The Organization for Economic Cooperation and Development has released its first set of recommendations for a coordinated international approach to combat tax avoidance by multinational enterprises, under the OECD/G20 Base Erosion and Profit Shifting Project.
The OECD and the Group of 20 finance ministers hope 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.
“The G20 has identified base erosion and profit shifting as a serious risk to tax revenues, sovereignty and fair tax systems worldwide,” said OECD Secretary-General Angel Gurría in presenting the recommendations. “Our recommendations constitute the building blocks for an internationally agreed and coordinated response to corporate tax planning strategies that exploit the gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment.”
At the request of the G20 leaders, the OECD’s work is based on a BEPS Action Plan setting out the 15 key elements to be addressed by 2015. The project aims to help governments protect their tax bases and offer increased certainty and predictability to taxpayers, while guarding against new domestic rules that result in double taxation, unwarranted compliance burdens or restrictions to legitimate cross-border activity.
The first seven elements of the action plan released Tuesday focus on helping countries to ensure the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralize hybrid mismatch arrangements; realign taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties; assure that transfer pricing outcomes are in line with value creation, through actions to address transfer pricing issues in the key area of intangibles; improve transparency for tax administrations and increase certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting; address the challenges of the digital economy; facilitate swift implementation of the BEPS actions through a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties; and counter harmful tax practices .
The OECD recommendations will be a key item on the agenda when G20 finance ministers next convene at a meeting hosted by Australia’s Finance Minister Joe Hockey on September 20-21 in Cairns, Australia.
The proposed measures were agreed to after a transparent and intensive consultation process between the OECD, G20 and developing countries and stakeholders from business, labor, academia and civil society organizations.
The OECD cautioned that the recommendations may be affected by decisions taken with respect to the remaining elements of the BEPS Action Plan, which are scheduled to be presented to G20 Governments for final approval in 2015. At that point governments will also address implementation measures for the Action Plan as a whole.
Reactions to OECD Recommendations
A number of tax experts commented on the OECD recommendations.
“Tax continues to be high on the agenda of both the public and policy makers,” said Ian Young, international tax manager at the Institute of Chartered Accountants in England and Wales, in a statement Tuesday commenting on the OECD recommendations. “The international flow of goods and trade, the spread of the Internet and the digitalization of economies and the globalization of business creates a headache for governments of established and emerging economies as they seek to secure their public finances and ensure they receive a reasonable tax take from international business.
“BEPS also needs to rebuild public trust in the tax systems of the world while at the same time allowing businesses to continue to grow and provide the resources for the public finances,” Young added. “The OECD has in the first 12 months of the BEPS project covered a lot of ground and managed to stick to its timetable of deliverables for its comprehensive review of the international tax system. The next challenge will be to maintain momentum over the coming 15 months, stay on track with the next set of deliverables and secure political buy-in and agreement to the proposals so that they make a difference in practical terms.
“Countries need to coordinate their response to BEPS and the way they organize better cross border information flows,” Young pointed out. “It is important to reach multilateral agreement because the alternative would be unilateral action by countries which will be counterproductive and could lead to double taxation—or non-taxation of business—and generally inhibit international trade and commerce.”
The BEPS Project aims to provide governments with clear international solutions for fighting corporate tax planning strategies that exploit gaps and loopholes of the current system to artificially shift profits to locations where they are subject to more favourable tax treatment.
“The OECD’s initial guidance on Base Erosion and Profit Shifting (BEPS), if adopted by key OECD member countries and observers as expected, will have a significant impact on U.S. multinationals with overseas operations, whether or not the U.S. makes changes in regulations or practices as a result of the recommendations,” said Manal Corwin, national leader of International Tax at KPMG LLP and former deputy assistant secretary for tax policy for international tax affairs at the U.S. Treasury Department. “We believe that impact will not only include changes in compliance obligations, but could directly affect current operating structures in meaningful ways. Companies clearly need to focus on the details of the report on the 2014 deliverables and carefully track how countries in which they operate are reacting and planning for change.”
“It is also critical for companies to stay engaged or, indeed, increase their engagement with the OECD and domestic governments as the 2014 deliverables are adopted and the 2015 deliverables are developed,” said Corwin. “There is a lot of political pressure on the OECD and policymakers to produce results fast. Policymakers need the input and constructive engagement of business to keep the exercise technically focused, recognize practical limitations and concerns facing businesses, and prevent unintended consequences.”
Greg Wiebe, global head of tax for KPMG International, said, “Clearly, today’s round of guidance from the OECD on Base Erosion and Profit Shifting could have far-reaching ramifications, which could ultimately transform the international tax landscape. With this increased clarity, the real work now begins for companies around the world.”
Ernst & Young's global vice chair for tax, Jay Nibbe, also weighed in with his thoughts on the OECD's release of the first output in the BEPS project. “Today’s guidance on taxation from the OECD will have wide-reaching implications for both governments and companies as policy makers consider changing the framework for taxing cross border business activity," he said. "We can expect to see implications for tax policy across numerous countries based on the substantial work that has been done by the OECD and G20 countries over the past year. As countries adopt different approaches, there is much work ahead, and extensive input from the global business community and other stakeholders will be needed. Companies will need to assess the commercial and practical implications of these recommendations. Therefore, constructive dialogue between governments and taxpayers is even more essential."
Frederic Donnedieu, chairman of Taxand, a global organization of specialist tax advisors to multinational businesses, sees major changes in how international taxes will be handled. "The OECD’s BEPS Action Plan is designed to redefine and revolutionise the taxation of companies across the globe," he said. "It is the most coordinated attempt to reach common objectives—in both developed and developing economies—that we have seen in some time. But it’s clear from today’s press conference that whilst the OECD’s plans are undoubtedly a further step to tilt the balance of power further towards tax authorities, how they will be implemented and the form they will take is very much unknown.
"Multinationals should be concerned that in many ways, the OECD Action Plan legitimizes the aggressiveness we have already seen from tax authorities towards taxpayers, particularly in areas such as transfer pricing," Donnedieu added. "Time will tell whether all of the OECD’s BEPS initiatives will be implemented and indeed how they will be enforced, but there is still cause for concern. At the heart of the BEPS proposals is a reorganization of the way in which profits are taxed, particularly in light of the new and borderless’ digital economy. The global initiative, coming to the first stage of its deliverables today, will require close international cooperation, transparency, data and reporting requirements from all countries and multinationals."
He pointed out that the OECD's work has been moving very slowly.
"However, progress with the OECD’s plan are moving at glacial speed—obtaining broad international agreement will not happen easily, as many countries fight to maintain their competitive advantage which attracts both employment and investment," said Donnedieu. "We are seeing a number of countries stalling on any legislative changes whilst they wait for BEPS to fine tune the guidance, particularly around the digital economy, whilst others are legislating changes in advance of international agreement, causing greater confusion for multinationals as they try to adhere to varying tax rules across their countries of operation.
"Country by country reporting likely constitutes one of the most critical elements of the BEPS initiative," Donnedieu added. "The technicalities are still unclear but will be watched with interest. There are a number of questions to be answered, namely around the information required to be published, whether the information will be published centrally or locally, and how confidentiality will be ensured. What’s clear is that misinterpretation of the reporting could be damaging for taxpayers—causing unfair reputational risk, as well as a heavy administrative burden. Companies should be prepared for this impending transformation in taxation which BEPS will enforce. It’s clear that there is a general consensus amongst nations that these issues need to be addressed. But for now it appears business as usual whilst the OECD continues its lengthy deliberation over the form it will take."
For further information, visit www.oecd.org/tax/beps-2014-deliverables.htm.
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