As the Organisation for Economic Co-operation and Development (OECD) and the G20 bring the anti-BEPS action plan to fruition, questions remain. The rationale is clear: the world economy has been characterised by a shift from country-specific businesses to global enterprises operating both over the internet and at locations remote from where their physical customers are buying goods and services. This has presented opportunities for complex profit repatriation structures – reducing the tax burden in other words – and has fuelled concerns of unfair and unethical practice.
BEPS refers specifically to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity. This practice is of particular significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises. So a set of measures designed to enable governments to close the loopholes seems to be a desirable outcome.
However, the anti-BEPS measures delivered by the OECD project with the goal of creating international standards for appropriate tax distribution, are already in danger of being undermined by unilateral and potentially conflicting tax laws passed in haste for political or other reasons.
In the UK, the government, while supporting the BEPS project, has chosen to implement what is being called a ’Google Tax’, a 25% diverted profits levy on sales generated in the UK but accounted for elsewhere. Some observers accused the UK government of political expediency and points-scoring ahead of the 2015 general election. There has been significant public opposition to corporations like Google, Amazon and Starbucks who were perceived to be tax avoiders. Lobbyists, anti- austerity and anti-capitalist protestors demanded a response. Other European and non-European jurisdictions are considering similar implementations.
The BEPS project is in itself a sizeable undertaking, but some believe that a wider effort is required to increase corporate transparency and reduce non-compliance with tax laws. In June 2015, the European Commission (EC) presented its own action plan (including initiatives to tackle tax avoidance).
The EC says its plan will fundamentally reform corporate taxation in the EU, prompting the observation from OECD secretary-general Angel Gurria that “a globalised economy needs single global standards”. Clearly those single standards will not be easy to find.
Christian Kaeser, chair of the commission on taxation at the International Chamber of Commerce (ICC) says countries should wait and act in accordance with the outcome of the BEPS project. By doing so, they will not disrupt the OECD’s aim to design one common approach and they will not create new conflicting international tax rules. “This also reflects the reality that the OECD is reluctant to address: the underlying concern that countries create their own regimes to attract economic activity (in other words, base erode other countries) which multinationals then utilise in their structuring,” he says. The ICC anticipates that some multinationals will restructure as countries move towards implementation of the BEPS measures.
Joe Harpaz, head of the Onesource corporate market for the tax and accounting business at Thomson Reuters, believes that many multinationals have work to do before they would be in a position to change the way they account for revenue. “Many multinationals are only now waking up to this even being an issue,” he says. “They will face difficult decisions and hard management choices.” Many will consider whether the cost of defending existing structures from a BEPS-based challenge will negate the tax benefit.
One giant which has made the change is Amazon, much vilified in the UK and elsewhere for what was seen as large scale tax avoidance. Amazon opened a London office within its Luxembourg headquarters, specifically to account for UK sales and to pay UK tax and will do the same for other European jurisdictions. Cynics suggest this was a move to pre-empt the 25% ’Google Tax’ but the real motive may be more complex, since Amazon faces other tax and location pressures unique to its business. The local 3% value-added tax (VAT) on sales of e-books which made Luxembourg an attractive home base, was raised in May 2015 to 17%.
TRANSPARENCY AND ENFORCEMENT
According to Joe Harpaz, what makes BEPS so interesting is that it is simultaneously global in scope and localised from an enforcement perspective. “While the OECD does have a clear-cut agenda to close loopholes in the global web of over 3000 bilateral tax treaties, actual enforcement of these guidelines will be left up to individual countries. The US has voiced concerns about the amount of detail US companies would need to report to foreign authorities under BEPS, so while there is broad, general support for the idea of transparency, the devil will be in the detail.”
Bas Pijnaker, tax partner, Govers Accountants/Consultants, Netherlands, agrees that the US is under some pressure from the project. “As it stands, profits that are not remitted into the US are not taxed there but once remitted they will be taxed. The problem for the US is that if multinationals such as Google or Apple pay tax in other countries, the US gets less when the profits are remitted to the US, which explains why it has been reluctant to throw its full weight behind BEPS.”
Jonathan Schwarz, barrister at Temple Tax Chambers in London who focuses on international tax disputes as counsel and advises on solving cross-border tax problems, agrees that the potential for double taxation will be increased as a result. “The combination of many more permanent establishments with companies away from home countries, together with heightened attention to transfer pricing worldwide, will provoke more conflict between tax authorities seeking to tax international profits,” he says. “Companies will need to be well prepared.”
Clive Gawthorpe, partner, UHY Hacker Young, Manchester, UK, and chair of UHY’s tax special interest group believes that a fundamental problem that will determine the success or otherwise of the OECD’s efforts is access to information.
“Country by country reporting is key to determining exactly where profits are made,” he says. “The next step is challenging transfer pricing calculations and for me this is the biggest issue.”
The Tax Justice Network conducts high-level research, analysis and advocacy on international tax, the role of tax in society and the impacts of tax evasion, tax avoidance and tax havens. Access to information is precisely their concern too. Senior analyst Markus Meinzer says, “Action 11 of the BEPS plan requires the establishment of methodologies to collect and analyse data on BEPS – and the actions to address it – but there is insufficient data available to understand the economic consequences of base erosion and profit shifting. Country by country reporting will not be made available for researchers or the public.”
Another significant factor in the BEPS debate is the support the measures may provide for emerging nations. From the outset there was a fear that the more comfortably off member countries of the OECD would be the primary beneficiaries while developing countries would struggle to achieve the equality of tax revenue distribution they are entitled to. The OECD has engaged extensively with over 80 developing and non-OECD/non-G20 countries and claims that their needs and differences have been integrated into the measures. However, not everyone is convinced.
Global Financial Integrity (GFI) is a not-for- profit research and advocacy organisation located in Washington D.C. in the US. Liz Confalone, policy counsel at GFI, is concerned that the smallest countries, which have the most to gain, have the least influence on the project. “We need to make sure the system also works for all developing countries,” she says.
Some observers have asked whether it is ethical to shift profits made in emerging economies to low tax jurisdictions in Europe, so potentially depriving poorer countries of much needed revenues.
Liz argues that the real question is should it be legal? “Recent coverage regarding the tax dodging of multinationals makes it abundantly clear to us, as well as the public, that the answer to that question is no. Companies engaging in profit shifting pay less tax and so their cost of doing business is less. This distorts markets, creates an uneven playing field and, ultimately, suppresses economic growth, especially in low income countries.”
Markus Meinzer, from the Tax Justice Network, says, “It is neither ethical nor legitimate to shift profits from any country where a multinational operates, especially after taking advantage of its customers, natural resources, human resources and infrastructure. If this depriving of revenues affects developing countries which need them the most, it is economic colonialism in the 21st century.”
THE CHALLENGE REMAINS
Perhaps the last word should go to Clive Gawthorpe at UHY, who takes a pragmatic view of the difficulties posed for emerging nations under the OECD plan. “Politicians have used the ethical argument to gain public support for the BEPS project. However, many developing nations lack the human resources to interpret the data and challenge transfer pricing calculations – and some of these countries don’t even tax profits this way as they use a withholding tax method. There will be more permanent establishments in emerging economies which should lead to more tax being due locally, but the challenge of collecting this tax remains.”
Contact: Clive Gawthorpe, UHY Hacker Young LLP, Manchester, UK and chair of UHY’s global tax special interest group. email@example.com
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