The OECD will have ‘plenty of economic analysis to drawn upon’ during the course of the BEPS project but there is a need for more commentary on practical questions, according to a former City tax lawyer.
John Watson, former head of tax at Ashurst LLP, wrote Multinationals and the great tax debate, a paper published by LexisNexis and distributed with last week’s Tax Journal.
He noted that ‘rather less material is written from a practical point of view and, in putting together systems designed to limit tax avoidance, it is practical questions which will govern how robust those systems are’.
Watson suggested that it was no surprise that practical commentary had ‘fallen behind the economic’. With some honourable exceptions, he said, practitioners were ‘reluctant to get drawn into a debate about how best to proof the tax system against exploitation’, partly because of time constraints and ‘also, perhaps, because their clients would not wish them to do so’.
Opportunities for tax avoidance could be reduced by unifying tax rates, Watson said. He concluded that ‘the existing transfer pricing system should be left as it is, with the current OECD guidelines being preferred to a general move to unitary tax’. However, in a discussion on unitary taxation, he pointed out that basing the tax charge on a group’s consolidated accounts was ‘not quite as radical as it might sound’.
Tax authorities ‘should not hesitate to use a profit split [in arriving at a transfer pricing adjustment] where it is the most appropriate method’, he said.
Last year, the House of Lords economic affairs committee suggested that ‘a destination-based cash flow tax could dramatically reduce the scope for profit-shifting and tax rate competition between countries’. Watson wrote: ‘The reasons why a jurisdiction might wish to tax profits ultimately funded by sales to its residents, even where those profits are generated elsewhere, are not wholly quixotic.’
He suggested ‘practical reasons’ for a destination-based tax: ‘The non-taxation of a company’s profits means that it needs a lower pre-tax return to justify its shareholders’ investment, giving a commercial edge over fully taxed competitors. Once one group selling to a jurisdiction sets up operations in tax havens, others may find it necessary to do the same in order to maintain a level playing field.’
It was ‘difficult to see how a destination-based tax on profits can be substituted for source-based taxation unless the new regime is universal’, but ‘the possibility of a destination-based top-up tax is well worth considering further’.
The tax would be complex and compliance would be expensive, Watson noted, so it would be charged only where a group’s sales to consumers resident in a country exceeded a ‘substantial’ threshold.
The OECD will have ‘plenty of economic analysis to drawn upon’ during the course of the BEPS project but there is a need for more commentary on practical questions, according to a former City tax lawyer.
John Watson, former head of tax at Ashurst LLP, wrote Multinationals and the great tax debate, a paper published by LexisNexis and distributed with last week’s Tax Journal.
He noted that ‘rather less material is written from a practical point of view and, in putting together systems designed to limit tax avoidance, it is practical questions which will govern how robust those systems are’.
Watson suggested that it was no surprise that practical commentary had ‘fallen behind the economic’. With some honourable exceptions, he said, practitioners were ‘reluctant to get drawn into a debate about how best to proof the tax system against exploitation’, partly because of time constraints and ‘also, perhaps, because their clients would not wish them to do so’.
Opportunities for tax avoidance could be reduced by unifying tax rates, Watson said. He concluded that ‘the existing transfer pricing system should be left as it is, with the current OECD guidelines being preferred to a general move to unitary tax’. However, in a discussion on unitary taxation, he pointed out that basing the tax charge on a group’s consolidated accounts was ‘not quite as radical as it might sound’.
Tax authorities ‘should not hesitate to use a profit split [in arriving at a transfer pricing adjustment] where it is the most appropriate method’, he said.
Last year, the House of Lords economic affairs committee suggested that ‘a destination-based cash flow tax could dramatically reduce the scope for profit-shifting and tax rate competition between countries’. Watson wrote: ‘The reasons why a jurisdiction might wish to tax profits ultimately funded by sales to its residents, even where those profits are generated elsewhere, are not wholly quixotic.’
He suggested ‘practical reasons’ for a destination-based tax: ‘The non-taxation of a company’s profits means that it needs a lower pre-tax return to justify its shareholders’ investment, giving a commercial edge over fully taxed competitors. Once one group selling to a jurisdiction sets up operations in tax havens, others may find it necessary to do the same in order to maintain a level playing field.’
It was ‘difficult to see how a destination-based tax on profits can be substituted for source-based taxation unless the new regime is universal’, but ‘the possibility of a destination-based top-up tax is well worth considering further’.
The tax would be complex and compliance would be expensive, Watson noted, so it would be charged only where a group’s sales to consumers resident in a country exceeded a ‘substantial’ threshold.
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