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Russo: “A comprehensive package of measures has been agreed.” |
Pascal Saint-Amans, Raffaele Russo and their tax colleagues at the OECD are happy people after the publication of the second and final set of proposals to tackle base erosion and profit shifting (BEPS), following two years of intensive talks.
It is a considerable achievement on the part of the Organisation, the G20, and other countries and multilateral bodies involved in the negotiations as participants or observers. The minority of people who thought in 2013 that there was nothing much wrong with how cross-border taxation rules worked, as well as those who called publicly for reform but hoped the OECD, which was mandated by the G20 to lead the work, would fail to come up with anything, must admit to that.
The recommendations and reports – the first set came out in September 2014 – cover all the elements of the international tax system from transfer pricing and the digital economy, to dispute resolution, harmful tax practices and a plan to assess how much is lost due to BEPS. Consensus was not possible on everything. What has been agreed is referred to as a mix of "minimum standards…revisions of existing standards…common approaches and guidance drawing on best practices".
In an interview with International Tax Review, Saint-Amans, the director of the OECD's Centre for Tax Policy and Administration, and Russo, the head of the BEPS project at the Centre, emphasised what had been done in the work, which was organised into 15 action points.
"We are extremely satisfied with the results," they said. "They go much further than the expectations, especially of private practice, who thought the BEPS Action Plan would go nowhere.
"It's a package with all the different measures, with much more emphasis on what happens on the ground, for example, in transfer pricing, rather than the legalistics. That's not to say contracts aren't important, but where there is no alignment, the legal arrangements won't drive the transaction. The emphasis is on who controls the transaction. It's a wake-up call. What has happened has been a legalistic reading of the rules. That's over."
The work generated an extraordinary amount of interest and attention from the beginning. More than 12,000 pages of comments were received on the 23 discussion drafts published and discussed at 11 public consultations, as well as more than 40,000 views of the OECD webcasts on BEPS.
Comprehensive package
An explanatory statement accompanying the documents sets out what has been agreed between the countries:
"A comprehensive package of measures has been agreed upon. Countries are committed to this comprehensive package and to its consistent implementation. These measures range from new minimum standards to revision of existing standards, common approaches which will facilitate the convergence of national practices and guidance drawing on best practices… Recognising the need to level the playing field, all OECD and G20 countries commit to consistent implementation in the areas of preventing treaty shopping, country-by-country reporting ( CbCR), fighting harmful tax practices and improving dispute resolution."
The explanatory statement added that not all countries involved in the process have endorsed "the underlying standards" on tax treaties and transfer pricing, and on recommendations on hybrid mismatch arrangements and best practices on interest deductibility, countries have agreed a "general policy direction". As well as this, countries which intend to bring forward measures on mandatory disclosure and controlled foreign corporations will do so through "guidance based on best practices".
One area where there was agreement was on CbCR, where a three-part approach will require taxpayers to submit a master file, covering global business operations and transfer pricing policies; a local file, detailing country-specific related-party transactions, the amounts concerned and how the transfer prices used were calculated; and an annual country-by-country report for each jurisdiction in which a large multinational company does business, which should include the amount of revenue, profit before income tax and income tax paid and accrued, number of employees, stated capital, retained earnings and tangible assets in that jurisdiction.
Breakthroughs
Saint-Amans and Russo point to a number of other breakthroughs: "The special approach to hard-to-value intangibles allows tax administrations to look back, to look at the income raised by the intangible, where an intangible is genuinely hard to value.
"On treaties there was agreement on the problem of treaty shopping and that it had to be tackled, but there was a divergence of views on whether the way to do it was through the principal purpose test or limitation of benefits [clauses].
"The discussion on the digital economy tried to clear the air in a very confused debate. Double non-taxation was one of the issues, but the discussion also looked at direct and non-direct taxation. These are BEPS issues not online issues. There was agreement that the destination principle should apply in VAT and the need to conclude simplified mechanisms for collection that build on the mini one-stop shop (MOSS) in the EU. Now Japan, Australia, South Korea and Canada are all doing it where providers of electronic services are having to account for VAT. This is big, particularly in the context of the level playing field. This is not a problem of nexus, but one of BEPS. We expect it to be solved.
"The permanent establishment (PE) report doesn't go as far as a digital PE, but there are still pretty meaningful changes."
Implementation
The publication of the reports and recommendations does not mark the end of all discussion on BEPS. Implementation and the negotiation of a multilateral instrument to modify bilateral tax treaties as a result of the BEPS work on treaty issues, are the next challenges. Some extra technical work will also be required in 2016 and 2017 to finalise, for example, transfer pricing guidance on the application of transactional profit split methods and on financial transactions, and measures to prevent treaty abuse through treaty shopping.
At their meeting in Ankara in September, the G20's finance ministers instructed the OECD to prepare a framework for implementation, to include interested non-G20 jurisdictions, especially in the developing world, by early next year. And December 31 2016 has been set as the deadline for conclusion of the drafting of the multilateral instrument.
The OECD and the G20 will continue to cooperate on BEPS issues until at least 2020, when a review of what has been achieved will take place.
"There will be a reassessment of CbCR in 2020 and whether it is producing the information expected," said Saint-Amans and Russo. "The same with the issues about residence in the digital economy. In 2020 more data will be available and it will be possible to analyse it."
The two are aware there will be opposition to, and scepticism about, what has been achieved.
"Critics will be those who benefit from the status quo and NGOs [non-governmental organisations] who wanted formulary apportionment. They (NGOs) would have wanted something different, but what about the political feasibility of such an approach?
"The BEPS project has strengthened the international-standard approach to tax rules in a multilateral fashion. It took 12 years to agree the work on the attribution of profits to a PE; this took two. We see 85% of the glass as full. If anyone wants to focus on the 15%, that's their problem."
