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BEPS in the developing countries context

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In September 2014, the OECD brought together 44 countries on an equal footing to discuss the practicalities of adopting the first set of seven deliverables. For the first time, developing countries and other non-OECD/non-G20 economies have been extensively consulted and their input has fed into the work. 

Whilst none would disagree that BEPS is a global issue that requires a global solution, it is also important to recognise that the BEPS risks faced by developing countries (and the challenges in addressing them), may be significantly different both in scale and nature to those faced by developed countries.

India expressed a ‘strong view’ in its response to the UN BEPS questionnaire and pointed out that ‘the BEPS issues must be addressed in a manner that result(s) in breaking down all such structures or practices that promote or protect BEPS... if the problem is a leaking bucket then steps must be taken to swiftly plug that leak or replace the bucket instead of debating how to calibrate the speed of inflow of water into the leaking bucket. In many of the discussions and decisions at the OECD, India gathers the impression that the real issues are being swept under the carpet and the superficial ones are sought to be addressed. This approach is not going to significantly impact BEPS... The approach of expecting developing countries to implement all the decisions made by the developed countries appears to be somewhat patronising and should be avoided. Steps must be taken to involve the developing countries in all decisions that are made’.

The focus of the attention appears to have shifted to the question of what BEPS is in a developing countries context. This question has however always been part of the considerations since the BEPS project commenced.

At the 2013 St. Petersburg Summit, G20 leaders had recognised that ‘developing countries should be able to reap the benefits of a more transparent international tax system, and to enhance their revenue capacity, as mobilizing domestic resources is critical to financing development’. The G20 endorsed the St. Petersburg Development Outlook, which committed the Development Working Group (DWG) to ‘review relevant work on BEPS during 2014 in order to identify issues relevant to low income countries (LICs) and consider actions to address them’. 

As a result of this work, the OECD published Report to G20 development working group on the impact of BEPS in low income countries in September 2014, which identified six key areas where the developing countries’ experience of BEPS may be different from developed countries.

  • Domestic policy: The report finds that developing countries often face policy and other conditions that impact their ability to address BEPS. 
  • International policy: In developing countries, the nature of cross-border tax planning could differ from developed countries. In some instances, the lack of relevant and effective rules creates opportunities for less sophisticated and sometimes more aggressive tax planning.  Rwanda for example, reported that its transfer pricing rules are incomplete and are insufficiently effective to counter profit shifting, and highlighted that developing countries may lack the necessary legislative measures needed to address BEPS.
  • Data gathering and analysis: The third difference is the accessing relevant information can be often difficult for developing countries.
  • Implementation capabilities: In 2010, the number of tax and customs staff available for every 1000 citizens was 0.131 in Mozambique, 0.087 in Tanzania. These ‘tax staff per population ratios’ are dramatically low compared to the world average of 0.82 (source: CMI, 2011). Thus, building and maintaining capacity to implement highly complex international rules is crucial for developing countries.
  • Political commitment: Moreover, the developing countries consistently raised the need for political impetus and to achieve political buy-in as a prerequisite to making the legislative changes and resource commitment required to tackle BEPS.
  • Foreign investment conflict: The final difference highlighted in the report is the acute pressure on developing countries to attract investment. This pressure can trigger a competitive ‘race to bottom’ and could result in unintended tax planning opportunities leading to revenue leakages. While tax incentives may be used in both developed and developing countries, their negative effects are especially pronounced in developing countries that have limited capacity to detect and counter detrimental tax avoidance techniques.

On 12 November, the OECD released its strategy for deepening developing country engagement: the ultimate goal is to strengthen their involvement in the decision-making processes and to bring them to the heart of the technical work. The strategy is built around three key pillars:

  • Pillar 1 is the direct participation of developing countries in the CFA, the key decision-making body of the OECD BEPS project, and its subsidiary bodies. Through this direct participation, developing countries will be able to provide input at the working and decision-making levels of the BEPS project, and to ensure that the specific concerns and context of developing countries are taken into account in the development of solutions to counter BEPS. Not only will developing countries be able to directly input and gain an improved understanding of the BEPS process, but OECD members and BEPS Associates will also be exposed first-hand to accounts of the specific perspectives of, and challenges faced by, developing countries.
  • Pillar 2 is about building a regional networks of tax policy and administration officials to coordinate an ongoing and more structured dialogue with a broader group of developing countries on BEPS issues.
  • The final pillar is the main priority of the strategy and focuses on providing capacity building support. 

It is undisputed that BEPS is an issue that harms both developed and developing countries. Whilst it is recognised that no one size fits all, it is apparent that global solutions are needed to resolve global problems. It is therefore essential that the OECD take the views and perspectives of developing countries into account when developing a new international tax framework.