Base Erosion Profit Shifting
– A New World Tax Order?
by krister andersson
1. introduction
Several speakers have mistakenly said Base Erosion and Profit Sharing
rather than Base Erosion Profit Shifting. Could it be a slip of the tongue
or is it simply wrong? In any case, the international framework for allocating taxable profits and income across countries is likely to undergo
substantial changes in only a couple of years’ time.
According to the OECD Base erosion and profit shifting (BEPS)
“refers to tax planning strategies that exploit gaps and mismatches in tax
rules to make profits ’disappear’ for tax purposes or to shift profits to
locations where there is little or no real activity but the taxes are low,
resulting in little or no overall corporate tax being paid.” The role of government incentives and tax competition is also mentioned but seems to
attract less focus, at least for the time being. The blame is mainly on businesses and taxpayers. This is in sharp contrast to an earlier project at the
OECD on Harmful Tax Competition: An Emerging Global Issue,
which was published in 1998.1 In the EU, much focus has also been on
harmful, targeted measures in the so called Code of Conduct work. In
1. http://www.oecd.org/tax/transparency/44430243.pdf.
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recent years, organizations and governments have targeted tax practices
rather than their own laws and legislative proposals.
The background to the BEPS Action Plan is an initiative at the G20.2
The G20 leaders meeting in Mexico on 18–19 June 2012 explicitly
referred to “the need to prevent base erosion and profit shifting” in their
final Declaration. This message was reiterated at the G20 finance ministers meeting of 5–6 November 2012 and they said that they looked forward to a report about progress of the work at their next meeting. On
the margins of the G20 meeting in November 2012, the United Kingdom’s Chancellor of the Exchequer, George Osborne, and Germany’s
Minister of Finance, Wolfgang Schäuble, issued a joint statement, which
has since then been joined by France’s Economy and Finance Minister,
Pierre Moscovici, calling for co-ordinated action to strengthen international tax standards and urging their counterparts to back efforts by the
OECD to identify possible gaps in tax laws. Such a concern was also
voiced by US President Obama in the President’s Framework for Business
Tax Reform, which states that “empirical evidence suggests that incomeshifting behaviour by multinational corporations is a significant concern
that should be addressed through tax reform”.
The OECD became the secretariat to the G20 for BEPS and on July
19, 2013 it issued an Action Plan on Base Erosion and Profit Shifting.3
The report outlined 15 actions to be undertaken. Each action point is
analyzed below.
There are a considerable number of question marks regarding both
the process and the measures to be undertaken. The OECD has for at
least fifty years been the standard setter in the international tax area,
building on a structured process and consensus between member countries. Much of the work on the actions to be undertaken will be part of
an OECD tax process but decision making is basically at the G20 level.
Many countries will not be represented at the table and in the discus2. The G20 brings together finance ministers and central bank governors from 19 countries: Argentina, Australia,
Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the Republic of Korea, Mexico, Russia,
Saudi Arabia, South Africa, Turkey, the United Kingdom, the United States of America plus the European Union,
which is represented by the President of the European Council and by the Head of the European Central Bank.
The G20 was formally established in September 1999 when finance ministers and central bank governors of seven
major industrial countries (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States)
met in Washington, D.C. in the aftermath of the financial crisis of 1997–1998, which revealed the vulnerability
of the international financial system in context of economic globalization and showed that key developing countries were insufficiently involved in discussions and decisions concerning global economic issues. The objectives
of the G20 refer to: 1. Policy coordination between its members in order to achieve global economic stability, sustainable growth; 2. Promoting financial regulations that reduce risks and prevent future financial crises; 3. Modernizing international financial architecture.
3. The report is available free of charge at: www.oecd.org/ctp/BEPSActionPlan.pdf.
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sions. However, non-OECD G20 countries were involved in the work
and all (Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia
and South Africa) participated in the meeting of the Committee on Fiscal Affairs where the Action Plan was adopted. The continued participation and endorsement of all G20 countries will be critical to guarantee a
level playing field and prevent inconsistent standards. Major nonOECD economies that are not OECD Members will participate in the
project on an equal footing. Other non-members could be invited to participate on an ad hoc basis.
In the EU, several countries are not members of the OECD and most
countries are not G20 members. The only representation for these countries in the deliberations at G20 level is through the European Commission. Sweden is a member of the OECD and the EU, but has not been
represented on the three task forces that resulted in the Action Plan. It is
of course very important that Sweden actively takes part in the current
and future work since the allocation of taxable profit between countries
is bound to be affected. The Action Plan however states that the actions
are not directly aimed at changing the existing international standards on
the allocation of taxing rights on cross-border income. Several of the
actions points calls for greater reliance on where economic activity takes
place and the importance of actual sales for taxable profits is emphasized.
For a small open economy like the Swedish one, with a substantial trade
surplus, even a small movement in the direction of attributing sales an
increased importance when assessing where profits should be taxed,
would result in substantial revenue losses from the corporate income tax.
Most of the action plans should be addressed within a two year
period. It is an unprecedented short period in the area of international
agreements. The OECD sees large risks in unilateral actions being taken
if the time table is not kept. The risk of unilateral actions should not be
underestimated. In a tax bill to the Mexican Congress on 8 September
2013, expenses paid by a Mexican company to a related party in Mexico
or outside Mexico are non-tax deductible in case the company receiving
the payment is taxed at less than 75% of the Mexican tax rate i.e. with
less than 22.5%. The proposal would, if implemented, result in companies active in countries with comprehensive tax systems, far from being
anything like a tax haven, encounter substantial international double
taxation. The Mexican Congress has since withdrawn this part of the tax
reform proposal. It nevertheless, demonstrates the need for multilateral
actions.
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2. background
The BEPS report refers to the challenges globalisation poses to countries’
corporate income tax regimes and the opportunities it has opened up for
multinational corporations (MNEs) as reasons for action. Both developed and developing countries are, according to the OECD, suffering
from revenue losses. Public investment is therefore under-funded and
purely domestic taxpayers will have to pay too much in taxes and competition between businesses is harmed.
There are no reliable estimates of the size of the amounts involved. As
a matter of fact, one of the actions points (number 11) calls for the need
to establish methodologies to collect and analyse data on BEPS. In the
EU, it is sometimes mentioned that the revenue loss in the EU amounts
to 1 trillion EUR. The validity of this estimate can certainly be questioned. The origin to the estimate seems to stem from a report for the
“Group of the Progressive Alliance of Socialists & Democrats in the
European Parliament”. The author is Richard Murphy, founder of Tax
Justice Network.4 In the estimation of 1 trillion EUR, it is assumed that
tax evasion amounts to 850 bn EUR, i.e. the black economy in the EU
amounts to 18.4% of GDP. For a country like Sweden, it is estimated to
be 18.8% of GDP. The Swedish Revenue Authority estimates the black
economy to be in the range 2.6–6% of GDP.5 The remaining 150 bn
EUR is assumed to stem from Tax avoidance. The estimate of 1 trillion
EUR is clearly not well founded.
