The OECD has published the much awaited 'action plan' to address base erosion and profit shifting. The report is available here. Here is some of the immediate reaction.
Bill Dodwell, head of tax policy at Deloitte: 'the most significant potential change to international taxation for decades'
‘The OECD’s Base Erosion and Profit Shifting Action Plan is the most significant potential change to international taxation for decades. The Plan aims to limit the potential exploitation of the international tax system, by reducing the scope for non-taxation of income. These changes will undoubtedly lead to increased costs for businesses, but international co-operation with the OECD will be needed to make progress. Ultimate delivery of the plan will depend on continued cooperation and agreement between countries, since the plan will lead to recommendations for changes to national law, the Model Tax Treaty and the OECD Transfer Pricing Guidelines.
‘The OECD Plan rejects the idea of fundamental change to the global tax system, such as the adoption of unitary taxation, which has been urged by some NGOs. It also does not alter the balance of tax between source and residence countries, which is a goal of some developing countries, as well as China and India. Its focus is on countering double non-taxation.
‘The plan identifies the challenge of taxing the emerging digital economy, but recognises there is currently no consensus. This is problematic and a key hurdle for the OECD to overcome. Businesses should also expect to see more imminent changes in connection with hybrid instruments and entities and the tax deductibility of interest.
‘The plan gives an outline of areas for review and potential action, so that working groups can take them forward. The outcomes are not pre-determined, though. A very tight deadline has been imposed: some groups must report by autumn 2014, whilst others are given an extra year.
‘Business will need to engage positively with the Plan, recognising the public and political momentum behind change.’
Chris Morgan, head of tax policy, KPMG: potential for ‘seismic shift’
‘Today’s proposals are ambitious and welcome. As the Action Plan acknowledges, globalisation has benefited domestic economies. Our economy needs businesses to flourish. This yields economic benefits beyond purely that of generating corporation tax revenues by fostering the creation of jobs and wealth. That said, it is widely recognised that the international tax rules need updating to take account of modern business practices. Today’s Action Plan creates a road map which should help companies to plan their future tax strategies.
‘It is particularly welcome that there will be involvement of a wide range of stakeholders including non-OECD G20 members, the UN, business and civil society so the rules can be developed to address real rather than perceived problems and will carry broad support.
‘It is important that the OECD’s work concentrates on the future and is not used to reinterpret existing laws and practice as this would create uncertainty and so harm economic growth.’
Katja Hall, CBI chief policy adviser: international coordination needed to ensure UK firms not disadvantaged
‘We agree with the OECD that in the majority of cases existing international tax rules and principles work well but some need updating to reflect today’s changing global business environment.
‘We support the reform of areas of international taxation which can cause confusion about where tax should be allocated and risk multiple or no taxation, but this must be coordinated internationally so UK firms are not disadvantaged.
‘The OECD is right to approach this in a considered and analytical way that takes into the account administrative and compliance burdens on businesses and gives them future certainty.’
James Anderson, Skadden: OECD 'reboot' for 21st century
‘The BEPS Action Plan is an ambitious undertaking that would require fundamental changes to the current system of international taxation. If ultimately adopted by member countries, measures arising from the Action Plan are likely to significantly impact many, if not most, international business structures, including those that do not involve aggressive or abusive tax planning.
‘While the OECD does not have legislative authority, there is substantial political will behind the BEPS project and wide support from the G20 countries. It is noteworthy that all of the G20 countries, including those which are not OECD members, are expected to both support and, on an equal footing, join the program set forth in the Action Plan. This indicates a unified commitment to tackle BEPS, which suggests that many of the measures developed in light of the Action Plan will be seriously considered at the national level.
‘In particular, the concern in the US is the possibility that advocates of legislation developed under the Action Plan can argue that adopting the provisions will not adversely affect the competitiveness of US multinationals because if the US enacts them other countries will do so as well.
‘Certain of the topics addressed in the Action Plan are likely to proceed on an accelerated basis. New procedural rules regarding enhanced tax transparency and disclosure may well advance rapidly. For example, the Action Plan proposes mandatory reporting by businesses of certain tax information, including the use of “aggressive tax planning strategies” and country-by-country transfer pricing data.
