OECD international tax proposals face uphill multilateral battle
The OECD’s landmark plans to combat tax avoidance by multinational companies have received the backing of the G20. However, the ambitious timeline, divergent interests of Bric economies and the familiar regulatory ‘race to the bottom’ all suggest it will take many years to foster a binding international tax agreement.
Last week’s G20 meeting in Moscow saw the launch of an action plan to tackle tax avoidance by multinational corporations.
The measures, which have been proposed by the Organization for Economic Cooperation and Development (OECD), come in the wake of recent media coverage of low tax rates paid by global companies, including Amazon and Google.
In a speech on Saturday, Angel Gurría, secretary-general of the OECD, set out the objectives of the action plan.
|Angel Gurría, OECD
“Our citizens are demanding that we tackle offshore tax evasion by wealthy individuals and re-vamp the international tax system to prevent multinational enterprises from artificially shifting profits, resulting in very low taxes or even double non-taxation and thereby eroding our tax base,” he said. Gurría added that the action plan “marks a turning point in the history of international tax co-operation” and pointed out that international taxation laws were intended to allow companies to avoid double taxation – but that “unfortunately these rules are now being abused to permit double non-taxation”.
The OECD’s action plan on base erosion and profit shifting (BEPS) comprises 15 separate actions, which are intended to be completed by December 2015, although any concrete actions might take substantially longer to be realized.
The actions highlighted within the plan include addressing the tax challenges presented by the digital economy, as well as improving transparency, preventing treaty abuse and addressing intra-group transfer pricing – for example by preventing companies from “engaging in transactions which would not, or would only very rarely, occur between third parties”.
Several of the actions are intended to result in reports exploring the issues highlighted within the action plan.
The topic of permanent establishment (PE) is one of the areas tackled by the OECD’s proposals. Companies such as Google have avoided paying tax in certain markets by arguing it does not have a permanent establishment in those markets, and that sales transactions are concluded elsewhere.
The OECD report includes proposals to update the definition of a PE to prevent the artificial avoidance of PE status, including through the use of commissionaire arrangements.
Other actions set out within the proposals will require taxpayers to "disclose their aggressive tax planning arrangements", as well as to improve the effectiveness of treaty-related dispute-resolution mechanisms. A multilateral instrument is to be developed 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".
While the proposals have been welcomed by finance ministers as a positive move, getting them enacted might prove challenging. Many believe the timeframe set out within the report might be somewhat unrealistic.
“To be effective, the OECD will need many governments to take action and implement its recommendations,” says Paul Smith, partner at Blick Rothenberg LLP. “This will not be easy.”
The OECD’s report is in keeping with wider sentiments around tax avoidance. UK prime minister David Cameron has pledged to “rewrite the rules on tax” during Britain’s presidency of the G8, and last month’s G8 summit included an agreement among leaders to share information about their residents’ tax activities.
“Generally, people are becoming less aggressive about their tax planning,” comments the group tax manager of a UK corporation. “Exercises like the OECD report and the treatment of Google by the public accounts committee hearing are intended to put pressure on corporations to tidy up their act.”
Nevertheless, the measures outlined in the action plan might be more relevant in some markets than in others. For example, in jurisdictions such as India, Brazil and China, withholding tax issues are a more pressing concern than the issues of BEPS. Consequently, these countries might be less interested in pursuing the actions set out by the OECD.
However, to get the new proposals off the ground they will first need to be backed up by full political support. It is also important to take into account the possible unintended consequences that might result from any measures taken.
Smith points out that all governments are competing for tax revenues, and that tax legislation has evolved to attract investment by providing tax incentives to international businesses.
Removing tax incentives will take away the attractiveness of certain locations to international businesses. Smith argues that the effective outcome of the various reports might be to recommend changes in tax laws in specific countries so that they comply with the OECD guidance – an outcome which might not be in the interests of some countries, such as Ireland.
There is also a question mark over the economic implications of tackling companies, which pay the minimum amount of corporation required by local laws. “We should welcome business that has moved to the UK,” says Smith.
“They do take advantage of our ‘improved’ tax regime and they may not pay large amounts of corporation tax. But they do employ a large number of staff; they collect and pay large amounts of VAT, PAYE and NIC to the government and they employ staff who might otherwise claim social security.”
At this point, the actions outlined in the OECD’s report are some way off being realized – but nevertheless, this is a topic that multinational corporations will need to keep an eye on in the coming years. The OECD proposals could change the international taxation landscape and, as such, any changes that come into effect should be closely monitored.