The international Organization for Economic Cooperation and Development has produced an action plan at the request of the G20 finance ministers to address the problems of base erosion and profit shifting that are depleting corporate tax revenue as multinational companies transfer their profits to low-tax countries.
In introducing the OECD’s Action Plan on Base Erosion and Profit Shifting, the OECD noted Friday that national tax laws have not kept pace with the globalization of corporations and the digital economy, leaving gaps that can be exploited by multinational corporations to artificially reduce their taxes.
The action plan was produced at the request of the Group of 20 and introduced at the G20 Finance Ministers’ meeting in Moscow. It identifies 15 specific actions that will give governments the domestic and international instruments to prevent corporations from paying little or no taxes. The OECD had produced a report in February, also commissioned by the G20, on the problem of base erosion and profit shifting, or BEPS (see OECD Calls for Curbs on Tax Avoidance by Multinationals).
The action plan recognizes the importance of addressing the digital economy, which offers a borderless world of products and services that too often do not fall within the tax regime of any specific country, leaving loopholes that allow profits to go untaxed.
“This action plan, which we will roll out over the coming two years, marks a turning point in the history of international tax cooperation,” said OECD Secretary-General Angel Gurría in a statement. “It will allow countries to draw up the coordinated, comprehensive and transparent standards they need to prevent BEPS. International tax rules, many of them dating from the 1920s, ensure that businesses don’t pay taxes in two countries—double taxation. This is laudable, but unfortunately these rules are now being abused to permit double non-taxation. The action plan aims to remedy this, so multinationals also pay their fair share of taxes.”
The action plan will develop a new set of standards to prevent the so-called “double non-taxation.” Closer international co-operation will close gaps that, on paper, allow income to “disappear” for tax purposes by using multiple deductions for the same expense and “treaty-shopping.” Stronger rules on controlled foreign companies would allow countries to tax profits stashed in offshore subsidiaries.
The OECD argues that domestic and international tax rules should relate to both income and the economic activity that generates it. Existing tax treaty and transfer pricing rules can, in some cases, facilitate the separation of taxable profits from the value-creating activities that generate them. The action plan aims to restore the intended effects of these standards by aligning tax with substance —ensuring that taxable profits cannot be artificially shifted, through the transfer of intangibles (such as patents or copyrights), risks or capital, away from countries where the value is created.
Commenting on the action plan, Russian Finance Minister Anton Siluanov said, “As the presidency of the G20, we commend the work of the OECD to ensure that the international tax system promotes growth and competition without distorting the basic tenets of fairness —that it allows multinational corporations to prosper without loading a higher tax burden on domestic companies and individual taxpayers.”
The OECD contends that greater transparency and improved data are needed to evaluate, and stop, the growing disconnect between the location where financial assets are created and investments take place and where multinational enterprises report profits for tax purposes. Requiring taxpayers to report their aggressive tax planning arrangements and rules about transfer pricing documentation, breaking down the information on a country-by-country basis, will help governments identify risk areas and focus their audit strategies, the OECD argues, and making dispute resolution mechanisms more effective will provide businesses with greater certainty and predictability.
The actions outlined in the plan will be delivered in the coming 18 to 24 months by the joint OECD/G20 BEPS Project, which involves all OECD members and G20 countries on an equal footing. To ensure that the actions can be implemented quickly, a multilateral instrument will also be developed for interested countries to amend their existing network of bilateral treaties.
The action plan drew a variety of reactions. KPMG noted that the scale of the report and its ambitions for change could signal a potential seismic shift in the international tax landscape. “Bringing today’s proposals to fruition within the 24-month timetable presents an enormous challenge,” said KPMG International global head of tax Greg Wiebe in a statement. “There is undoubtedly an urgent need to work quickly as uncertainty helps no one, but modernizing over 75 years of international tax laws in just two years’ time without jeopardizing the aspects of the current system that operate as intended and are fit for purpose will not be straightforward.”
