The OECD’s work on base erosion and profit shifting

News stories such as Bloomberg’s ‘The great corporate tax dodge’, the New York Times’ ‘But nobody pays that’, The Times’ ‘Secrets of tax avoiders’ or The Guardian’s ‘Tax gap’ are just some examples of the increased media attention to big corporates’ tax affairs. From the front pages of newspapers, we have now moved to political support for action with the G20 leaders welcoming the work the OECD has undertaken into the problem of base erosion and profit shifting (BEPS). G20 finance ministers, triggered by a joint statement of UK chancellor, Osborne, and Germany’s finance minister, Schäuble, have asked the OECD to report on this issue by their next meeting in February 2013.

A few highly visible cases have clearly encouraged the perception that the international corporate tax system is broken and that taxes are only paid by the naive. In a context of fiscal consolidation, with VAT and personal income tax increases, the perception that some may not contribute fairly clearly becomes a political problem with no tolerance for what can be perceived as massive tax avoidance by a wealthy few. Civil society and NGOs have also been very vocal, sometimes addressing very complex tax issues in a simplistic manner and pointing fingers at transfer pricing rules based on the ‘arm’s length principle’ as the cause of all problems. Big corporate groups are accused of dodging taxes all around the world and in particular in developing countries, where tax revenue is critical in fostering long-term development. On the other hand, business leaders have a responsibility towards their shareholders to legally reduce the taxes their companies pay and consider most of the accusations unjustified.

The role of the OECD

Is there systemic evidence of a massive issue or just a bunch of anecdotal cases? How can policy makers make sure that, in a globalised environment, they put in place policies supporting sustainable growth through cross-border investments, by eliminating double taxation and at the same time without resulting in ‘stateless income’ and double non-taxation? How to ensure business competitiveness and fair contribution to tax systems? These are some of the key issues the OECD has been invited to provide solutions to. The reason why the OECD has become involved is because the issue affects many of the organisation’s core work streams.

We work for sound and sustainable economic growth and employment in member and non-member countries on the premise that the adoption of common standards plays a fundamental role in achieving this. We promote dialogue and cooperation between governments on tax matters:

• the model tax convention forms the basis for negotiation of the 3,000 existing bilateral tax treaties;
• the OECD transfer pricing guidelines embody the international standard to allocate profits among different parts of an MNE group;
• the directory and the studies on aggressive tax planning help governments respond more quickly to tax risks, highlight trends and patterns already identified and experienced by others, and share experiences in dealing with them;
• the Forum on Harmful Tax Practices has built support for fair competition and minimised tax induced distortions. More than 40 regimes, which have been identified over time as potentially harmful, have been abolished or modified;
• the work on tax policy and statistics, which has dealt with the effects of taxation on FDIs and the implementation of sensible corporate tax reforms; and last but not least
• the work on transparency, which has led to major progress on transparency and exchange of information for tax purposes over the past three years.

Work on base erosion and profit shifting

The OECD is now carrying out an in-depth analysis of BEPS issues to identify, based on the available data and information, the problems and the different factors that have caused them. This will allow the OECD to address these issues in a holistic and comprehensive manner. It appears that corporate tax policy, and in particular its international aspects, may need a new approach. Some rules and their underlying policy were built on the assumption that one country would forgo taxation as the other would then be able to exercise it. That is not always the case and the profits may end up in a third, low or no tax, country.

Many rules are grounded in an economic environment characterised by fixed assets, such as plants and machinery and a lower degree of economic integration across borders, rather than today’s digital economy where much of the profit lies in risk-taking and intangibles. Not all issues are new and some of them have actually been there for several decades. It is now time to identify concrete actions to shape a fairer, more effective and efficient international tax system. Although there is no magic recipe to address BEPS issues, the OECD is ideally positioned to provide solutions that ensure the effectiveness and fairness of the international corporate tax system and at the same time provide a certain and predictable environment for business. Not doing so risks undermining the consensus-based principles, encouraging countries to take unilateral and uncoordinated actions.

Political support and the international context

It is encouraging to see how much political support has been expressed for this work in the recent past. This political support is very much needed. As BEPS strategies are based on the careful interaction of a number of domestic and international rules, only a multilateral and inclusive approach can bring results in this area, ensuring that countries act together and avoid being played against one another. Concerns over international competitiveness, mostly based on claims by business groups that accommodating treatment is available in other countries, have often conditioned governments’ stances in the area of anti-avoidance. International tax cooperation is still the key to eliminate obstacles to international trade and cross-border investments, both paramount for growth recovery in our globalised environment. However, international tax cooperation is also key in eliminating double non-taxation, which not only undermines tax sovereignty but also confidence in fair tax systems.

Pascal Saint-Amans is director of the OECD’s Centre for Tax Policy and Administration