However, it should be recognized that tax shifting does occur and lack
of transparency may lead to non-optimal resource allocation and taxmotivated behaviour. It is therefore very welcome that G20 will now
develop methodologies of how to measure BEPS and monitor the
progress of the amounts involved.
The sharp decline in economic activity and resulting deficits in public
accounts and the higher debt levels experienced by most countries in the
OECD economies probably play a major role for the timing of this
project. Despite the economic crisis starting in 2008, OECD statistics
show only a minor decline in corporate tax revenue as a per cent of GDP.
4. http://europeansforfinancialreform.org/en/system/files/3842_en_richard_murphy_eu_tax_gap_en_120229.pdf.
5. Tax Statistics Yearbook 2011 published by the Swedish National Tax Authority (Skattestatistisk årsbok (2011
års utgåva), Chapter 10, page 221, referring to Nordic/Northern European esimates in the range of 2.5–6 per cent.
http://www.skatteverket.se/BAB1223B-BA1B-4EE3-B541-4C48C8B6A1AC/FinalDownload/DownloadId3A17ECA7E7A5847A054EF331FF169C8C/BAB1223B-BA1B-4EE3-B541-4C48C8B6A1AC/download/
18.5fc8c94513259a4ba1d800065202/15214.pdf.
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The trend has instead being rising rather in sharp contrast to the fears of
a race to the bottom.
Source: OECD.
Reasons behind the persistence in corporate tax revenues are the continued reduction in statutory corporate tax rates, making more investments
economically viable and therefore making the tax base broader and
deeper, and the base broadening measures undertaken by governments
to protect the revenue base, often in terms of anti-abuse legislations.
Sources: National sources, OECD.
Further reductions of the corporate tax rates are in the pipeline.
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Examples of changes in statutory corporate tax rates
Completed, per cent
Planned
United Kingdom
30 to 23 (4 steps up to 2013)
20 (2015)
Finland
29 to 24.5 (2 steps up to 2012)
20 (2014)
Denmark
32 to 25 (3 steps up to 2007)
22 (2016)
Portugal
35.2 to 31.5 (5 steps up to 2012)
19 (2018)
Netherlands
35 to 25 (5 steps up to 2011)
Czech Republic
31 to 19 (6 steps up to 2010)
Germany
38.7 to 29.8 (1 step in 2008)
Sources: IBFD, Swedish Budget Bill for 2013 (where some 15 additional
examples can be found on similar changes in other European countries
since 2000).
Governments, however, do not only lower statutory corporate tax rates
to protect their tax revenues. They also frequently engage in tax competition enabling certain businesses to use tax incentives. It is somewhat of
a paradox that governments enact these incentives at the same time as
they instruct, or at least allow, their revenue authority to pursue an
increasingly aggressive tax audit and litigation agenda. Some tax authorities are increasingly testing border line cases to see whether a deduction
could be disallowed or an income made taxable within their jurisdiction
as well. Other countries have embarked on a more coordinated
approach, trying to promote investments in general and cross-border
investment in particular, by setting up incentive schemes and tax authorities allowing companies to benefit also from a business friendly tax
administration.
The consistency for purely domestic taxpayers where a deduction for
one taxpayer is matched by taxation for another taxpayer receiving the
income is not automatically upheld in a cross country setting. In combination with tax incentive schemes and differences in implementation
and enforcement between countries, friction between sovereign states
may build up. If businesses, in addition try to exploit such differences by
“aggressive” tax planning activities, some governments may consider
themselves disadvantaged. This may result in tax rules that are harmful
to economic activities.
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3. aggressive tax planning
The term “Aggressive tax planning” plays a key role in BEPS discussions.
The term is not well defined and countries have very different interpretations of what it entails or mean. In an international context, it is sometimes linked to whether income is taxed in another country or not. The
“subject to tax” concept is however also vague; is it sufficient to be subject to tax even if the rate is low or even zero? The EU Commission has
in various documents tried to define aggressive tax planning. A recent
example is:
“Aggressive tax planning in general can be described as the practice whereby tax
payers exploit loopholes of a single tax system or mismatches in the interaction
between two or more tax systems via complex and/or artificial arrangements to
reduce their tax liability. In these cases, the tax savings could be considered to be
unintended by any of the jurisdictions involved, but the arrangement are generally not illegal. Such tax planning schemes frequently lack transparency and are
therefore difficult to detect. Member States may not even be aware of their existence and therefore fail to propose effective remedies. It is therefore plausible that
some schemes would not achieve their intended tax benefits if they were subject
to effective exchange of information provisions.”6
From this text it is obvious that a number of clarifications are needed.
What does words like “practice” and “exploit” mean? What is a mismatch? When is a transaction “complex”? To what extent does the tax
liability have to be reduced for it to be aggressive? What is the role of the
transparency of the transaction? How does one assess whether the transaction is difficult to detect?
Aggressive tax planning is almost always attributed to taxpayer behavior but the importance of government behavior must also be recognized.
The EU Commission states:
“In summary, aggressive tax planning schemes can be considered to thrive on a
lack of transparency, a lack of cooperation between tax authorities and the presence of special tax incentives.”7
The importance of national tax laws and incentive schemes has been
clearly demonstrated during the tax debate in 2013. Companies like
Apple, Starbucks, Microsoft and others have been scrutinized in public
hearings and in media. Have they engaged in aggressive tax planning and
would revenue authorities agree on the classification?
6. DOC: Platform/003/2013/EN, PLATFORM FOR TAX GOOD GOVERNANCE, Draft Discussion Paper
on the “Tax Havens” Recommendation.
7. Op. cit.
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When Apple decided to borrow 17 billion USD for dividend payments despite having 144 bn USD in cash, the US tax regime with taxation upon repatriation came into focus, as well as the low effective tax
rate the company endured for its European activities.8
The tax situation for Apple and other companies resulted in unilateral
actions being taken by European countries at the same time as the BEPS
agenda continues. On October 15, 2013, the Irish government
announced that it would close a legal loophole that enabled Apple to save
tax on $44bn of offshore income in the country’s first major step against
tax avoidance.9 The Irish finance minister said that he would publish legislation to ensure that Irish-registered companies could not remain
“stateless” in terms of their tax residency.
“Let me be crystal clear, Ireland wants to be part of the solution to this
global tax challenge, not part of the problem,” he told parliament in his
budget speech. “I want Ireland to play fair – as we always have done –
and I want Ireland to play to win.”
