By Daniel Hunter
National tax laws have not kept pace with the globalisation of corporations and the digital economy, leaving gaps that can be exploited by multi-national corporations to artificially reduce their taxes.
OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) offers a global roadmap that will allow governments to collect the tax revenue they need to serve their citizens. It also gives businesses the certainty they need to invest and grow.
Produced at the request of the G20 and introduced at the G20 Finance Ministers’ meeting in Moscow, the Action Plan identifies 15 specific actions that will give governments the domestic and international instruments to prevent corporations from paying little or no taxes.
“This Action Plan, which we will roll out over the coming two years, marks a turning point in the history of international tax co-operation. It will allow countries to draw up the co-ordinated, comprehensive and transparent standards they need to prevent BEPS,” said OECD Secretary-General Angel Gurría.
“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.”
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 multi-national corporations to prosper without loading a higher tax burden on domestic companies and individual tax payers.”
The Action Plan recognises 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.
The Action Plan will develop a new set of standards to prevent 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.
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 will 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 (eg patents or copyrights), risks or capital, away from countries where the value is created.
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 MNEs 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. 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.
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