‘The OECD is also proposing a framework for the automatic exchange of information between countries, such that each taxing body will be more aware of the operations of companies within its jurisdictions, together with how those companies fit into the value chain. In addition, countries that offer favorable taxing regimes, often involving the ability to obtain a tax ruling, are likely to face increasing pressure to alter their rules regarding tax rulings, including in ways that could significantly impact their tax revenues.
‘The enhanced transparency proposed in the Action Plan could well be implemented relatively quickly and would likely prompt increased governmental and broader public scrutiny of corporate tax practices.
‘Indeed, the Action Plan’s transparency agenda dovetails with recent announcements in both the US and the UK. In the US, the Obama Administration has signaled an interest in at least some kind of business tax transparency. In the UK, the government has taken a much more detailed approach already, and has recently announced an initiative to radically expand corporate transparency and boost public trust in business. The UK proposals in this area include proposals for a central public registry of beneficial owners who hold more than 25 percent of the shares or voting rights in a UK company, abolition of bearer shares, disclosure of nominee director status and abolition of corporate directors. The UK’s proposals are just one example of how governments are responding to public and media demand for complete transparency and openness in the business environment.
‘It will be critical to monitor the uptake of the broadly phrased OECD proposals in both the US and the UK. The OECD may also be able to proceed quickly with revising model treaties to address hybrid entity and hybrid instrument mismatches, enhance MAP provisions to improve dispute resolution, and tighten treaty anti-abuse and limitation on benefits rules. And though not likely to be addressed through treaties, model legislation regarding thin capitalization rules could be released relatively quickly, with the potential for swift and broad-based implementation through domestic legislative change.
‘Other issues addressed in the report — those implicating more complex technical and policy issues and requiring greater domestic law changes — will likely take longer to implement. Addressing issues surrounding the taxation of the digital economy and revisions to the PE rules to address newer, technology driven business models; developing model CFC legislation; and altering transfer pricing rules may well take a longer time both to reach international consensus and to achieve implementation.
‘The proposed changes to transfer pricing arrangements are particularly wide-ranging, and will likely require considerable changes to the detailed local transfer pricing rules that have been adopted to date by supporting countries. The ability to disregard related-party contractual and risk-shifting arrangements and allocate income in accordance with value creation may be a difficult concept to legislate appropriately. But perhaps even more challenging will be achieving international consensus and drafting rules to address the proper allocation of income between source or market countries on the one hand and developer countries on the other.
‘The Action Plan also includes a proposal for the development of a multilateral treaty that can allow signatories to swiftly adopt some of the measures outlined in the Action Plan is a novel approach to international taxation that can potentially accelerate the implementation of a number of measures. Of note, the OECD views the multilateral treaty as a platform to address other international tax issues, and not just BEPS. If the OECD is successful in tackling BEPS, the multilateral treaty platform could well be expanded to other areas of international taxation …
‘Given the Action Plan’s aim to address nearly all the above-described issues raised within the next 24 months, ordinary channels of engagement may not be sufficient to allow the business community to provide timely input regarding these tax issues that are of critical import to the multinational business community.’
Richard Collier, tax partner at PwC: 'biggest reform of global taxation in a lifetime'
‘This could be the biggest reform of global taxation in a lifetime. The tax system isn't being rewritten from scratch, but the OECD is looking at every aspect that isn't working for today's world. Taken together, the many areas covered, and how they interact, amount to a full scale review.
‘The international tax system was designed originally to prevent corporate profits being taxed twice. The OECD's big focus is preventing cases where profits might escape tax or where taxable profits are separated from the location of the valuable activities that generate them. The package of new measures is likely to include tougher tests to assess taxable presence and the substance of business activities in a particular country.
‘The BEPS action plan is a movement not an isolated project. The scale of its ambition means change is not going to happen overnight. Change will come from countries adopting domestic rules, changes to international tax treaties and changes to the practical application of existing rules by both tax authorities and businesses.
‘It's in everyone's interest to reform the tax system and the BEPS action plan is a welcome step forward. Its success will depend on continued commitment and effort by governments and business. The biggest risk to the BEPS project will be if momentum and buy-in now wanes.’
