OECD recommendations hailed as ‘important milestone’, and the challenge now is to ensure measures are implemented consistently and coherently.
On Monday 5 October 2015 – two years after the G20 countries tasked the OECD with tackling global corporate tax avoidance by multinational businesses – the OECD published its final reports on its base erosion and profit shifting (BEPS) project. Spanning a total of almost 2,000 pages, the final BEPS package consisted of the BEPS project’s 15 action points, condensed into 13 reports.
The aim is to provide governments with solutions for closing the gaps in existing international rules that allow corporate profits to ‘disappear’ or be artificially shifted to low-tax or no-tax environments, where little or no economic activity takes place. The OECD conservatively estimates annual revenue losses from BEPS at US$100–240bn, or anywhere from 4–10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is said to be particularly significant.
Presenting the final BEPS package was Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration. Speaking in Paris, Saint-Amans insisted that, contrary to reports, there was consensus among countries on the package as a whole, particularly on BEPS actions covering transfer pricing-related topics.
OECD secretary-general Angel Gurría added: ‘The BEPS project has shown that all stakeholders can come together to bring about change. Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.’
The package was welcomed by the European Commission, with the European Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici, hailing it as ‘a very important milestone towards greater tax transparency and efficiency’.
‘We must now ensure that these measures are implemented consistently and coherently, to ensure a level playing field for all businesses and countries involved,’ said Commissioner Moscovici. ‘The action plan that the EC presented in June launched an ambitious process of corporate tax reform, aligned to the BEPS project and tailored to the European single market. We need to move forward decisively with this revolution in tax transparency, and the EU can lead the way – starting with a robust agreement on the automatic exchange of information on tax rulings which [we saw] at Tuesday’s ECOFIN Council.’
In the UK, Rain Newton-Smith, CBI director for economics, called for the OECD’s measures to be fully assessed at a national level, adding: ‘The cooperation of governments to put in place an effective, efficient and timely inter-country dispute resolution mechanism is now essential, as it is currently absent from the international tax environment. Our tax system should address BEPS activity as well as the risk of double taxation, while signalling that the UK remains open to business and investment.’
Some of the more critical views came from NGOs. ActionAid tax policy advisor Anders Dahlbeck slammed the OECD’s proposals for international tax reform as ‘cooked up by a club of rich countries’ and which ‘fail to properly tackle tax avoidance by large multinationals’.
Meanwhile, Christian Aid’s principle advisor on economic justice, Toby Quantrill, called it a ‘sticking-plaster approach’, which was ‘a long way from the comprehensive, effective solution that is required’.
The proposals ‘failed to challenge the fiction that multinationals’ subsidiaries are independent of each other’, but Quantrill acknowledged that the OECD’s recognition of the value of country by country reporting was a positive.
Bill Dodwell, head of tax policy at Deloitte, said the announcements ‘make it clear that profits will need to be allocated to where people are carrying out valuable functions, rather than a company with legal rights but no staff. It should bring to an end to the idea that you can assign legal rights to a sandy island with no tax and no people and then have that company receive a lot of profits. The G20/OECD working group notes that the fiscal effects of BEPS are significant. This could mean that the tax rates for many multinationals will rise by several percentage points.’
KPMG’s head of tax policy, Chris Morgan, agreed: ‘Broadly speaking, multinationals will see their tax bills go up when these recommendations are implemented. Those most likely to face higher tax costs are those affected by the rules around permanent establishments, interest deductibility and hybrid arrangements. Perhaps increased tax bills are to be expected given the sums involved.’
Practitioners have raised concerns about the OECD recommendation that countries amend their tax laws to restrict the availability of tax relief for interest deductions, with countries free to pick a percentage level within a range (10–30%). In a client briefing, Dan Neidle (Clifford Chance) noted that these recommendations ‘represent a hugely significant change for many jurisdictions’. He explained: ‘Some jurisdictions, such as Germany, already have “interest barrier” rules and other restrictions on interest deductibility very similar to those proposed here. Others, such as the UK, Ireland, Luxembourg and the Netherlands, do not.’
Heather Self, partner at Pinsent Masons, warned of the impact on infrastructure projects, but said that the potential exemption for ‘public benefit projects’ could offer a ‘glimmer of hope’. She said: ‘Although the proposals offer hope for infrastructure companies engaged in PFI projects and the like, it seems unlikely that the UK will be able to introduce an exemption that will be wide enough to benefit energy companies, even though these sorts of projects are not likely to give rise to the tax risks that the OECD project is intended to address.’
Wendy Nicholls, tax partner at Grant Thornton, said: ‘The OECD deserves much credit for the progress it has made in the last two years. But although the reports [this week] have been billed as the “final” BEPS reports and will be applauded by the G20 at their meetings in Lima this week, the devil is in the detail. The OECD admits there is much work to be done over the next months and years, and a lot will depend on implementation – or otherwise – by countries themselves.'
Chris Bates, partner at Norton Rose Fulbright, similarly observed that the OECD had introduced a 'comprehensive and complex suite of measures' to address aggressive tax planning by multinational organisations. 'Delivering these measures is a considerable achievement, but this feels like a beginning not an end.’