His move came after Dublin was singled out by a US Senate committee this year for acting as a conduit for Apple’s earnings so that it could
sidestep large tax payments around the world. The report claimed that
Dublin allowed Apple to apply a corporation tax of 2 per cent or less,
well short of the usual 12.5 per cent rate.
From an example like Apple, it is clear that BEPS would also have to
focus on how governments use tax policy for incentive purposes.
4. source versus residence
taxation countries
Another important factor behind the BEPS project is the increasing
importance of countries relying on source taxation rather than residence
based taxation. The rapid growth of countries like India, China and Brazil in the world economy has tilted the balance in the direction of more
source based taxation. The OECD countries of today represent only
8. Apple CEO Tim Cook said late Tuesday [April 23, 2013] that the company will double the amount it returns
to shareholders through share buybacks and dividends by 2015, but will “access the debt market” to pay for it. If
Apple were to try to bring that cash back to the United States, it could be taxed at the top corporate tax rate of
35%. “We are continuing to generate significant cash offshore and repatriating this cash would result in significant
tax consequences under current U.S. tax law,” said Apple finance chief Peter Oppenheimer during an analyst call
Tuesday. Source: http://buzz.money.cnn.com/2013/04/24/apple-debt-repatriation-taxes.
9. Ireland pledges to close Apple tax loophole, By Jamie Smyth in Dublin and Richard Waters in San Francisco,
FT Oct 15, 2013.
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66% of world GDP and are expected to decline to 49% by 2030.10 The
acceptance for the Model Convention and the OECD Transfer Pricing
Guidelines are challenged and countries with a strong position advocating source based taxation would like the BEPS project to shift the right
to tax in favour of source countries. This would call for a review of the
concept of Permanent Establishment (PE), taxation of Intangibles, the
importance of the allocation of risk and control as well as the linkage of
economic activity to actual sales. All of these areas are listed as action
points in the BEPS report (see below).
The importance of sales is however also stressed by some existing
OECD members. France has for years challenged the international taxation principles for the corporate income tax when it comes to internet
sales and the so called digital economy. An earlier revision of taxation of
internet sales, resulted only in a clarification of a PE when a server is in
place for the actual sales.11 The taxation of profits from the sale of good
and services facilitated by the server was not discussed. However, that
issue is now on the agenda in the BEPS project. It would potentially
involve whether France could claim as taxable in France part of the profit
in companies outside its territory but engaged in sales over the internet
to French consumers.
The complexity of the transfer pricing rules and the outcome in taxation rights is challenged by a number of NGOs. They claim that developing countries loose out due to weak administrations and lack of ability
to pursue complicated tax cases. At the same time, they claim that developed countries loose staggering amounts in tax revenue (see above). The
impression is given that there is a free lunch – higher taxes on business
activities in developing as well as developed countries would be to the
benefit of everyone. At the same time OECD and other international
organisations have highlighted the negative consequences of higher taxes
10. Measured as real GDP at 2005 PPPs, according to OECD Economic Outlook, Volume 2012, Issue 1, Figure
4.5, page 217.
11. “The distinction between a web site and the server on which the web site is stored and used is important since
the enterprise that operates the server may be different from the enterprise that carries on business through the
web site. For example, it is common for the web site through which an enterprise carries on its business to be
hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these
contracts typically do not result in the server and its location being at the disposal of the enterprise (see paragraph
4 above), even if the enterprise has been able to determine that its web site should be hosted on a particular server
at a particular location. In such a case, the enterprise does not even have a physical presence at that location since
the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business
by virtue of that hosting arrangement.” Par. 42.3 in INTERPRETATION AND APPLICATION OF ARTICLE
5 (PERMANENT ESTABLISHMENT) OF THE OECD MODEL TAX CONVENTION, 19 October 2012.
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on investments and businesses for growth and job creation. It must
therefore implicitly be assumed that the return on the potential tax revenues must exceed the negative effects on investments and jobs. In other
words, governments must use the extra tax revenues strategically and
very efficiently. More effective and equal competition across countries
and between different types of businesses is also held out as a carrot for
increasing taxes. At the same time, many governments engage in active
tax competition to make more investments economically viable and to
attract investments. It is therefore sometimes hard to understand the
eagerness to increase taxes on the one hand and to lower them on the
other hand. Hopefully, the BEPS project will result in greater transparency in the area of tax competition and with a clear definition of what
acceptable government behaviour is, as well as acceptable corporate
behaviour.
5. general comments on
the action plan
The Action Plan on Base Erosion Profit Shifting by the OECD and G20
spins over basically every aspect of international taxation. The global tax
system was originally designed to prevent double taxation. The focus
now is on double non-taxation. However, it is important to address both
these aspects in the BEPS project.
Considering the political pressure behind the BEPS project, it is
important to keep in mind and to make sure that any changes to the
international tax system is made in a balanced and proportionate way.
Governments need to agree on acceptable forms of tax competition and
businesses must adhere to rules and principles agreed upon. Failure to
come to such an agreement might, as shown above, result in unilateral
actions by states, which in turn increases the risk of double taxation.
Achieving consensus, beyond the G20 countries, towards uniformly
agreed standards is thus critical in order to avoid numerous new cases of
international double taxation.
In the BEPS report and other OECD publications a distinction is
made between intended and unintended double non-taxation. This distinction is important because it gives meaning to differences between tax
efficiency and aggressive tax planning on the side of business and normal
tax policy and harmful tax practices on the side of governments. This dis-
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tinction therefore needs to be further operationalized to be able to come
to effective and proportional measures in tackling BEPS related issues.
This also means that there should be consensus that universally accepted
unintended results of either tax policy or tax planning should be the pivotal point of the work on BEPS. Defining these concepts would clearly
be very helpful.
The aim of the BEPS project should be to identify parts of the international tax system that do not work well and/or do not work as
intended. These issues should be addressed by formulating open norms
based on well-established principles, not dealing with issues through adhoc anti-abuse measures. In addition, the information that is available to
tax authorities could greatly be improved by automatic exchange of
information between different tax authorities.
In this way a global level playing field can be promoted and affirmed,
designed to enhance global trade and prosperity. The Action Plan should
play a vital role in realizing growth and prosperity. Any changes of international rules of how to allocate taxation rights between countries must
be proportionate. Allowing any increased importance of sales as an indicator of economic activity when attributing the right of corporate profits, rather than the existing international taxation principles, must be
carefully analysed before any changes are considered.
Since many Member States in the EU are not members of the G20
and/or the OECD, it is important that that the European Commission
is active in the work on BEPS to ensure an acceptable outcome for all
Member States and Europe as a whole. Any change in international tax
rules or principles must be EU law compliant to ensure application also
in the EU.
