OECD BEPS Action Plan: Attaining tax symmetry
Now that stakeholders have had a chance to digest the content of the OECD’s Action Plan on Base Erosion and Profit Shifting (the action plan), Sandy Bhogal and Simon Slade of Mayer Brown take another look at some of the action plan’s focus areas, and assess whether the OECD is best-placed to lead international efforts to tackle BEPS.
On July 19 2013, the OECD published its Action Plan on Base Erosion and Profit Shifting (the action plan), which was endorsed unanimously by the G20 finance ministers at their meeting in Moscow the following day.
Given the way businesses are evolving (globalisation, digitisation for example), and the current economic climate, most would agree that tax reform is necessary with one overriding theme being the attainment of tax symmetry between jurisdictions. While the action plan is a positive step towards achieving such reform, it remains to be seen exactly how it will be implemented.
In terms of what reforms will be made, there is no discussion of an alternative tax system, such as a unitary tax, or formulary apportionment, or destination-based taxation. Perhaps this was seen as being too contentious and too difficult to achieve. The IMF recently acknowledged that those in civil society do favour more radical approaches such as these and stated that they "deserve a more thorough and realistic assessment". The UK’s House of Lords also called upon the UK government and the Treasury to "explore the scope for more radical alternative approaches to corporate tax" in a report published on July 31 2013, and they even went so far as to recommend investigation into a destination-based tax and whether the UK could introduce this unilaterally.
Given the scope of the reforms, a large amount of effort will be required to meet the proposed timetable. The proposed output therefore envisages change being brought about at a number of levels:
1. OECD recommendations and changes to existing OECD published guidelines or model treaties. This appears sensible, given that many countries already follow these to a large extent, and there is already ongoing work relating to these.
2. Domestic changes of law: A number of the actions include recommendations regarding the design of domestic rules. Countries will need to decide whether, and to what extent, any of the Actions and recommendations have already been implemented domestically. In the UK for example, we have the anti-arbitrage rules, the controlled foreign companies (CFC) regime and the worldwide debt cap, but do they go far enough? Also, the EC Action Plan will tackle many of the same issues, such as aggressive tax avoidance and use of tax havens. Who will determine whether the measures introduced by each jurisdiction achieve the intended aims and what will be the consequences if they do not? We have seen with EU law that it can be difficult to police local implementation of laws passed at a supra-national level. It is hoped that the detail of the recommendations is such that it provides turnkey legislative solutions which can be adopted expeditiously by each country (much like the Model Treaty).
3. New or amended bilateral treaties: These are seen as providing the solution in a number of areas, and the OECD amendments to its Model Treaty may also make it necessary for countries with existing treaties to update them to include the amendments. Given the number of treaties in existence, this could be an onerous and lengthy task, though the proposed multilateral instrument (the form of which is uncertain) may assist.
4. Multilateral instrument: Action 15 states that the instrument is intended to implement the BEPS and amend bilateral treaties, as well as providing "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". This is wide and ambitious, particularly when it is not clear who will be responsible for producing the instrument. If it works, it might be an efficient solution.
We are likely to end up with a patchwork solution rather than radical wholesale change, but this may prove to be more workable in the shorter term.
The OECD commissioned the action plan, but is the OECD the most appropriate body to be leading the reforms, and what are the alternatives? The OECD is a supra-national NGO without law-making powers. Its members represent a diverse range of jurisdictions across the globe, but it is not all-inclusive, for example, developing countries are hugely under-represented. This may cause problems when it comes to implementation, particularly where a multilateral approach is favoured. To what extent have the views of non-members been canvassed, and how will they be involved in the ongoing process?
Ultimately the OECD can only produce guidance, recommendations and model treaties. That said, the work the OECD has done, and continues to do, in relation to model treaties, transfer pricing and intangibles, arguably makes it best-placed to lead the process and achieves a certain level of inclusivity without becoming too cumbersome.
The G20 commissioned the report, and their finance ministers unanimously approved the action plan the day after it was published, which would suggest some prior knowledge or involvement. If the G20 were to lead reform, this may be seen as too exclusive, whereas it is perhaps seen as diplomatically more appropriate for them to work with the OECD and more subtly influence proceedings.
The EU will undoubtedly play a key role in the reform process and the co-ordination of the European response, but it only represents Europe's interests and probably isn't best-placed to lead. It is also implementing its own action plan in parallel, which has many of the same goals, and it is to be hoped that this will assist with the implementation of the OECD Action Plan.
The UN would be the most inclusive body that could lead the project, but that in itself could give rise to problems in terms of reaching agreement among all of its members. The UN's Tax Committee has provided its own Model Tax Convention between Developed and Developing Countries as well as its Practical Manual on Transfer Pricing for Developing Countries. Its input is likely to be valuable and necessary, particularly in dealing with developing countries. The Global Alliance for Tax Justice, Christian Aid and Oxfam released a joint statement warning that while the action plan was a step forward, it "fails developing countries". They also stress that developing countries will be relying on the UN to represent their views but question the resources available to do this.
So it is clear that while the OECD may be best-placed to lead a review of international taxation, there will be a number of parties whose input will be required if a successful outcome is to be achieved. Everyone will need to play their part, but it is hoped that the collective willpower and political interest that are currently providing momentum can be sustained for long enough to make potentially historic change a workable reality.
Sandy Bhogal is London head of tax, and Simon Slade is a senior associate, at Mayer Brown.