This content is from: Direct Tax

OECD report on base erosion and profit shifting marks new discussion of tax reform

The OECD released its long-awaited report to the G20 on base erosion and profit shifting (BEPS) today. It has been welcomed by business and activists alike, hailing an era of greater dialogue and cooperation to address the weaknesses of the international tax system and tackle avoidance.

A debate at the Centre for the Study of Financial Innovation yesterday concluded that the international tax system is at risk of breaking apart under the strain of aggressive tax competition and avoidance.

The OECD BEPS report is the first step towards fixing this, highlighting the need for greater transparency and a number of key pressure points such as entity and instrument characterisation; application of treaty concepts to profits derived from the delivery of digital goods and services; the tax treatment of related party debt-financing, captive insurance and other inter-group financial transactions; transfer pricing; the effectiveness of anti-avoidance measures; and the availability of harmful preferential regimes.

The report calls for a comprehensive action plan to tackle the problem and it represents the first step in that process.

The Tax Justice Network (TJN), which has in the past been critical of the OECD’s efforts to tackle tax avoidance, hailed the report as a “milestone”.

“Some of us are saying that we could have written it ourselves,” said John Christensen, director of the TJN. “The OECD spent decades with a close focus on preventing double taxation, but it now recognises the systemic problem of double non-taxation and that piecemeal reform will not work. This is a major step forward.”

Andrew Packman of PwC also welcomed the report’s balance, noting that it is unhelpful if there is too much focus on corporates being aggressive.

“It’s better to recognise that the system hasn’t kept up with the way business has developed,” said Packman. “Emphasis on behaviour is a distraction from the real issue, which is the international tax system.”

“We have been saying for a long time that the international corporate tax system is designed for the mid-20th century trading economy rather than the e-enabled world of seamless multinationals we now find ourselves in,” said Chartered Institution of Taxation President Patrick Stevens. “The system needs to change and adapt and that is difficult for individual countries to do: it needs bodies such as the OECD to take a lead.”

The systemic problem is something both activists and businesses agree on. Christensen in particular finds it encouraging that nothing will be left off the table in the discussions to come, which means that some of the TJN’s key demands such as formulary apportionment and combined reporting will be looked at.

“We want more work on how unitary taxation can be applied in practice and how to make multinational companies report by country, and we want to look at the practical issues such as harmonising and accounting definitions,” said Christensen. “We want the OECD and UN Tax Committee to look at revising the model treaty provisions, particularly around articles 7 and 9 to allow unitary taxation.”

Richard Woolhouse, head of tax and fiscal policy at the Confederation of British Industry (CBI), said the UK must continue to work together with other countries through the OECD to update international tax rules, particularly on transfer pricing and intangibles.

ActionAid, however, are concerned that the solutions proposed will not bring significant benefits for the world's poorest countries for years to come.

“The OECD correctly identifies that the lack of a level playing field stifles the development of small businesses, which ultimately stunts economic growth and development,” says ActionAid’s Chris Jordan. “However the incremental reforms it recommends offer limited hope to small business in the short term. A more fundamental revision of the international tax architecture is urgently required.”

But the report will bring all sides together to discuss this problem in a more collaborative and constructive way than has so far been seen. That alone is significant progress.

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