMF-World Bank meetings in the city; G-20 heads of government/ state will then in November consider the proposals at their summit in Antalya, Turkey.
The OECD’s Action Plan on Beps was published in July 2013 and it contains 15 separate action points or work streams, some of which are further split into specific actions or outputs. The plan was supported by G-20 at their summit in St. Petersburg in Sept 2013.
The principle underlying the proposed new rules is that profits should be taxed where they are generated, rather than where they attract the lowest tax rate.
Products like the Apple iPhone comprise contributions from several countries and it’s not easy to apportion value or cost on a geographical basis. However, companies will have to come up with the data and inevitably it would not be difficult to have more transparency than the current system.
“Tax planning will continue, but we are closing down the large avenues,” said Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, according to The Wall Street Journal.
In a letter in August to Jack Lew, US treasury secretary, Orrin Hatch, US Senate Finance Committee chairman, and Paul Ryan, House Ways and Means Committee chairman, outlined concerns regarding the country-by-country (CbC) reporting requirements that are being considered by the Treasury Department and called on Secretary Jack Lew to respond to their earlier request for information on the Beps project.
“Rather than expend additional administrative resources on the CbC (country by country) regulatory project, we encourage Treasury to focus in the near term on preparing and providing the legal memorandum and other documentation requested in our June 9 letter to you,” wrote Hatch and Ryan. “In addition, we ask that Treasury officials consider the results of the GAO (Government Accountability Office) analysis of the Beps project and recommendations before moving forward with any CbC-related guidance.”
Access information and published reports on the OECD’s Beps mini website here.
Senator Hatch in July, asked the nonpartisan GAO to undertake an in-depth analysis of the multiple provisions and actions under contemplation in the OECD’s Beps project. Hatch further asked them to look into how such policies would impact the US economy.
“The way all this has been designed is that if you have one country refusing, others are able to protect their tax bases,” Saint-Amans told the Journal.
In June this year pushing forward efforts to boost transparency in international tax matters, the OECD released a package of measures for the implementation of a new country-by-country reporting plan. 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 (multinational enterprises) 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 Orrin/Ryan August letter said that “the benefits to the US government, businesses, and workers from providing sensitive information in the CbC reports (and, just as importantly, the master file document) is unclear, at best.”
The support of countries like China for the tax reforms is important and this month the China Daily news service reported that Apple paid ¥452m yuan/ renminbi ($70.87m) less tax that it should have in 2013.
China Daily says: “According to the ministry, the total amount of money involved in tax violations uncovered during the inspection reached ¥69.1bn yuan by the end of last year.
It said that henceforth companies and executives will be fined and subject to administrative penalties, if cases of tax violation are established.
At present, the related enterprises and accounting firms are allowed to make the necessary rectifications.”
Citigroup analysts said last may that Beps 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.
Some governments have already implemented anti-avoidance measures. More than half of companies surveyed by Deloitte expected “significant unilateral legislative changes,” and more than three-quarters expected some degree of double taxation.
The Financial Times reported last May that Amazon has been at the centre of the row over low tax bills because its taxable profits in countries like the UK have been very small compared with its sales. It has paid tax of just a few million pounds in the UK while its sales, which totalled $8.3bn in 2014 were funnelled through low-tax Luxembourg.
But the e-retailer, which reported an overseas loss of $403m last year, warned that tax is on profits not revenues. In a statement, it said it “began the process of establishing local country branches” of Amazon EU Sarl, its main retail operating company in Europe more than two years ago.
“As of May 1, Amazon EU Sarl is recording retail sales made to customers in the UK through the UK branch. Previously, these retail sales were recorded in Luxembourg,” it said.
The Netherlands has said it’s committed to stop multinationals using agreements with the Dutch tax office to avoid paying tax in developing countries by signing 23 new treaties with African states, the Volkskrant newspaper said last April. The treaties will allow African countries to make claims against companies which try to shift profits via the Netherlands for tax purposes or which only have a letter-box company in the country. The first treaty was signed with Malawi in April.
Lilianne Ploumen, Dutch minister for foreign trade and development cooperation, wrote in the Guardian last July:
“The urgency here is overwhelming. The UN Conference on Trade and Development (Unctad) estimates that multinationals avoid $100bn worth of corporation tax in developing countries. Governments and international institutions now have to make good on promises to fight tax avoidance and tax evasion.”
Where western multinationals have big overseas markets such as China, Germany, UK, France etc. they are likely to encounter more scrutiny on where they are booking their profits. Tax authority officials expecting a lucrative job from clients are also likely to be more careful.
Tax planning and cheating will continue but overtime, the current ease in which corporate tax avoidance and evasion can be pursued will likely change even though the level of transparency will not be at a level that activists expect.
EU exchange of tax rulings
On Tuesday the Ecofin council of EU finance ministers is expected to reach a political agreement on the proposal for a directive on cross-border corporate tax rulings. The draft directive aims at increasing transparency in the assurances given by member states to cross-border companies about how their taxes will be calculated.
“The current system of corporate tax rules is unfit for purpose and unjust. Some companies are losing out, whereas others win by hiding behind a variety of national rules,” Jean-Claude Juncker, European Commission president, told MEPs at a joint meeting of the committees for Tax Rulings and for Economic and Monetary Affairs on 17 Sept. “We need a better insight into how multinational companies behave and how they make use of the differences between countries. Then we should create some order!” he added.
Asked about his past role as Luxembourg’s finance minister, Juncker said that he had never stated a position on individual rules set by the Luxembourg tax authorities. “Of course I met with companies like Commerzbank, but I never talked about tax issues with them,” he said. Juncker was irritated by MEPs’ continuous references to the ’Lux Leaks’ revelations last November on special tax deals for multinationals involving very low rates. “Tax rulings are common practice in many member states,” he said. “It should instead be ‘EU Leaks’,” he added.
Pierre Moscovici, EU tax commissioner, said that like Juncker he also favours a common consolidated corporate tax base, but that this requires a step-by-step approach: “We should start with a common base and in a second phase we might try for consolidation, so as to combine the possible with the desirable,” he told MEPs.
On the possibility of introducing mandatory country-by-country reporting for multinational companies, Moscovici said he wanted to see the results of a public consultation and an impact study first. He was more reticent about the possibility of sharing more tax-related information with Parliament: “There are limits to what we can transfer,” he said..
On the exchange of tax rulings, the Commission had proposed that rulings over a 10 year period should be included but that is expected to be cut to 5 years while there will be a threshold for the size of company that would be covered.
Ireland and the UK are also reported to be arguing for limiting the information exchange to avoid the release of “commercially sensitive” details but authorities could follow-up for clarifications — there is a danger of course that the exchange could be a sham.
Ireland
The European Commission’s current investigation of special tax deals that Ireland gave to Apple will be published in coming months.
We reported last year that Apple had decided to make its principal Irish company stateless for tax purposes in 2006.
The Double Irish tax schemes will cease in 2021, Michael Noonan, finance minister, announced in last October’s budget statement.
On the impact of the tax reforms on Ireland, the challenge is that Ireland remains reliant on FDI (foreign direct investment) as the indigenous international trading sector is too weak to make a difference. There is simply no strategy to address the underperformance of over half a century.
Can Ireland reduce its reliance on FDI by boosting Irish firms?
2013: US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000
2014: Finfacts submission on tax reform to the Department of Finance
2014: Finfacts submission to the OECD Beps project
2015: Multinational companies pay on average 30% less tax than domestic competitors in EU
