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Treasury Works with OECD on Base Erosion and Profit Shifting

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April 10, 2014

The United States is working with other countries on multinational corporate tax issues, including the increasingly thorny issue of base erosion and profit shifting.

The international Organization for Economic Cooperation and Development has been trying to come up with an approach to transfer pricing, tax deferral and other strategies that enable multinational corporations to effectively shift their profits to low-tax countries.

During a speech Tuesday at an NYU/KPMG Tax Lecture Series conference at the New York University School of Law, Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs in the Treasury Department’s Office of Tax Policy, discussed how the U.S. will be meeting with other countries at the OECD this week to discuss their progress on efforts to address base erosion and profit shifting, known as BEPS for short.

“This BEPS work is moving into a critical phase,” Stack noted. “We have meetings the end of this week before the [OECD] bureau. The work is supposed to be driven from the top down as these papers and projects move along. At each stage, the bureau steps back, looks at the state of play and tries to make adjustments as different countries talk about their perspectives on the work.”

Stack noted that there are several deliverables set for 2014 and all the projects are on fast timelines. One is on the digital economy, and another is on hybrid mismatches, which relates to transfer pricing, intangibles and country-by-country documentation. Other deliverables include treaty abuse, harmful tax practices and multilateral instruments. There are already public drafts out for comment on intangibles, the digital economy, hybrid mismatches and treaty abuses.

“The program is making a very good effort to get stakeholder involvement,” said Stack. “The United States has been very much behind efforts to get these papers out sooner rather than later. They’re not perfect and they can really involve the tax community to get their responses. There’s lots of good work going on.”

He noted that various countries’ delegates are engaged in the effort, but he believes there’s more that can be done.

“What our approach is to be for this week’s meeting at the bureau is to stake out the U.S. positions in clear and straightforward terms so that we can help shape and guide the work as it moves forward,” said Stack.

He cautioned the tax professionals in the audience that there has been great demand in many countries for more action to discourage profit shifting by multinational corporations.

“From the perception of tax administrators and political folks around the world, there is a perception that multinationals have been able to greatly reduce their effective rate of tax by various means that result in income being shifted from higher tax jurisdictions to low- or no-tax jurisdictions,” said Stack. “This results from the interaction of various design flaws in the system that can be best addressed when countries get together and think about new rules, whether they be domestic or whether they be a treaty.”

He sees a subtext in the debate between various countries over whether BEPS ought to be an opportunity to re-slice the pie and re-allocate taxing rights.

“It’s very important that American audiences understand that tax administrators and politicians around the world are very frustrated with the phenomenon and this has become very high profile,” he said. “When things become very high profile and when they’re on the front page of The New York Times and when there are ministry speeches in France, this elevates the work. You get a project like BEPS, and it’s left to policy folks to do the best we can in a highly charged atmosphere to shepherd that into something that is high quality and successful on the tax policy side of things. But it’s an atmosphere that I think American audiences have to fully comprehend.”

He cautioned that some tax administrators are looking in some cases for blunt instruments to take care of the issue of stateless income. “The main challenge in the United States is to get this project to work back from blunt instruments and towards policies that are understandable, fair, clear, administrable and reach the right technical tax results,” he said.

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