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OECD Unveils G20 Anti-Evasion Plan

by Ulrika Lomas,, Brussels

22 July 2013

The Organization for Economic Cooperation and Development (OECD) has released an Action Plan it says offers a road-map to governments for the recovery of tax owed.

The Plan has been produced at the request of the G20 group of nations, and was unveiled in time for a meeting of Finance Ministers in Moscow. The G20 asked that the Plan "provide countries with domestic and international instruments that will better align rights to tax with economic activity."

The OECD contends that the process of globalization, while beneficial to domestic economies, has opened up a number of opportunities for multinational enterprises (MNEs) to "greatly minimize their tax burden." The result is a "tense situation in which citizens have become more sensitive to tax fairness issues." In turn, governments are now required to "cope with less revenue and a higher cost to ensure compliance."

Base Erosion and Profit Shifting (BEPS) in particular is seen as having undermined the integrity of the tax system, and the OECD recognizes the additional pressure placed on governments by the portrayal in the media and by the public of low corporate taxes as unfair. This can further harm the reputation of MNEs, while corporations operating only in domestic markets are finding it increasingly hard to compete with those entities "that have the ability to shift their profits across borders to avoid or reduce tax."

The OECD is clear that "fundamental changes are needed to effectively prevent double non-taxation, as well as cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it." The Plan therefore identifies 15 specific actions that should give governments the domestic and international mechanisms to prevent corporations from paying little or no taxes.

The action that is perhaps likely to cause the greatest amount of concern is action number twelve. Under it, taxpayers would be required to disclose any aggressive tax planning arrangements. Governments are called upon to develop recommendations for the design of "mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules."

The OECD argues that these rules would need to be shaped in a way that ensures maximum consistency, but that also allows for country-specific needs and risks. Special focus would need to be placed on international tax schemes, and on the use of a wide definition of "tax benefit," to capture such transactions.

Action thirteen also draws on the need for appropriate transparency, in this instance in transfer pricing documentation. It suggests that regimes be created along a common template, which would require all MNEs to provide relevant governments with specific information on their "global allocation of the income, economic activity, and taxes paid among countries." The development by interested parties of a multilateral instrument "designed to provide an innovative approach to international tax matters," as stipulated in action fifteen, would enable governments to reflect "the rapidly evolving nature of the global economy and the need to adapt quickly to this evolution." The implementation of better and more effective dispute resolution mechanisms is also seen as helpful by the OECD, as action fourteen sets out.

Among the other actions, action one aims at tackling the tax challenges presented by the evolution of the digital economy. It states that governments should identify these issues, and take a "holistic approach" to dealing with them. The Plan moves on to the need to neutralize the effects of hybrid mismatch arrangements, and suggests that model treaty provisions and recommendations regarding the design of domestic rules be drawn up. Similarly, its calls for the development of recommendations regarding the design of controlled foreign company (CFC).

The OECD also believes that preventing any base erosion from the use of interest expense can be done via the evolution of best practices for the design of rules in this area. In conjunction with this, transfer pricing guidance should be established regarding the pricing of related party financial transactions, which should further be coordinated with the work on hybrids and CFCs.

Action five concentrates on the need to "revamp the work on harmful tax practices." Governments are urged to concentrates on improving transparency, and in particular on compulsory spontaneous exchange on rulings related to preferential regimes. To this end, the activity of the Forum on Harmful Tax Practices (FHTP) will be refocused, to create more effective solutions. Action six stresses the need for model treaty provisions regarding the set-up of domestic rules for stopping the grant of treaty benefits in inappropriate circumstances, and action seven calls for changes to the definition of a permanent establishment (PE), to prevent the artificial avoidance of PE status in relation to BEPS.

Actions eight, nine, and ten, are designed to ensure that transfer pricing outcomes are in line with their intentions. The Plan states that a new system should be laid out to prevent BEPS through the movement of intangibles among group members, the transference of risks among, or the allocation of excessive capital to, group members, and the engagement in transactions which would not normally occur between third parties.

The need to establish a set of methodologies for the collection and analysis of data on BEPS, is made clear in action eleven. This would "involve developing an economic analysis of the scale and impact of BEPS (including spill-over effects across other countries), and actions to address it." Existing data sources will need to be assessed, and governments should identify what new types of data can and should be collected.

OECD Secretary-General Angel Gurría said that the Action Plan "marks a turning point in the history of international tax co-operation. It will allow countries to draw up the coordinated, comprehensive and transparent standards they need to prevent BEPS. International tax rules, many of them dating from the 1920s, ensure that businesses don’t pay taxes in two countries - double taxation. This is laudable, but unfortunately these rules are now being abused to permit double non-taxation. The Action Plan aims to remedy this, so multinationals also pay their fair share of taxes."

The Russian Finance Minister, Anton Siluanov, added: "As the presidency of the G20, we commend the work of the OECD to ensure that the international tax system promotes growth and competition without distorting the basic tenets of fairness, that it allows multi-national corporations to prosper without loading a higher tax burden on domestic companies and individual tax payers."

The aim is to deliver on the actions during the course of the next 18 to 24 months.

Commenting, Greg Wiebe, Global Head of Tax at KPMG International, said: "Bringing today’s proposals to fruition within the 24-month timetable presents an enormous challenge. There is undoubtedly an urgent need to work quickly as uncertainty helps no one, but modernizing over 75 years of international tax laws in just two years’ time without jeopardizing the aspects of the current system that operate as intended and are fit for purpose will not be straightforward."

Manal Corwin, principal and national leader for International Corporate Services at KPMG LLP and former deputy assistant secretary for tax policy for international tax affairs at the US Treasury Department, also commented: "Today’s report proposes significant changes to the international tax landscape in a very short period of time. We are encouraged that the OECD is emphasizing the importance of consulting with a range of non-governmental stakeholders as it moves forward. KPMG believes this dialogue is a critical step to the plan’s ultimate success, and we look forward to engaging constructively with the OECD during the consultation process."

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