The evolving focus of G20 and OECDJanuary 8, 2013
Four years have passed since the height of the financial crisis. In those four years, taxation has become front page news like never before; fiscal stimulus has been followed by fiscal austerity and tax now makes headlines the world over.
This article was first published in the Ernst & Young Global Tax Policy and Controversy Briefing, Issue 11, December 2012 (pdf, 4.26 MB)
But while the policy gyrations of the last few years have been fast, furious and a real challenge for the corporate tax function to monitor and assess, of equal interest is how rapidly and fundamentally the global enforcement landscape continues to be shaped in response to not only the uncertain global (not to mention European) economy, but to the changing dynamics of global business.
A signal that the enforcement landscape is taking a brand new direction was indicated at the recent G20 meeting in Los Cabos, Mexico. The large number of players trying to shape and influence the tax landscape continues to bring a real challenge at a time when business is already under significant stress. Tax used to be largely a local issue with the rules set by each country.
Today for many multinationals, that model is over and the web of stakeholders influencing (or attempting to influence) how multinationals are taxed is more complex than ever. For the corporate tax director, this shift in enforcement is key; financial and reputational risk related to tax is probably higher than ever.
Monitoring the agenda of country, regional and global stakeholders can provide foresight of what enforcement issues will likely be a focus at the local level in the future. A new set of activities from the OECD means this is now more important than ever.
A crystallizing set of views
In the past there appeared to be little coordination behind the efforts by all of the various stakeholders — including the G20, OECD, EC, EU, IMF, UN, ATAF, CIOT and CIAT. Some activities — particularly those launched at the height of the crisis, when virtually all stakeholders walked in lockstep — had a profound effect, such as the approach to growing the volume of information exchange and cooperation among countries.
Some roared in like a lion but left like a lamb, however. Across the stakeholder groups there has been a lot to keep up to date on, little visibility of a cohesive strategy. The publication of one short sentence in recent months, though, seems to indicate that this is now changing.
The Los Cabos communiqué
When the G20 convened in Los Cabos, Mexico, in June of this year, not a great deal was expected to be communicated on the tax front — at least not in comparison to other G20 meetings of recent years where more sizable tax news had been made. Instead, the meeting was expected to focus almost exclusively on the European debt crisis.
But the addition of one single sentence to the end-ofmeeting communiqué in fact encapsulates what is occurring at the heart of global collaboration in the area of tax. That sentence read: “We reiterate the need to prevent base erosion and profit shifting and we will follow with attention the ongoing work of the OECD in this area.”
That sentence concluded a longer tax section of the communiqué, which read:
“ In the tax area, we reiterate our commitment to strengthen transparency and comprehensive exchange of information. We commend the progress made as reported by the Global Forum and urge all countries to fully comply with the standard and implement the recommendations identified in the course of the reviews, in particular the 13 jurisdictions whose framework does not allow them to qualify to phase 2 at this stage. We expect the Global Forum to quickly start examining the effectiveness of information exchange practices and to report to us and our finance ministers. We welcome the OECD report on the practice of automatic information exchange, where we will continue to lead by example in implementing this practice. We call on countries to join this growing practice as appropriate and strongly encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance. We also welcome the efforts to enhance interagency cooperation to tackle illicit flows including the outcomes of the Rome meeting of the Oslo Dialogue. We reiterate the need to prevent base erosion and profit shifting and we will follow with attention the ongoing work of the OECD in this area.”
(Communiqué from G20 leaders meeting — Los Cabos, Mexico, 18-19 June 2012.)
That last sentence, represents how the G20 — with the OECD providing day-today operational support — is shifting its focus. As with many political messages, the precise meaning of the sentence is representative of the tip of an iceberg, with many layers of detail yet to be seen under the surface.
Deciphering the message
Dr. Jeffrey Owens, recent director of the OECD’s Centre for Tax Policy and Administration and a new appointee to Ernst & Young’s global Tax Policy and Controversy network as Senior Policy Advisor to the Global Vice-Chair of Tax Services, has clear views as to the importance of this.
“I think that this represents the beginning of the G20 taking a greater interest in multinationals and transfer pricing, even though they didn’t specifically include the words ‘transfer pricing’ in the communiqué,” said Owens.
“This is an item that was pushed by India, South Africa and Brazil ahead of the G20 meeting, but interestingly with not that much enthusiasm on the part of the OECD G20 countries. I see it as lending political support to the work that OECD is doing on intangibles, as well as the organization’s other work on transfer pricing.