The OECD has published the much awaited 'action plan' to address base erosion and profit shifting. The report is available here. Here is some of the immediate reaction.
Bill Dodwell, head of tax policy at Deloitte: 'the most significant potential change to international taxation for decades'
‘The OECD’s Base Erosion and Profit Shifting Action Plan is the most significant potential change to international taxation for decades. The Plan aims to limit the potential exploitation of the international tax system, by reducing the scope for non-taxation of income. These changes will undoubtedly lead to increased costs for businesses, but international co-operation with the OECD will be needed to make progress. Ultimate delivery of the plan will depend on continued cooperation and agreement between countries, since the plan will lead to recommendations for changes to national law, the Model Tax Treaty and the OECD Transfer Pricing Guidelines.
‘The OECD Plan rejects the idea of fundamental change to the global tax system, such as the adoption of unitary taxation, which has been urged by some NGOs. It also does not alter the balance of tax between source and residence countries, which is a goal of some developing countries, as well as China and India. Its focus is on countering double non-taxation.
‘The plan identifies the challenge of taxing the emerging digital economy, but recognises there is currently no consensus. This is problematic and a key hurdle for the OECD to overcome. Businesses should also expect to see more imminent changes in connection with hybrid instruments and entities and the tax deductibility of interest.
‘The plan gives an outline of areas for review and potential action, so that working groups can take them forward. The outcomes are not pre-determined, though. A very tight deadline has been imposed: some groups must report by autumn 2014, whilst others are given an extra year.
‘Business will need to engage positively with the Plan, recognising the public and political momentum behind change.’
Chris Morgan, head of tax policy, KPMG: potential for ‘seismic shift’
‘Today’s proposals are ambitious and welcome. As the Action Plan acknowledges, globalisation has benefited domestic economies. Our economy needs businesses to flourish. This yields economic benefits beyond purely that of generating corporation tax revenues by fostering the creation of jobs and wealth. That said, it is widely recognised that the international tax rules need updating to take account of modern business practices. Today’s Action Plan creates a road map which should help companies to plan their future tax strategies.
‘It is particularly welcome that there will be involvement of a wide range of stakeholders including non-OECD G20 members, the UN, business and civil society so the rules can be developed to address real rather than perceived problems and will carry broad support.
‘It is important that the OECD’s work concentrates on the future and is not used to reinterpret existing laws and practice as this would create uncertainty and so harm economic growth.’
Katja Hall, CBI chief policy adviser: international coordination needed to ensure UK firms not disadvantaged
‘We agree with the OECD that in the majority of cases existing international tax rules and principles work well but some need updating to reflect today’s changing global business environment.
‘We support the reform of areas of international taxation which can cause confusion about where tax should be allocated and risk multiple or no taxation, but this must be coordinated internationally so UK firms are not disadvantaged.
‘The OECD is right to approach this in a considered and analytical way that takes into the account administrative and compliance burdens on businesses and gives them future certainty.’
James Anderson, Skadden: OECD 'reboot' for 21st century
‘The BEPS Action Plan is an ambitious undertaking that would require fundamental changes to the current system of international taxation. If ultimately adopted by member countries, measures arising from the Action Plan are likely to significantly impact many, if not most, international business structures, including those that do not involve aggressive or abusive tax planning.
‘While the OECD does not have legislative authority, there is substantial political will behind the BEPS project and wide support from the G20 countries. It is noteworthy that all of the G20 countries, including those which are not OECD members, are expected to both support and, on an equal footing, join the program set forth in the Action Plan. This indicates a unified commitment to tackle BEPS, which suggests that many of the measures developed in light of the Action Plan will be seriously considered at the national level.
‘In particular, the concern in the US is the possibility that advocates of legislation developed under the Action Plan can argue that adopting the provisions will not adversely affect the competitiveness of US multinationals because if the US enacts them other countries will do so as well.
‘Certain of the topics addressed in the Action Plan are likely to proceed on an accelerated basis. New procedural rules regarding enhanced tax transparency and disclosure may well advance rapidly. For example, the Action Plan proposes mandatory reporting by businesses of certain tax information, including the use of “aggressive tax planning strategies” and country-by-country transfer pricing data.