Manal Corwin, principal and national leader for international corporate services at KPMG LLP and former deputy assistant secretary for tax policy for international tax affairs at the U.S. Treasury Department, also commented: “Today’s report proposes significant changes to the international tax landscape in a very short period of time. We are encouraged that the OECD is emphasizing the importance of consulting with a range of non-governmental stakeholders as it moves forward. KPMG believes this dialogue is a critical step to the plan’s ultimate success, and we look forward to engaging constructively with the OECD during the consultation process.”
The research and advocacy group Global Financial Integrity said the OECD report lags behind the global transparency movement and fails to endorse country-by-country reporting for multinational companies, which it believes would better curtail corporate tax avoidance.
“While we welcome the international attention being given to corporate tax avoidance, we’re very disappointed in the OECD’s failure to recommend public country-by-country reporting for multinational companies,” said GFI managing director Tom Cardamone in a statement. “As recent hearings and articles exposing the profit-shifting practices of Apple, Starbucks and Google highlight, international businesses have been finding creative ways to artificially shift a company’s profits out of the nations in which they were generated and into tax havens. Such behavior starves governments of much needed tax revenue at a time when rich and poor nations alike are struggling to make ends meet. Requiring companies to disclose where they’re operating, where they’re making their profits, and where they’re paying taxes is a straightforward way to detect and deter corporate tax dodging.”
Another advocacy group calling for greater corporate tax transparency, the Financial Transparency Coalition, said the OECD action plan confirmed that the integrity of the current global tax system has been undermined by multinational companies and their tax planners exploiting the boundaries of acceptable tax planning, and that artificially shifting revenues and profits to low or no tax jurisdictions harms governments, businesses and citizens throughout the world. The Coalition welcomed the OECD’s acknowledgment that “in developing countries the lack of tax revenue leads to critical under-funding of public investment that could help promote economic growth.”
“For too long poor nations have had their tax revenue undermined by multinational corporations that have artificially siphoned away profits that could be harnessed to improve health, education and economic opportunity for billions of people,” said Financial Transparency Coalition manager Porter McConnell in a statement.
Alvin Mosioma, director of Tax Justice Network Africa and Africa regional advocate for the Financial Transparency Coalition, added, “Comprehensive reform of the international tax system is urgently required because it is outdated, not fit for purpose, and it fails rich and poor nations alike. So it is welcome that today the OECD has initiated a much needed reform agenda.”
Murray Worthy, tax campaigner at the London-based anti-poverty charity War on Want, was more critical of the action plan. “This plan is papering over the cracks in a broken system, rooted in an outdated and irrelevant model of corporate taxation,” he said in a statement. “It might be able to tackle the worst of corporate tax dodging, but it won’t fix the system. The OECD is desperately trying to maintain the fiction that the different subsidiaries of multinational companies like Apple or Amazon are wholly separate companies, rather than recognizing them as the single entities they so obviously are. The prospects of meaningful change are also seriously limited when the U.K. government has being doing the exact opposite of this report’s recommendations for the last three years—such as making it easier for multinationals to dodge tax by shifting their profits through tax havens. It is also hard to see how these plans will help the world’s poorer countries, when they are all locked out of the OECD’s rich country club.”
Tax attorney Cym Lowell, vice-chairman of the International Chamber of Commerce Taxation Commission, and a member of the Business and Industry Advisory Committee to the OECD and U.S. Council of Business, had a much different reaction. “Put simply, political G20 leaders need a scapegoat for the ongoing economic malaise. Multinational enterprises and their effective tax rate planning have become a popular target, with some famous names in the headlines, and OECD is tasked by the G8 and G20 to address the perceived problem. The EU is undertaking a similar process with its own action plan.”
“OECD/UN/US model treaties date to post-World War I,” added Lowell, who is a Houston-based partner at the international law firm McDermott Will & Emery. “While the world has changed in the interim, treaties and treaty policies have not. This is Elephant #1 in the room. The actual culprit in ‘base erosion’ is countries which create regimes to attract economic activity (as U.K. is doing today). This is Elephant #2 in the room. A third element is the ability of any tax administration to enforce ever-more complicated regimes. This is Elephant #3. There could be a fundamental shift in profit allocation methodologies arising from the BEPS process. The critical issues to watch for relate to whether the OECD seriously addresses the elephants.”