6. specific comments on
the action plan
Action points 2–5 deal mainly with coordinating national tax policy, 6–
10 deal with issues concerning substance and transfer pricing and 11–14
focus mainly on legal certainty and transparency between governments
amongst themselves and/or between business and governments. Action
points 1 and 15 fall somewhat outside these clusters, dealing with the
digital economy and the possibilities of a multilateral treaty.
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6.1
coordinating national tax policy (action points 2–5)
This cluster of action points should be examined in light of earlier
OECD work on harmful tax practices, EU initiatives on harmful tax
competition and work in the Code of Conduct group. Tax competition
in itself is embraced by most governments as beneficial for states. It
encourages states to innovate their tax system and prevents inefficiencies
and the forming of ’cartels’.
Sound tax competition does not lead to a race to the bottom, but will
result in an appropriate level as long as there are oversight bodies such as
the OECD to determine the playing field and to safeguard the rules. For
that reason, a clear internationally agreed working definition on harmful
tax practices would be very useful in addressing BEPS issues and in determining the boundaries for acceptable forms of tax competition.
The Action Plan also states that accomplishing the actions set forth
requires an effective and comprehensive process that involves all relevant
stakeholders. To this end, the OECD will also involve interested G20
countries that are not OECD members. Also other non-member will be
invited. This is a laudable development from a point of view that a global
level playing field should be achieved. At the same time, going by G20
statements, it seems that the OECD has deviated somewhat from the
path of requiring consensus. This could lead to a situation where countries deal with the issues in their own way, creating more gaps and frictions between national tax systems. Consequently, consensus should be
required.
Action 2 – Neutralize the Effects of Hybrid Mismatch Arrangements
“Develop model treaty provisions and recommendations regarding the design of
domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include:
(i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the
benefits of treaties unduly; (ii) domestic law provisions that prevent exemption
or non-recognition for payments that are deductible by the payor; (iii) domestic
law provisions that deny a deduction for a payment that is not includible in
income by the recipient (and is not subject to taxation under controlled foreign
company (CFC) or similar rules); (iv) domestic law provisions that deny a
deduction for a payment that is also deductible in another jurisdiction; and (v)
where necessary, guidance on co ordination or tie-breaker rules if more than one
country seeks to apply such rules to a transaction or structure. Special attention
should be given to the interaction between possible changes to domestic law and
the provisions of the OECD Model Tax Convention. This work will be co ordinated with the work on interest expense deduction limitations, the work on CFC
rules, and the work on treaty shopping.”
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There is a need to address hybrid mismatches. It is however important
that any initiative in this area is internationally coordinated. In order to
achieve a positive impact on hybrid mismatches, countries will have to
be willing to share information regarding mismatches and also commit
not to implement new legislation that would facilitate mismatches.
Furthermore, one has to acknowledge that there may be cases where
double non-taxation is an intentional result of domestic policy initiatives, introduced to stimulate investment. Consequently, it is of utmost
importance that any action to reduce the impact of mismatches is clearly
defined.
Action 3 – Strengthen CFC Rules
“Develop recommendations regarding the design of controlled foreign corporation rules. This work will be coordinated with other work as necessary.”
A more coordinated approach regarding CFC rules is welcome. More
uniformity in this area may increase predictability and thus be beneficial
to tax administrations and businesses. However, the taxation of foreign
income constitutes an important aspect of the tax policy of every
national government to stimulate growth and investments. The taxation
principles in this area vary from country to country and consequently, so
does the current CFC regimes. Many countries do not have CFC rules.
Considering that countries have chosen such different approaches to
stimulate economic activity, I believe that it will be very difficult to coordinate and reach a common position on a standardized CFC regime.
Some of the highly publicized corporate tax cases, like Apple (see
above), may have its origin in the design of the US CFC regime and
check the box regime. While the US for decades argued that other countries should introduce or strengthen their CFC rules, they enacted a different pro-business regime themselves. A number of countries have since
scaled backed their CFC regimes when the negative effects on investments and jobs became obvious.
Action 4 – Limit Base Erosion via Interest Deductions
and Other Financial Payments
“Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the
use of related-party and third-party debt to achieve excessive interest deductions
or to finance the production of exempt or deferred income, and other financial
payments that are economically equivalent to interest payments. The work will
evaluate the effectiveness of different types of limitations. In connection with
and in support of the foregoing work, transfer pricing guidance will also be
developed regarding the pricing of related party financial transactions, including
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financial and performance guarantees, derivatives (including internal derivatives
used in intra-bank dealings), and captive and other insurance arrangements. The
work will be co-ordinated with the work on hybrids and CFC rules.”
As a principle, companies should be entitled to finance their business
operations as they see fit, with equity or debt, as long as they comply with
transfer pricing principles in relation to the level of debt and the interest
payable. More coordination in the area of interest deductibility would be
welcomed if it reduces the burden of compliance and improves certainty
for business. It may be noted that the inherent economic double taxation
of equity financed investments implies a distortion in the financing mix
of companies. In this respect, shareholder taxation ought to also be
included but this is outside the scope of this action point.
A likely outcome of this action point is concluding that best practices
is an earnings stripping rule, like the one in Germany, allowing full
deductibility of corporate interest payments up to 30 percent of
EBITDA (earnings before interest, taxes, depreciation and amortizationa cash flow measure). The reason why EBITDA has been chosen in a
number of countries rather than EBIT is the much higher correlation
between EBITDA and capital intensity in production compared to
EBIT. This could be expressed as stating the obvious that there is higher
financing needs in an industry like a steel plant (having extensive capital
investments and therefore large depreciations) than in a grocery store.
EBITDA would take this into account while EBIT would not.
Disparities between States in nominal tax rates should fall inside the
domain of acceptable tax competition. This should therefore be outside
the scope of BEPS, or at least not being addressed as an interest deductibility issue, but rather as a question of acceptable tax competition.
Action 5 – Counter Harmful Tax Practices More Effectively,
Taking into Account Transparency and Substance
“Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime.
It will take a holistic approach to evaluate preferential tax regimes in the BEPS
context. It will engage with non-OECD members on the basis of the existing
framework and consider revisions or additions to the existing framework.”
Since tax is a cost that every MNE tries to control, companies will consequently respond to legitimate incentives. It is of utmost importance for
businesses to be able to understand the difference between what is perceived as a BEPS incentive and what is simply permissible planning to
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manage tax as a cost. Certain structures resulting in BEPS appear to be
the result of domestic legislation rather than generic/global issues. Consequently, consideration needs to be given to differentiate between issues
that can be addressed through domestic measures and those that will
require international coordination.