OECD recommendations hailed as ‘important milestone’, and the challenge now is to ensure measures are implemented consistently and coherently.
On Monday 5 October 2015 – two years after the G20 countries tasked the OECD with tackling global corporate tax avoidance by multinational businesses – the OECD published its final reports on its base erosion and profit shifting (BEPS) project. Spanning a total of almost 2,000 pages, the final BEPS package consisted of the BEPS project’s 15 action points, condensed into 13 reports.
The aim is to provide governments with solutions for closing the gaps in existing international rules that allow corporate profits to ‘disappear’ or be artificially shifted to low-tax or no-tax environments, where little or no economic activity takes place. The OECD conservatively estimates annual revenue losses from BEPS at US$100–240bn, or anywhere from 4–10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is said to be particularly significant.
Presenting the final BEPS package was Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration. Speaking in Paris, Saint-Amans insisted that, contrary to reports, there was consensus among countries on the package as a whole, particularly on BEPS actions covering transfer pricing-related topics.
OECD secretary-general Angel Gurría added: ‘The BEPS project has shown that all stakeholders can come together to bring about change. Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.’
The package was welcomed by the European Commission, with the European Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici, hailing it as ‘a very important milestone towards greater tax transparency and efficiency’.
‘We must now ensure that these measures are implemented consistently and coherently, to ensure a level playing field for all businesses and countries involved,’ said Commissioner Moscovici. ‘The action plan that the EC presented in June launched an ambitious process of corporate tax reform, aligned to the BEPS project and tailored to the European single market. We need to move forward decisively with this revolution in tax transparency, and the EU can lead the way – starting with a robust agreement on the automatic exchange of information on tax rulings which [we saw] at Tuesday’s ECOFIN Council.’
In the UK, Rain Newton-Smith, CBI director for economics, called for the OECD’s measures to be fully assessed at a national level, adding: ‘The cooperation of governments to put in place an effective, efficient and timely inter-country dispute resolution mechanism is now essential, as it is currently absent from the international tax environment. Our tax system should address BEPS activity as well as the risk of double taxation, while signalling that the UK remains open to business and investment.’
Some of the more critical views came from NGOs. ActionAid tax policy advisor Anders Dahlbeck slammed the OECD’s proposals for international tax reform as ‘cooked up by a club of rich countries’ and which ‘fail to properly tackle tax avoidance by large multinationals’.
Meanwhile, Christian Aid’s principle advisor on economic justice, Toby Quantrill, called it a ‘sticking-plaster approach’, which was ‘a long way from the comprehensive, effective solution that is required’.
The proposals ‘failed to challenge the fiction that multinationals’ subsidiaries are independent of each other’, but Quantrill acknowledged that the OECD’s recognition of the value of country by country reporting was a positive.
Bill Dodwell, head of tax policy at Deloitte, said the announcements ‘make it clear that profits will need to be allocated to where people are carrying out valuable functions, rather than a company with legal rights but no staff. It should bring to an end to the idea that you can assign legal rights to a sandy island with no tax and no people and then have that company receive a lot of profits. The G20/OECD working group notes that the fiscal effects of BEPS are significant. This could mean that the tax rates for many multinationals will rise by several percentage points.’
KPMG’s head of tax policy, Chris Morgan, agreed: ‘Broadly speaking, multinationals will see their tax bills go up when these recommendations are implemented. Those most likely to face higher tax costs are those affected by the rules around permanent establishments, interest deductibility and hybrid arrangements. Perhaps increased tax bills are to be expected given the sums involved.’
Practitioners have raised concerns about the OECD recommendation that countries amend their tax laws to restrict the availability of tax relief for interest deductions, with countries free to pick a percentage level within a range (10–30%). In a client briefing, Dan Neidle (Clifford Chance) noted that these recommendations ‘represent a hugely significant change for many jurisdictions’. He explained: ‘Some jurisdictions, such as Germany, already have “interest barrier” rules and other restrictions on interest deductibility very similar to those proposed here. Others, such as the UK, Ireland, Luxembourg and the Netherlands, do not.’
Heather Self, partner at Pinsent Masons, warned of the impact on infrastructure projects, but said that the potential exemption for ‘public benefit projects’ could offer a ‘glimmer of hope’. She said: ‘Although the proposals offer hope for infrastructure companies engaged in PFI projects and the like, it seems unlikely that the UK will be able to introduce an exemption that will be wide enough to benefit energy companies, even though these sorts of projects are not likely to give rise to the tax risks that the OECD project is intended to address.’
Wendy Nicholls, tax partner at Grant Thornton, said: ‘The OECD deserves much credit for the progress it has made in the last two years. But although the reports [this week] have been billed as the “final” BEPS reports and will be applauded by the G20 at their meetings in Lima this week, the devil is in the detail. The OECD admits there is much work to be done over the next months and years, and a lot will depend on implementation – or otherwise – by countries themselves.'
Chris Bates, partner at Norton Rose Fulbright, similarly observed that the OECD had introduced a 'comprehensive and complex suite of measures' to address aggressive tax planning by multinational organisations. 'Delivering these measures is a considerable achievement, but this feels like a beginning not an end.’