The BRICS would also see this as an indirect way to support the United Nations work on transfer pricing. You can also see this as the beginning of a shift away from the G20 just focusing on high-net-worth individuals to bringing MNCs more explicitly into the G20 tax work, reflecting the campaign by nongovernmental organizations and charities in the last few years.”
This potential interest of the G20 in transfer pricing aligns closely to what readers of this publication saw in our June 2012 issue as Owen’s successor at the OECD, Pascal Saint-Amans, set out transfer pricing as one of his three key priority areas as he takes up the reins in his influential role: “My second priority is that we need to address transfer pricing, which is an undertaking that creates some difficulties in our relationship with non-OECD countries, and also difficulties within the OECD,” said Saint-Amans.
“One goal is to limit double taxation. Interest in transfer pricing has been growing for 20 years, and it’s still growing. So how do you best use transfer pricing to avoid double taxation? Which standard? Which practices? Which APAs? Which MAP? Which arbitration? I’m quite impatient with endless discussions, and I want to deliver some progress. So I would like to shake up that process so that we don’t merely reproduce the discussions we had on arbitration five years ago.”
It is interesting to note that Saint-Aman’s comments focused exclusively on the role of transfer pricing in limiting double taxation, which is a long-standing and critically important objective of the transfer pricing standards and the related provisions of bilateral tax treaties. Indeed, he made no reference to base erosion and profit shifting in those comments on transfer pricing.
Shifting focus of the OECD and the emergence of the BEPS project
During the course of the financial crisis, the OECD has been a central character in the global tax debate. In this recent period, the OECD has been particularly vocal with respect to the international cooperation area, including both the wider tax information exchange program and the “peer review” program within which countries assess the quality, ability and willingness to exchange such information, which have long been areas of focus for the OECD but which have come more to the fore in the last few years.
The OECD also pursued some projects that were, perhaps, more reactionary in nature, dealing with specific topics and issues such as enhanced relationships between taxpayers and tax authorities, issues affecting high-net-worth individuals, bank losses and joint audits of taxpayers. Many of these projects reflect issues that had to be dealt with very quickly in the fallout from the financial crisis.
During this period, the traditional core work of the OECD in the areas of tax treaties and transfer pricing has taken a bit of a back seat in relation to other more pressing requirements, but has continued uninterrupted.
The OECD’s Base Erosion and Profit
Shifting project (hereafter referred to as the “BEPS” project) represents something of a joining up of the traditional focus areas of the OECD with the newer areas of focus, and, interestingly, did not actually attract a “formal” launch in the manner that is customary for OECD projects. This is interesting for a project of such seeming importance.
About the BEPS project
The OECD’s website indicates that the BEPS project “is looking at whether, and if so why, Multinational Enterprise’s (MNE’s) taxable profits are being allocated to locations different from those where the actual business activity takes place.”
Based on the findings of an initial environmental scan, the OECD plans to implement what it describes as an “integrated and holistic approach to improve the concrete tools it has to address base erosion and profit shifting.” According to its website key areas of work of the OECD in which this is a current focus include:
- Harmful tax practices
- Aggressive tax planning
- Transfer pricing
- Tax treaties
- Tax policy and statistics
- Tax and development
- Tax compliance
The OECD has set out its aim as providing “comprehensive, balanced and effective strategies for countries concerned with base erosion and profit shifting.” The OECD states that essential elements of this framework include the arm’s length principle and the elimination of double taxation as well as the elimination of inappropriate double non-taxation, “whether that arises from aggressive strategies put in place by taxpayers or from tax policies introduced by national governments.”
The OECD cites the pressures of economic recovery and the need to combine a focus on competitiveness with efforts to ensure that business bears its fair share of the tax burden in answer to the question “why now?”
The OECD states that many (it does not say who) are questioning why so many multinational companies — and in particular those that are IP-intensive — have effective tax rates that seem to be dramatically lower than the statutory rates of the countries in which they operate. In this regard, the OECD acknowledges that certain items of income may be tax-exempt or taxed on a deferred basis, which is a main reason for the difference between effective tax rates and statutory tax rates.
But, at the same time, it also statesthat “a number of MNEs are also using aggressive strategies to minimize their tax burden.”
