Congress Scrutinizes OECD BEPS Corporate Tax Changes

The House and Senate held hearings Tuesday on the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting action plan, also known as OECD BEPS, for combating tax avoidance by multinational corporations.

A number of the lawmakers expressed a skeptical view of the international tax reforms. “The OECD’s BEPS project recommendations are deeply troubling on a number of levels, not the least of which is the aggressive attempt to impose substantial tax policy changes on the international community under the guise of eliminating so-called ‘harmful tax practices’ to ensure multinational companies pay their ‘fair share’ of taxes owed in the jurisdictions in which they operate,” said House Ways and Means Tax Policy Subcommittee chairman Charles Boustany, R-La. “This is a highly subjective standard set by the OECD that seems to unnecessarily target American companies, while also disregarding the detrimental impact these recommendations will have on U.S. companies that currently operate under the worldwide system of taxation observed in the U.S.”

Senate Finance Committee chairman Orrin Hatch, R-Utah, also has reservations about the OECD’s plans. “Throughout this process we have heard concerns from large sectors of the business community that the BEPS project could be used to further undermine our nation’s competitiveness and to unfairly subject U.S. companies to greater tax liabilities abroad,” he said. “Companies have also been concerned about various reporting requirements that could impose significant compliance costs on American businesses and force them to share highly sensitive proprietary information with foreign governments.”

Lawmakers are concerned about the wave of corporate tax inversions, most recently evidenced by Pfizer’s bid to acquire Allergan and thereby move its tax domicile to Ireland. “A new wave of inversions has gripped the corporate world; as yet another U.S. multinational has renounced their US corporate citizenship,” said Rep. Richard Neal, D-Mass., the ranking Democrat on the House Ways and Means Tax Policy Subcommittee. “In a record-setting $160 billion deal, Pfizer and Allergan have agreed to merge and create the world’s largest pharmaceutical company. With this merger, the U.S. tax base continues to erode. Perhaps this latest inversion will prompt Congress to come together on reforms so this does not continue to happen. These inversions happen because of a broken tax code which allows these deals to take place. Congress must take action immediately, as we did in 2004, to stop the flow of these inversions until we can a meaningfully fix our broken tax code. Our rudimentary tax code remains ill-equipped to handle our increasingly globalized and digital economy. As a result, we have seen an explosion of multinational companies shift profits, activities, and property from high-tax countries to low-tax countries. By the OECD’s best guesses, countries are losing as much as $240 billion a year in lost revenue.”

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, predicted the Pfizer deal won’t be the last inversion. “Until Congress summons the political will to do what we know must be done, inversions will continue to happen, and you can bet Pfizer’s won’t be the last—and maybe not the largest,” he said. “Foreign governments will continue to use our obsolete tax code against the U.S. by agreeing to give certain companies sweetheart deals to locate in their borders. As matters have continued to spin out of control, the largest economies in the world—acting through the G-20 and the OECD—came together to develop the most significant global tax policy project in decades to address the rampant Base Erosion and Profit Shifting that is unraveling the world’s tax systems, straining enforcement resources, and draining treasuries around the world. It is a massive effort with a singular goal to make it harder to game the system.”

One of the witnesses testifying in the Senate hearing was Michael Danilack, a tax principal at PricewaterhouseCoopers in PwC’s Washington National Tax Services practice. He was skeptical about the OECD BEPS plan. “Creating uncertainty regarding how tax compliance will be measured in a particular area is not necessarily a poor way for governments to proceed if the effort is targeted at specific practices that clearly should be ended,” he said. “In other words, governments can and often do create ambiguity about how a particular law will work going forward as a means of addressing specific situations where the intent of current law is clearly being circumvented. If BEPS were focused on ending a specific kind of abusive tax planning, then perhaps the uncertainty the project has created would be less objectionable, and companies would be advised to react by moving out of the identified structures before the new standards crystalize. The problem, though, is that the October 5 papers are not aimed at what might be fairly referred to as abusive. Rather, the papers will have the effect of broadening the collective corporate tax base and providing countries with new ways to claim a bigger share of that corporate base.”

Robert Stack, the Deputy Assistant Secretary of International Tax Affairs at the U.S. Treasury Department, has been closely involved in monitoring the OECD BEPS negotiations and defended the importance of the project during the Senate hearing. “The United States has a great deal at stake in the BEPS project and a strong interest in its success,” he said. “Our active participation is crucial to protecting our own tax base from erosion by multinational companies, much of which occurs as a result of exploiting tax regime differences. A key goal of BEPS is to identify those differences and write rules that close loopholes. In addition, as the home of some of the world’s most successful and vibrant multinational firms, we have a stake in ensuring that companies and countries face tax rules that are clear and administrable and that companies can avoid unrelieved double taxation, as well as expensive tax disputes. Both the United States and our companies have a strong interest in access to robust dispute resolution mechanisms around the world. In contrast, failure in the BEPS project could well result in countries taking unilateral, inconsistent actions, thereby increasing double taxation, the cost to the U.S. Treasury of granting foreign tax credits, and the number and scale of tax disputes. Indeed, notwithstanding the BEPS project, some countries have taken unilateral action, and it is our hope that they will reconsider those actions in the post-BEPS environment.”

Barbara Angus, a principal at Ernst & Young who leads Strategic International Tax Policy Services at EY, told the House hearing that the OECD BEPS project has reached a crucial stage. “With the OECD’s recent issuance of final reports in connection with its BEPS Action Plan, the BEPS project is entering a new phase where the focal point will be implementation of the recommendations reflected in those reports,” she said. “At this stage attention must turn to the practical implications for global businesses of the changes in international tax laws and treaties that are embodied in the BEPS recommendations and that are being considered and adopted by countries around the world. Moreover, as the Ways and Means Committee continues its work toward reforming the U.S. tax system, it will be important to consider the principles and recommendations reflected in the final BEPS reports, the actions that other countries are taking in response to the BEPS recommendations, and how those actions will affect global companies that are headquartered or invested in the United States.”