Governments have to agree on acceptable forms of tax competition
(for instance, is a patent box regime acceptable?) and avoid labeling businesses as aggressive tax planners or tax avoiders when using legislated tax
incentives such as accelerated depreciation or patent box regimes. In
return businesses must adhere to rules and principles agreed upon by and
between countries. Governments need to find a common position on
how to define “acceptable tax competition”. Such a definition could be
linked to full transparency as far as the rules are concerned and a sufficient level of economic activity required.
The question of CSR (Corporate Social Responsibility) is sometimes
raised in this context. The notion that companies should pay a “fair
amount” rather than what is legally required is really the same question
as the treatment of donations or charitable contributions. It is primarily
a question for the shareholders and their control of management activities. Most countries have strict rules regarding the use of corporate means
for other purposes than increasing the value of the company. Most governments also have tax rules for such contributions. CSR is also
addressed in the MNE Guidelines of the OECD. Here, companies are
obliged to follow laws and regulations of the countries they invest in as
well as the country in which they operate from.
6.2
substance and transfer pricing (action points 6–10)
It is important to maintain a principle-based approach rather than resort
to a series of ad hoc measures. The Action Plan confirms that the at arm’s
length principle must be maintained. Additional measures to combat
unintended double non-taxation should remain within the arm’s length
standards. Where it is clear that a transaction is upheld by proper analysis
of functions carried, risks taken and assets used and reasonable substance
is present, it should be clear that there is no situation of artificially segregating taxable income from the activities that generate it.
Action 6 – Prevent Treaty Abuse
“Develop model treaty provisions and recommendations regarding the design of
domestic rules to prevent the granting of treaty benefits in inappropriate circum-
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stances. Work will also be done to clarify that tax treaties are not intended to be
used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a
tax treaty with another country. The work will be coordinated with the work on
hybrids.”
The first sentence in this action point raises some concern. Is the intention to introduce domestic anti-abuse rules that would override tax treaties? If so, I would be strongly against it since it would effectively undermine the predictability and certainty of a tax treaty. When making an
investment, a taxpayer should be able to rely on the text of a tax treaty.
Although I understand the need for rules to counter treaty abuse, such
rules should come in the form of treaty provision and not in the form of
domestic legislation. A number of provisions to counter treaty abuse can
already be found in the Commentary on Article 1 of the OECD Model
Tax Convention. The work in this area should therefore be concentrated
on designing effective treaty provisions to counter treaty abuse.
Action 7 – Prevent the Artificial Avoidance of PE Status
“Develop changes to the definition of PE to prevent the artificial avoidance of
PE status in relation to BEPS, including through the use of commissionaire
arrangements and the specific activity exemptions. Work on these issues will also
address related profit attribution issues.”
Obviously, artificial business arrangements should be targeted. However, considering the discussions in relation to the latest review of the
commentary to Article 5 on the definition of permanent establishment,
one may feel somewhat concerned that this could turn into yet another
clash between source and resident taxation. The case of a limited risk distributor may serve as a good example. Assume that a company selling
products over the internet establishes a warehouse to speed up delivery
in country X. Should this warehouse render a PE?
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Source: BIAC
The potential risk of conflicting views and numerous new PEs is obvious. This would result in numerous double taxation cases. One could
question the need for changes in this respect. Article 5 and Model Convention commentary provides relative clarity on principles of PE status
and these principles, developed over many years, have allowed the creation of commercial agreements with third parties and within the enterprise that take into account liability for PE status where that arises. Furthermore, many aspects of the global supply chain and customer/dealer
relationships are predicated on a mutual understanding of PE status and
changes would be costly not only for businesses but also for governments. Any change to the model treaty or the model treaty guidance
should therefore be targeted at specific abuses and not involve substantial
change to long established principles.
Action 8 – Intangibles
“Develop rules to prevent profit shifting BEPS by moving intangibles among
group members. This will involve: (i) adopting a broad and clearly delineated
definition of intangibles; (ii) ensuring that profits associated with the transfer
and use of intangibles are appropriately allocated in accordance with (rather than
divorced from) value creation; (iii) developing transfer pricing rules or special
rules measures for transfers of hard-to-value intangibles; and (iv) updating the
guidance on cost contribution arrangements.”
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In order to avoid inconsistent interpretation and application, finding a
clear and well accepted definition of the term intangible is of utmost
importance. Anything else is likely to result in numerous dispute and
double taxation. In my view, a definition of intangible assets that are to
be recognized for TP-purposes ought to include three typical characteristics: ownership, control, and transferability. Although business attributes
or notions such as goodwill, on-going concern value, synergies, location
savings, workforce in place etc. may affect the valuation of a transaction
and consequently affect the transfer price of an intangible asset, such
attributes or notions are not themselves assets which can be owned, controlled or transferred. Consequently, they should not be included in the
definition.
It is equally important to distinguish between allocation of ownership
and the compensation for functions performed which may (or may not)
contribute to the development and enhancement of the IP. The compensation for functions performed will naturally vary depending on the
facts and circumstances in each case but nothing should prevent a highly
qualified service provider performing important functions related to the
development and/or enhancement of the IP from being entitled to a significant service fee, without acquiring any right or share in the potential
IP resulting from his services. At arm’s length, it is indeed reasonable to
assume that a highly qualified service provider performing high value
adding R&D or marketing functions should receive a higher compensation than a service provider only providing routine R&D or marketing
activities. However, this does not mean that either of the service providers at arm’s length is entitled to a share in the IP as such. This distinction
is important in order not to dilute the IP ownership concept for transfer
pricing purposes into something completely unpredictable. It is crucial
to avoid a situation where it will in most cases be possible to argue for
some sort of joint or shared ownership based on notions of how “important” various functions are considered to be.
Action 9 – Risks and Capital
“Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members. This will involve adopting transfer pricing rules
or special measures to ensure that inappropriate returns will not accrue to an
entity solely because it has contractually assumed risks or has provided capital.
The rules to be developed will also require alignment of returns with value creation. This work will be co-ordinated with the work on interest expense deductions and other financial payments.”
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I strongly believe that for normal transactions the arm’s length principle
works. It should not be modified or diluted to deal with abusive behavior. The principles laid out in Chapter IX of the Transfer Pricing Guidelines on risk allocation and capital are valid and reasonable. Abusive
behavior should be countered with targeted measures. To allocate
increasing taxation rights to outsourced R&D despite limited risk and
control at the outsourced facility must be questioned. If deductions for
a substantial part of the investment have been made in a country like
Sweden, it would not be justified to allocate taxation of the return of the
investment to another country. Certainly, the pricing for services rendered should be at arm’s length but an adequate return for the strategic
risk and control should also be granted.
