Your Taxes: OECD issues action plan to begin prevention of Base Erosion and Profit Shifting

By September 2014, the OECD intends to issue a report (another one) identifying issues raised by the digital economy and possible approaches to them.

By LEON HARRIS
An accountant calculator taxes 370 (photo credit: Ivan Alvarado / Reuters)
An accountant calculator taxes 370
(photo credit: Ivan Alvarado / Reuters)
Taxation is at the core of countries’ sovereignty, but in recent years, multinational companies have avoided taxation in their home countries by pushing activities abroad to low- or no-tax jurisdictions. This is referred to as BEPS (Base Erosion and Profit Shifting). The G20 asked the Organization for Economic Cooperation and Development to confront this growing issue by creating an action plan to address BEPS, and on July 19, they identified a series of steps and set timelines for their implementation. Following are highlights from the OECD’s timetable:
By September 2014, the OECD intends to issue a report (another one) identifying issues raised by the digital economy and possible approaches to them. In fact, this is the number one issue identified in the action plan.
According to the OECD, a company is able to have a significant digital presence in the economy of another country without being liable to taxation under current international rules. Also there are issues with attributing value created from the generation of marketable location-relevant data (who does this remind you of?).
You can expect tighter “transfer pricing” proposals for transactions between related companies in a multinational group. Furthermore, the OECD wants to check how to ensure the effective collection of valueadded taxes with respect to the cross-border supply of digital goods and services.
In addition, the OECD intends to develop rules to deal with hybrid instruments (debt in one country, equity in another) and hybrid entities (taxable in one country, ignored in another, e.g. US LLC).
Hybrids are not always good for the tax environment. The result currently is sometimes double non taxation – no tax on receipts in one country, deductible expense in the paying country. The OECD is likely to propose changes to tax treaties and domestic tax laws.
Furthermore, the OECD wants to develop a multinational tax instrument (treaty).
The idea is that individual countries can more quickly agree anti-avoidance tax measures with a number of countries in one go, instead of signing tax treaties with other individual countries that can take years.
Other things the OECD intends to report on by September 2014 include: greater transparency regarding preferential tax regimes (will Israeli preferred enterprises be targeted?); preventing tax treaty abuse; tougher tax rules when intellectual property is moved around and tighter rules regarding transfer-pricing documentation in multinational groups.
By September 2015, the OECD intends to develop recommendations regarding controlled foreign companies – usually offshore companies. Many Western countries (including Israel) have them but they do vary a bit.
Also, the OECD wants to limit interest “excessive” expense deductions for interest on loans and other products from related and third parties.
The OECD will develop rules against so called “commissionaire” arrangements.
These are cross border trading arrangements where a local agent “sells” goods of a foreign supplier that the local agent doesn’t really own. The OECD intends to clarify that the foreign supplier is really doing business via a “permanent establishment” in the local country and ought to pay taxes there.
Also, the OECD plans to develop rules to ensure that “inappropriate returns” will no longer accrue to an entity solely because it has assumed risks or provided capital.
Methodologies will be established for collecting and analyzing data on BEPS and requiring taxpayers to disclose their “aggressive” tax planning arrangements.
Some Western countries including Israel have rules requiring taxpayers to report certain tax shelters they have. Tax treaty dispute procedures will be made more effective although there is a rider slipped in that arbitration may be denied in certain cases. (Comment: If justice is to be denied, this does not augur well for the action plan as a whole...) Some items to be reported on by September 2014 will be further developed by September or December 2015. These include rules regarding interest deductions, transparency and a multilateral treaty.
Comments
There is a perception that multinational corporations have successfully exploited weaknesses in current tax laws and treaties to reduce tax revenues of many governments by large amounts. If the action plan is indeed finished by the end of 2015, individual countries will need to then legislate and implement the OECD action plan.
So tax revenues from multinationals may not increase dramatically for at least a few more years. Of course, it remains to be seen if the action plan will work or whether we’ll merely see cat-and-mouse tactics involving new tax planning techniques to avoid the planned new tax measures.
leon@hcat.co