This view is clearly shared by Masatsugu Asakawa, the Chair of the OECD Committee on Fiscal Affairs (to which the BEPS project will provide an interim report in 2013) and Deputy Vice-Minister of Finance for International Affairs, Japan. In a recent edition of World Commerce Review, Asakawa writes:
“ … this gap [between an MNE’s effective tax rate and the statutory rate of the country in which they operate] has clearly broadened and this is largely due to aggressive positions taken by some MNEs. Many of these strategies can be entirely legal. In some cases they may be responses to the lack of effective countermeasures in the tax system. In other cases, they may be based on provisions wilfully put in place by governments. Nevertheless, the results of these strategies put a spotlight on the tax system and require reflection by policymakers and other stakeholders. At stake is the ongoing credibility of the domestic and international tax systems that are key foundations for long-term growth and for reducing inequalities.”
Intangibles in the spotlight
While the particular parameters of the BEPS project seem not to have been determined yet, it is clear that transfer pricing, and in particular those elements of transfer pricing addressing intangibles, will be an area of focus. Transfer pricing, of course, represents one of the most significant compliance burdens and sources of tax risk for multinational companies.
In fact, both taxpayers and tax administrators reported transfer pricing as their leading source of risk in our 2011–12 Tax risk and controversy survey. Transfer pricing is inherently complex because it can be very difficult to compare transactions between companies in a multinational corporation to deals between unrelated parties.
As difficult as they are, and even though they can lead to significant disagreement and controversy because of the fact-intensive nature of the analysis, such hypothetical comparisons are the long-established, globally agreed standard for determining and evaluating transfer pricing. What eventual impact the BEPS project might have on OECD transfer pricing guidelines is, at this point, not clear.
Indeed the OECD is due to issue revised guidance on transfer pricing intangibles in 2013, following this summer’s comment process on the OECD discussion draft in this area and the upcoming public meeting on intangibles to be held at the OECD meeting center in Paris in November.
It seems that given the depth and complexity of carrying out an environmental scan on the perceived difference between MNC effective tax rates and actual statutory rates, reaching consensus on what causes the difference (assuming one is found) and then developing and implementing a consistent, manageable set of guidelines, regulations, and, not unlikely, penalties for infringements will be no easy or quick task.
Others join the debate
Of course, if the tax policymakers and tax administrators of the world were collaborating, coordinating and being influenced by a single multi-member entity (such as the OECD) that would be one thing; the truth is, of course, there are multiple such entities, each with its own stakeholders, all simultaneously seeking to influence the activity of not only governments but the taxpayers who ultimately foot the bill.
This creates additional layers of complexity for tax directors who are trying to manage risk and support their business through effective (not to mention legal) tax planning. Other sets of guidance and regulation often find their genesis in the European Union. Currently, 21 of 27 EU Member States also share membership with the OECD.
Many of the tax coordination (for want of a better word) activities of the EU (or EC) are similar in nature to those of the OECD, although the relationship among EU members is very different than the status of OECD members.
A key example is the issue of double non-taxation; within just days of each other, the EC and the OECD issued papers dealing with so-called “double non-taxation” situations. On 29 February 2012, the EC launched its public consultation on factual examples of double non-taxation cases, while a week later, the OECD published a report that focuses on hybrid mismatch arrangements.
Another example is the European Union activity in the area of aggressive tax planning. The EC in June 2012 published a communication on concrete ways to reinforce the fight against tax fraud and tax evasion.
“Before the end of 2012, the Commission will also set out a ‘stick and carrots’ approach to dealing with tax havens, and measures to deal with aggressive tax planners,” said Algirdas Šemeta, European Commissioner responsible for taxation and customs union, audit and anti-fraud, when discussing the EC’s latest communication on the topic in late June 2012.
In our view, the occurrence of double taxation (especially in transfer pricing) and the implication by Asakawa that individual governments still have a road ahead of them to harmonize their systems should be the key focus area for G20, the OECD and all other supra-national organizations.
Information exchange — another example of “plates to be juggled”
The vast and growing array of taxpayer information exchange mechanisms in place around the world is another area that tax directors may feel does not impact them quite so directly, and in our view, this is a mistake. However, this is an area that business should be watching keenly.
In that regard, building an understanding of the different information exchange mechanisms into pre-controversy strategy is increasingly important. Unfortunately, this is no easy task as the global information exchange model now operates on so many different dimensions.
On one dimension, the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes reports that more than 800 bilateral tax information exchange agreements are now in place between countries. While few statistics are published, that these agreements are used on a regular basis is quite evident.