Action 10 – Other High-Risk Transactions
“Develop rules to prevent profit shifting BEPS by engaging in transactions
which would not, or would only very rarely, occur between third parties. This
will involve adopting transfer pricing rules or special measures to: (i) clarify the
circumstances in which transactions can be recharacterised; (ii) clarify the application of transfer pricing methods, in particular profit splits, in the context of
global value chains; and (iii) provide protection against common types of base
eroding payments, such as management fees and head office expenses.”
I believe that the arm’s length principle works and it does not require
that comparables between unrelated parties exist for every transaction. In
situations where there are no comparables, transactions can still be priced
by the use of transfer pricing methods.
In order to make business decisions, legal certainty is required. A
transaction should, in accordance with the Transfer Pricing Guidelines,
only be recharacterised in exceptional cases. Increasing use of recharacterisation would create uncertainty for business and lead to double taxation.
It also needs to be acknowledged that there are transactions taking
place within a group that one would rarely find between independent
parties. This does not mean that these transactions cannot be priced in
accordance with the arm’s length principle. It does however mean that
these transactions will be more difficult to analyze. Paragraph 1.69 of the
TPG states “…The fact that independent enterprises do not structure
their transactions in a particular fashion might be reason to examine the
economic logic of the structure more closely, but it would not be determinative….”. Consequently, tax administrations are advised to show
great caution in dealing with such transactions and to respect the transactions actually undertaken to the extent possible. Transactions should
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not be disregarded or substituted with other transactions simply because
it is difficult to find comparable transactions between independent parties.
If there is an overlap of the range of acceptable prices for the seller and
for the buyer and if the price falls within this range, the price should be
accepted by the tax authorities. The tax authorities should not ask for the
median or a specific point in the range. When looking at the realistically
available options for a company, a company should not be compelled to
elect the most favorable one since it should take into account its belonging to a group and therefore the interest of other members. As indicated
in paragraph 9.60 of the TPG, as long as the choice is clearly not less
attractive than another one it should be accepted.
6.3
legal certainty and transparency
(action points 11–14)
In relation to these action points, it is disconcerting to find that there is
no reliable data available on the magnitude of BEPS, nor is there an
agreed upon methodology to gather and analyse such data. One wonders
which measures should be undertaken if the problem at hand is not identified. Furthermore, can effective and proportionate measures be
expected if there is little or no real insight into the scope of the problem?
In addition, the proposed timing concerning the action points raises
some question since the results on data collection and developing methodologies (action point 11) are not foreseen until September 2015.
Despite this, it is stated that actions should be delivered by September
2014 in the area of hybrid mismatch arrangements (action point 2),
treaty abuse (action point 6), transfer pricing aspects of intangibles
(action point 8), transfer pricing documentation requirements (action
point 13), identifying the problems of the digital economy (action point
1) and part of the work on harmful tax practices (action point 5 – finalise
review on member countries regimes).
Establishing methodologies to collect and analyse data should have
far more priority than what is currently the case. As stated in the Action
Plan: timely, targeted and comprehensive information is essential. Decisions need to be taken on the basis of the right policy considerations.
Despite all political pressure, proper due diligence need to be performed
to be able to come to effective and proportional measures. As is the case
with all action points, international coordination is of utmost importance.
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Action 11 – Establish Methodologies to Collect and Analyze Data
on BEPS and the Actions to Address It
“Develop recommendations regarding indicators of the scale and economic
impact of BEPS and ensure that tools are available to monitor and evaluate the
effectiveness and economic impact of the actions taken to address BEPS on an
ongoing basis. This will involve developing an economic analysis of the scale and
impact of BEPS (including spillover effects across countries) and actions to
address it. The work will also involve assessing a range of existing data sources,
identifying new types of data that should be collected, and developing methodologies based on both aggregate (e.g. FDI and balance of payments data) and
micro-level data (e.g. from financial statements and tax returns), taking into consideration the need to respect taxpayer confidentiality and the administrative
costs for tax administrations and businesses.”
The OECD’s February report on BEBS concluded that there basically
was no reliable data available on the scale and impact of BEPS.
The importance of reliable data has been addressed above. A lot of relevant information is clearly already available for tax authorities by way of
audits – as stated in the Action Plan – but also through yearly submitted
tax returns. Additionally, co-operative compliance programmes could
provide more up-to-date information without resorting to new disclosure initiatives and related administrative burdens. It is important to
make sure that any new types of data to assess BEPS, and actions to
address it, does not lead to significantly greater administrative burden on
businesses or on tax administrations.
Action 12 – Require Taxpayers to Disclose Their Aggressive
Tax Planning Arrangements
“Develop recommendations regarding the design of mandatory disclosure rules
for aggressive or abusive transactions, arrangements, or structures, taking into
consideration the administrative costs for tax administrations and businesses and
drawing on experiences of the increasing number of countries that have such
rules. The work will use a modular design allowing for maximum consistency
but allowing for country specific needs and risks. One focus will be international
tax schemes, where the work will explore using a wide definition of ‘tax benefit’
in order to capture such transactions. The work will be coordinated with the
work on co-operative compliance. It will also involve designing and putting in
place enhanced models of information sharing for international tax schemes
between tax administrations.”
This focus in this action point – as well as the previous one – is mainly
about solving a perceived information deficit on the side of the tax
authorities. If the claim is correct that in most countries the tax authorities have little capability to develop the ’big picture’ of the value chain,
there could be a warranted need for a targeted approach to improve this.
However, in order to ascertain the need for this approach it should
first be established that the lack of capability in fact lies with the absence
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of information, insufficient means to access that information etc. In
addition, it should be established that the information could not be
made available to the relevant tax authorities through (automatic) international exchange of information.
Only in other cases would it be valid to resolve the absence of information, on for instance, the value chain by an internationally agreed and
coordinated request to the taxpayer to disclose the relevant information.
Mandatory disclosure rules on aggressive tax planning arrangements
seem irrelevant when there is no consensus on what should be considered
an aggressive tax planning arrangement (see above). Also, disclosure rules
should be redundant if the automatic information exchange between tax
authorities is properly arranged as indicated above.
Action 13 – Re-examine Transfer Pricing Documentation
“Develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for
business. The rules to be developed may include a requirement that MNE’s provide all relevant governments with needed information on their global allocation
of the income, economic activity and taxes paid among countries according to a
common template.”
Businesses spend a lot of time and incur a lot of costs to define and document their Transfer Pricing (TPD). Despite this, the documentation
often seems to serve little practical purpose. With tougher tax administrations and environments changing ever more rapidly, it is hard to
define rules that last more than 3 years and to document them with the
details requested by tax administrations.
