Sonia Velasco of Cuatrecasas Gonçalves Pereira explores recent developments for international taxpayers.
"Efforts to ensure that all pay their fair share of taxes are clearly to be endorsed but these initiatives should not only include multinationals and big corporations, (who now often find themselves the target of public debate), but of all of us, low or high taxpayers."
2013 is a year of tumult and, perhaps, fundamental change in the tax world. Topics such as base erosion, profit shifting, transfer pricing, taxation of digital businesses, transparency and the morality of tax planning are continuously in the press, usually in a negative and often uninformed way.
The OECD has very recently released an ambitious action plan to address base erosion and profit shifting. The EU and other jurisdictions (including the United States and the United Kingdom) are also considering a fundamental reform of the entire approach to taxing international transactions.
In February 2013, the OECD released a report on base erosion and profit shifting (BEPS) that placed the need to analyse the current principles of international taxation on the political agenda.
The BEPS report concluded that there was no evidence to prove the existence of BEPS and how BEPS affects the tax income of countries but also concluded that the current rules on international tax needed to be reviewed. The report recommended the development of an action plan to address BEPS. This plan was released on 19 July 2013 with the support of the G20 finance ministers who publicly endorsed the action plan.
The BRICS countries (Brazil, Russia, India, China and South Africa), seem to support the plan also. In this sense, the OECD plans to launch a BEPS project under which interested G20 countries that are not OECD members will be invited to contribute to the project and expected to associate themselves with its outcome. The OECD will coordinate with the United Nations.
The action plan focuses on three main areas: (i) establishing international coherence in corporate tax, (ii) restoring the full effects and benefits of international standards, and (iii) ensuring transparency and exchange of information. Each action has its own deadline and proposed next steps. The OECD has set three deadlines within which the work must be completed: September 2014, September 2015, and December 2015.
The first group focuses on hybrid mismatches, implementation of efficient CFC rules, limiting interest deductions and abolishing harmful tax practices.
The second group focuses on preventing treaty abuse, practices related to avoiding permanent establishments, and changing transfer pricing rules for intangibles.
The third group concerns transparency, disclosing aggressive tax planning arrangements to tax authorities, exchanging information, and dispute resolution as a mechanism to resolve international disputes.
The OECD’s proposed measures to implement the actions involve modifying the OECD model tax treaty and transfer pricing guidelines, and developing a multilateral instrument to provide an innovative approach to international tax matters.
The main problem of this initiative is that the OECD cannot change the law, and it requires the support of each jurisdiction to implement the project. Agreeing on the basic concepts is complex, but implementing the principles consistently in each jurisdiction is much more complex. Domestic tax laws and tax treaties must be changed to implement it.
However, something is clearly changing, which taxpayers, especially those with interests in many jurisdictions, cannot afford to ignore.
Tackling BEPS has gained sufficient political momentum for some form of change to occur in due course. Certainly it has already happened with regard to the automatic information exchange with the strong political support of the main jurisdictions but there will be much more than that if there is enough political support for the OECD initiative.
Based on these developments, all multinationals should consider the potential implications of the action plan on their global activity and taxation.
That said, responsible multinationals have been implementing structures that conform to existing laws for many years. Multinationals have been steadily increasing the scope and sophistication of their tax compliance and reporting for a long time. Many take great care to only undertake tax planning initiatives that comply with applicable laws of the jurisdictions involved, as well as with the facts of the underlying business transactions themselves.
Efforts to ensure that all pay their fair share of taxes are clearly to be endorsed but these initiatives should not only include multinationals and big corporations, (who now often find themselves the target of public debate), but of all of us, low or high taxpayers.