Indeed, as recently as September 2012, the Australian Taxation Office (ATO) Assistant Deputy Commissioner, International, Large Business & International, Michael O’Neill, confirmed that the ATO expects to conduct several joint audits with the IRS this year that information exchange is used within this context is undeniable. Of course, country-to-country tax information exchange represents only one dimension.
To gain the maximum leverage of such data, a multilateral instrument was needed by global tax authorities in order to make such data fully shareable. Two such vehicles now exist — again, one under the auspices of the OECD and another for the European Union.
The OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters was originally developed by the OECD and the Council of Europe in 1988 and was refreshed in 2010 to enable three main things:
- The multilateral element of exchange that exists today
- Making the agreement available to non-OECD countries
- Aligning the agreement to the internationally agreed standard on exchange of information for tax purposes.
In that regard, it provides that bank secrecy and a domestic tax interest requirement should not prevent a country from exchanging information for tax purposes. In addition, it is important to note that the agreement also provides for the automatic exchange of information as well as for information exchange on request.
Since the 2011 Cannes G20 Summit, seven additional countries — Argentina, Colombia, Costa Rica, Greece, India, Ghana and Tunisia — have signed the agreement. The number of signatory countries now stands at 37 and, in the most recent news, July 2012 also saw the OECD announce that the agreement has been further modified to allow for group requests, meaning tax authorities are able to ask for information on a group of taxpayers (without naming them individually) as long as the request is not a “fishing expedition.”
Europe and Africa
In the European Union, meanwhile, political agreement was reached in 2010 on a draft of the Council Directive on administrative cooperation in the field of taxation, with this Directive effectively delivering a complete overhaul of the 1977 Directive 1977/799/EEC.
The scope of the improved administrative cooperation Directive is widened over and above that of the 1977 Directive to include all taxes except those that are dealt with by separate EU legislation (for example, the VAT Directive), while a new set of common rules of procedure, forms and information channels allows the tax authorities of the Member State to make administrative enquiries in the territory of the other Member State.
In order to allay the risk of Member States making imprecise requests aimed at detecting irregularities (“fishing expeditions”), the Council of the European Union agreed to identify in the Directive certain details that must be specified in requests for information, namely the identity of the person under investigation and the tax purpose for which the information is sought.
The Council also agreed on a step-by-step approach aimed at eventually ensuring unconditional exchange of information for eight categories of income and capital, and from 2015, Member States will automatically communicate information for a maximum of five categories, provided that that information is readily available.
Aside from the fact that the European Union mechanism of information exchange represents one more layer of detail for taxpayers to be aware of, a key question is whether information shared between country A and country B could be shared with country C given the multilateral nature of each mechanism.
On this point there does not yet seem to be global agreement. The global, multilateral web of information has now been created and continues to be built out month after month, with additional players, such as the African Tax Administration Forum (ATAF), joining the dialogue.
“Gradually, more and more multilateral forms of cooperation are emerging” said Mr. Logan Wort, ATAF Executive Secretary, at a July 2012 ATAF conference. “… and we have taken to the global trend to develop one that is representative of the needs of African revenue authorities.” This is one of many areas in which business has to stay connected to multiple interested parties.
Countries have their say, too
The examples outlined above show how many different dimensions the corporatetax function now has to monitor and assess as new players enter the global tax landscape. Indeed, the examples do not take into account measures put in place by the countries themselves particularly those less willing to adopt standards developed by others.
As 2012 has progressed, this dimension has become more and more evident, illustrated by the number of countries now either proposing a new General Anti-Avoidance Rule (India, United Kingdom) or strengthening existing GAAR (Australia, and, perhaps, soon, China), not to mention driving through new Specific Anti-Abuse Rules (SAAR) covering a range of tax issues.
Adding it all up
In summary, the OECD, has embarked on a project that attempts to tie multiple strands of activity together. The BEPS project is still going and it impact not yet evident. Monitoring the BEPS project and similar activities by other interested parties should now be a line item on the “to do” list of tax directors.
As outlined in our 2009 publication Tax administration without borders, “… by understanding the context in which tax policy and tax administration decisions are made, and assessing the potential impact of new legislation on existing and planned tax positions, companies can get a head start on implementing a pre-controversy strategy.”
An interim report from the BEPS project team is expected to be discussed by the Committee on Fiscal Affairs in 2013, though there is little visibility currently on when exactly and what the next steps might be thereafter.
Questions or comments? Contact T Magazine and Ernst & Young