The current focus of TPD is local and not well suited to an increasingly global economy. It is important to identify what information
would be most useful to tax authorities. The information requested in
the action plan seems a bit rudimentary in order to provide useful indicators for risk assessment purposes. It may be more relevant to focus on
information in relation to particular risk associated with certain activities. Consequently, the OECD work on TPD should be streamlined
with the one on Transfer Pricing Risk Assessment (TPRA). Information
required by tax authorities for Transfer Pricing Risk Assessment purposes will vary from business to business. Businesses themselves are probably best placed to determine how this information can be usefully presented in relation to their activities. It is in the interest of businesses to
present the information in a manner that tax authorities can understand,
as this is more likely to lead to a “low risk” assessment.
The words in action point 13 “provide all relevant governments with
needed information on their global allocation of the income, economic
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activity and taxes paid among countries according to a common template” deserves some additional comments. No doubt, there are linkages
to the discussions regarding country by country reporting (CBCR).
There have been several initiatives in this area and the standard for any
reporting requirement deviates considerably. A US standard is taking
form and several initiatives are under consideration in Europe.
Currently there are three EU regulatory frameworks introducing
country by country reporting: the capital requirements directive (part of
the CRD IV package12), the accounting directive and the transparency
directive.13 However these EU regulatory frameworks do not apply to
the same companies. While CRD IV covers credit institutions and
investment firms, the accounting and transparency directives apply to
large listed and non-listed companies active in the extractive industry
and the logging (primarily forest) industry.
In April 2013, the Commission put forward additional new legislation on non-financial reporting (’’Disclosure of non-financial and diversity information by certain large companies and groups Directive’’) in
order to increase the transparency of EU companies and improve their
performance on environmental and social matters.14
There is no requirement on CBCR in the Commission’s proposal
which is currently being discussed by the European Parliament and
Member States. However, in May 2013, the European Council called for
rapid progress on this proposal in order to amend legislation concerning
the disclosure of non-financial and diversity information by large companies and groups to ensure that they provide country-by-country
reporting (European Council Conclusions, 22 May 2013).
12. In March 2013 the EU institutions reached agreement on the fourth Capital Requirements package (CRD IV)
consisting of the Capital Requirements Directive (CRD) and Regulation (CRR). In this context, EU institutions
agreed to introduce CBCR requirements for institutions regulated under the Capital Requirements Directive. This
was the first piece of EU legislation to introduce CBCR. The CRD IV legislation was published in the Official
Journal on 27 June 2013.
13. The new Accounting Directive repealing Accounting Directives (78/660/EEC and 83/349/EEC) introduces a
new obligation for listed and large non-listed large extractive and logging companies to report all material payments to governments broken down by country and by project, when these payments have been attributed to a
specific project. The Accounting Directive regulates the information provided in the financial statements of all
limited liability companies registered in the European Economic Area (EEA).
14. Under the new legislative proposal on Disclosure of non-financial and diversity information by certain large companies and groups (so called non-financial reporting), the Commission seeks to increase the transparency and performance of businesses in all sectors on environmental and social matters, in order to contribute to long-term economic growth and employment. The proposed Directive will amend the Accounting Directives (Fourth and Seventh Accounting Directives on Annual and Consolidated Accounts). It establishes certain minimum requirements
for European companies to meet in order to enhance consistency and comparability of non-financial information
disclosed within the EU. The European Parliament and the Council led by the Lithuanian Presidency recently
started their discussions on the text.
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However, in June 2013, Commissioner for Internal Market and Services Michel Barnier called for “measures on more transparency on tax for
all large companies and groups – the taxes they pay, how much and to
whom”. Additionally, he stated that “It should be possible to introduce rules
for the publication of the information on a country by country basis, similar
to those approved for banks in CRD IV, or in the Commission’s proposal on
improving the transparency of certain large companies on non-financial
reporting, adopted in April” (Commissioner’s statement, 12 June 2013).
Obviously, CBCR is a political issue that is currently being discussed
by the European Parliament and the Member States. The issue is how to
extend the scope of the non-financial reporting directive like in the
accounting and CRD IV directives.
It remains to be seen whether CBCR reporting should be an accounting issue or tax information given to tax authorities. One major difference between the two approaches would be the requirement for audited
accounts if it is part of the accounts, while tax reporting would not be
audited information.
Action point 13 calls for a common template and the purpose here is
said to be to assist tax authorities in their risk and audit analysis. Only a
very limited number of information items is envisaged for that purpose.
The CBCR requirements seem to go much further and businesses are
likely to end up with multiple standards within Europe for accounting
purposes and tax purposes as well as requirements across the Atlantic.
Action 14 – Make Dispute Resolution Mechanisms More Effective
“Develop solutions to address obstacles that prevent countries from solving
treaty-related disputes under MAP, including the absence of arbitration provisions in most treaties and the fact that access to MAP and arbitration may be
denied in certain cases.”
It is of course very welcome that dispute resolution is addressed in the
action plan. This topic is of great importance for businesses. It is also
important for governments since the elimination of international double
taxation increases investments, jobs and therefore tax revenues. Furthermore, legal certainty is of utmost importance for any business investment
and the availability of effective dispute resolution mechanisms form an
inextricable part of this.
The problem of international double taxation, also within the Single
market, has been illustrated by DG TAXUD. They conducted a public
consultation in 2010 with the title ’Double taxation conventions and the
internal market: factual cases of double taxation’.15 Later, the Commis15. http://ec.europa.eu/taxation_customs/common/consultations/tax/2010_04_doubletax_en.htm.
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sion adopted a Communication in 2011 “Double Taxation in the Single
Market” COM (2011) 712 where it concluded on the need to take
actions against international double taxation. Since then, DG TAXUD
has continued its work to analyse the problem and evaluate the tax policy
options that could better help to solve them. In December 2012, a Fiscalis Seminar dedicated one of its modules to international double taxation. As part of the seminar a questionnaire was circulated to the Member States (MS) on their practice in eliminating double taxation and on
their experience in mutual agreement procedures (MAPs) to solve conflicts in the interpretation of double taxation treaties (DTCs). In addition, Working Party IV of the Commission held meetings with Member
States’ delegates and with stakeholders to discuss this issue in April 2013.
Considering the scope of the BEPS project, with new claims of taxing
rights, it is likely to exert additional strain on the disputes resolution
mechanisms. Still, relatively few tax treaties include an arbitration clause
and the number of MAP cases keeps increasing. Consequently, the
OECD and the EU should be encouraged to work on improvements to
the efficiency of MAP and the promotion of mandatory arbitration provisions in tax treaties.
6.4
digital economy and multilateral treaties
(action points 1 and 15)
Action 1 – Address the Tax Challenges of the Digital Economy
“Identify the main difficulties that the digital economy poses for the application
of existing international tax rules and develop detailed options to address these
difficulties, taking a holistic approach and considering both direct and indirect
taxation. Issues to be examined include, but are not limited to, the ability of a
company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable
location-relevant data through the use of digital products and services, the characterisation of income derived from new business models, the application of
related source rules, and how to ensure the effective collection of VAT/GST with
respect to the cross-border supply of digital goods and services. Such work will
require a thorough analysis of the various business models in this sector.”