‘The OECD is also proposing a framework for the automatic exchange of information between countries, such that each taxing body will be more aware of the operations of companies within its jurisdictions, together with how those companies fit into the value chain. In addition, countries that offer favorable taxing regimes, often involving the ability to obtain a tax ruling, are likely to face increasing pressure to alter their rules regarding tax rulings, including in ways that could significantly impact their tax revenues.
‘The enhanced transparency proposed in the Action Plan could well be implemented relatively quickly and would likely prompt increased governmental and broader public scrutiny of corporate tax practices.
‘Indeed, the Action Plan’s transparency agenda dovetails with recent announcements in both the US and the UK. In the US, the Obama Administration has signaled an interest in at least some kind of business tax transparency. In the UK, the government has taken a much more detailed approach already, and has recently announced an initiative to radically expand corporate transparency and boost public trust in business. The UK proposals in this area include proposals for a central public registry of beneficial owners who hold more than 25 percent of the shares or voting rights in a UK company, abolition of bearer shares, disclosure of nominee director status and abolition of corporate directors. The UK’s proposals are just one example of how governments are responding to public and media demand for complete transparency and openness in the business environment.
‘It will be critical to monitor the uptake of the broadly phrased OECD proposals in both the US and the UK. The OECD may also be able to proceed quickly with revising model treaties to address hybrid entity and hybrid instrument mismatches, enhance MAP provisions to improve dispute resolution, and tighten treaty anti-abuse and limitation on benefits rules. And though not likely to be addressed through treaties, model legislation regarding thin capitalization rules could be released relatively quickly, with the potential for swift and broad-based implementation through domestic legislative change.
‘Other issues addressed in the report — those implicating more complex technical and policy issues and requiring greater domestic law changes — will likely take longer to implement. Addressing issues surrounding the taxation of the digital economy and revisions to the PE rules to address newer, technology driven business models; developing model CFC legislation; and altering transfer pricing rules may well take a longer time both to reach international consensus and to achieve implementation.
‘The proposed changes to transfer pricing arrangements are particularly wide-ranging, and will likely require considerable changes to the detailed local transfer pricing rules that have been adopted to date by supporting countries. The ability to disregard related-party contractual and risk-shifting arrangements and allocate income in accordance with value creation may be a difficult concept to legislate appropriately. But perhaps even more challenging will be achieving international consensus and drafting rules to address the proper allocation of income between source or market countries on the one hand and developer countries on the other.
‘The Action Plan also includes a proposal for the development of a multilateral treaty that can allow signatories to swiftly adopt some of the measures outlined in the Action Plan is a novel approach to international taxation that can potentially accelerate the implementation of a number of measures. Of note, the OECD views the multilateral treaty as a platform to address other international tax issues, and not just BEPS. If the OECD is successful in tackling BEPS, the multilateral treaty platform could well be expanded to other areas of international taxation …
‘Given the Action Plan’s aim to address nearly all the above-described issues raised within the next 24 months, ordinary channels of engagement may not be sufficient to allow the business community to provide timely input regarding these tax issues that are of critical import to the multinational business community.’
Richard Collier, tax partner at PwC: 'biggest reform of global taxation in a lifetime'
‘This could be the biggest reform of global taxation in a lifetime. The tax system isn't being rewritten from scratch, but the OECD is looking at every aspect that isn't working for today's world. Taken together, the many areas covered, and how they interact, amount to a full scale review.
‘The international tax system was designed originally to prevent corporate profits being taxed twice. The OECD's big focus is preventing cases where profits might escape tax or where taxable profits are separated from the location of the valuable activities that generate them. The package of new measures is likely to include tougher tests to assess taxable presence and the substance of business activities in a particular country.
‘The BEPS action plan is a movement not an isolated project. The scale of its ambition means change is not going to happen overnight. Change will come from countries adopting domestic rules, changes to international tax treaties and changes to the practical application of existing rules by both tax authorities and businesses.
‘It's in everyone's interest to reform the tax system and the BEPS action plan is a welcome step forward. Its success will depend on continued commitment and effort by governments and business. The biggest risk to the BEPS project will be if momentum and buy-in now wanes.’