To widen the scope of the PE concept to include the digital economy
could result in a completely new system for allocating international taxation rights across countries. Considering the complexity of this topic
and the speed with which business models evolve around the digital
economy, a specific set of rules for the digital business does not seem
achievable. This is an area where a more in-depth policy debate on the
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merits of direct/indirect tax solutions is needed. The EU’s work on this
topic for VAT and competition purposes should be explored.
The Action Plan states that actions are not directly aimed at changing
the existing international standards on the allocation of taxing rights on
cross-border income. However, several of the actions points calls for
greater reliance on where economic activity takes place and in Action 1
the importance of actual sales for taxable profits is emphasized. For
smaller open economies, attributing sales an increased importance when
assessing where profits should be taxed, would result in substantial revenue losses from the corporate income tax. This is simply not acceptable,
in particular since smaller countries are not members of the G20 and
therefore have little or no influence on new rules but would encounter
the largest tax revenue losses.
There are reasons to believe that also a large country like the USA
would oppose such a new world order of taxation rights. A working
group has been formed to look into this subject. It is co-chaired by
France and the USA.
Action 15 – Develop a Multilateral Instrument
“Analyze the tax and public international law issues related to the development
of a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS and amend bilateral tax treaties. On the basis of this analysis, interested Parties will develop a
multilateral instrument designed to provide an innovative approach to international tax matters, reflecting the rapidly evolving nature of the global economy
and the need to adapt quickly to this evolution.”
A multilateral instrument could be an effective way to implement BEPS
actions in the current extensive body of bilateral treaties. It would be
beneficial to increase international tax coordination and improve the
effectiveness of the current framework in this area. This action point has
a later deadline that other action points. It should be completed by the
end of 2015 while most of the other action points should be resolved
during 2014.
7. the way forward
An intensive work agenda is now embarked upon. It is stated in the
BEPS report that
“The BEPS Project will draw on the expertise of the Committee on Fiscal Affairs
(CFA) and of its subsidiary bodies. While the practices of these subsidiary bodies
are well-adapted to developing consensus on routine work, they require some
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adaptation to deliver results within the expected timelines. There is thus a need
to find ways to accomplish the work quickly while seeking consensus. Each subsidiary body will need to seek new ways to find consensus as quickly as possible.
This may involve, for example, setting up focus groups for the actions for which
it is responsible. Each focus group could be composed of a relatively small
number of delegates, with one country taking the lead and acting as co-ordinator. The focus groups would work actively in between meetings of the relevant
subsidiary body, using remote working methods and reducing physical meetings
to a minimum, to prepare drafts which would be circulated to and approved by
the subsidiary.”
At their June 2013 meeting, the CFA mandated the formation of a new
working party on Aggressive Tax Planning (WP 11) to assist the CFA
with certain of its responsibilities in relation to the BEPS Action Plan. In
particular the CFA mandate called for WP 11 to develop the instruments
called for in Action Item 2 – Neutralise the Effects of Hybrid Mismatch
Arrangements. WP1 will provide input to WP11. A tentative timetable
indicated that Action point 2 to be approved by CFA in June 2014.
WP11 will also address action points 3, 4 and 12.
It will come as no surprise that the meeting schedule at the OECD
for various working parties and focus groups will be very heavy during
2014. No doubt, there will be major hurdles and problems to resolve and
success will not be declared on all action points. However, since it is a
political project rather than a tax or economic project, there will be successes to celebrate.
8. summary
We experience an unprecedented internationalization. Businesses structure their activities increasingly according to value creation in a truly global setting and not according to national borders. The international tax
framework has not been able to keep up with these changes and therefore
an increasing number of international double taxation cases as well as so
called double non taxation cases have materialized. Governments have
responded by actively competing with lower corporate tax rates to make
more investments economically viable within their borders in order to
promote growth and jobs. They have also introduced numerous tax
incentives which businesses have responded to. The government tax policies have however been dichotomized. They have also instructed or
allowed their revenue authorities to pursue increasingly aggressive audit
and control strategies to increase tax collections.
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Krister Andersson
Tax planning has become necessary in order to navigate in a very
complex international tax structure. Some advisors and companies have
engaged in sophisticated transactions and structures which tax authorities have brought to their respective governments attention, asking for
more restrictive tax rules.
At the same time, a number of large non-OECD economies have
grown very rapidly and they challenge the existing international tax
rules. Their tax systems have resulted in many cases of international
double taxation and a lot of court cases around the globe. Countries
advocating taxation according to the source principle have certainly
gained territory at the expense of countries advocating taxation based on
residence and the OECD books of rule.
After a stalemate, the G20 countries decided that enough was enough
and they asked the OECD to act as a secretariat for a study on Base Erosion and Profit Shifting (BEPS). The balance of power has clearly
shifted. At the same time a number of OECD countries experience large
budget deficits and increasing public debts, and they would like to
increase their tax revenues as well. Therefore, they all agree to embark on
an unprecedented review of international tax rules.
In the middle of all of these efforts are international businesses and
small economies. For a country like Sweden, Finland or the Netherlands,
with large exports and a small domestic markets, even a small shift in
favor of increased source taxation could result in higher taxes for the their
multinational enterprises at the same time as corporate tax revenues in
those countries would decline. Sweden stands to lose a lot since we run
current account surpluses and our export sector is very large. Furthermore, Swedish companies have considerable research and development
in Sweden as well as headquarters located in the country and several of
the action points in the BEPS report point to higher taxation in countries where the companies are active and sell their products.
There is every reason to follow this process very closely. The time
table is very ambitious. Most of the reforms should be in place within
24 months. The traditional OECD requirement of consensus is downplayed and decisions will be made at the G20 level. Unfortunately, Sweden is only represented in the G20 by the European Commission, without a national seat at the table. We may have a new world tax order once
the action points in BEPS are agreed upon.
In such a world, one would hope that it is indeed Profit Sharing rather
than Profit Shifting. Profit Sharing would mean that international
double taxation is eliminated. Could that explain why the project somesvensk skattetidning 9.2013
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Base Erosion Profit Shifting – A New World Tax Order?
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times is called Base Erosion Profit Sharing rather than Base Erosion
Profit Shifting?
Krister Andersson is Head of the Tax Policy Department, Confederation of Swedish Enterprise. He is also Chairman of the Tax Policy Group of BUSNISSEUROPE and Vice Chair
of the Tax Committee of the Business Industry Advisory Committee (BIAC) to the OECD.
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