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What does success look like for BEPS, and what is failure?

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Any major project undertaken by a corporation or a public body ought to have criteria for determining the success or failure of the project. The BEPS project is to last for at least two and a half years, and involves a significant commitment of resources both by the OECD, by participating governments, and by business and civil society in commenting on the proposals. It is perfectly appropriate, now that the project has been underway for a little over a year, to ask what are the criteria for success or failure.

If we are to evaluate the criteria for judging success or failure, then the starting point has to be an identification of the real BEPS problems. Success would then be the resolution of those problems; failure would be their continued existence. Unfortunately, there is more than one candidate for the real target of the BEPS project.

What are the real problems?

The first possible candidate is the public disquiet at the low effective tax rates paid by some multinational companies, including some of the largest multinationals with their headquarters in the US. This is what one might refer to as the ‘Margaret Hodge’ factor. This public disquiet has been fanned by parliamentary committees on both sides of the Atlantic and by newspaper journalists who have found a new interest in tax matters. However, parliamentary committees and newspaper journalists – as with the public – can be somewhat fickle, and one wonders if this public disquiet will survive the end of fiscal austerity. Assuming that austerity ends relatively soon, will the public continue to be concerned about multinationals paying low taxes? Or will they recognise that higher taxes would need to be reflected in more expensive products, lower returns on shareholdings, or lower payments to employees, all of which would hit the public in one way or another.

Quite a strong, second candidate for the real BEPS problem is the dysfunctional nature of the US tax system, particularly the US taxation of international income. A series of changes over the last 15 years has ensured that US headquartered multinationals enjoy very low effective tax rates. Highest amongst the culprits was the introduction of the ‘check the box’ system, plus the reform of the CFC rules to make them largely ineffective. The consequence of these changes is that the US tax system – theoretically a worldwide system – has become territorial in practice, so long as US multinationals can avoid remitting their profits to the US.

Viewed by some across the Atlantic and outside the European Union, however, the real BEPS problem is the continued existence of regimes of harmful tax competition, particularly among European countries. The prevalence of patent boxes and similar regimes, as well as the ruling practices in certain countries, has created fertile ground for multinationals to bring down their low effective tax rates.

Finally, and more broadly, some would say that the real BEPS problem is the diminishing acceptance of the traditional international tax order, developed between the end of the First World War and the start of the 21st century. In particular, this traditional international tax order is not necessarily accepted by all of the BRICS or developing countries. The diminishing acceptance is seen in the reduced acceptance of tax treaties based on the OECD Model and the rejection of traditional transfer pricing approaches.

Looked at from the perspective of the problems that the BEPS project is setting out to solve, some people would see success in the US abandoning the ‘check the box’ system and making the Sub-Part F rules effective once more. On the other hand, others would say that the continued existence of patent box regimes would prove the failure of the BEPS project.

With these comments in mind, one can perhaps suggest what success looks like (and what failure might look like).

What would success look like?

It is important to put aside the fact that the BEPS project will be declared a success by government leaders, no matter what the outcome. The real question is how hollow will the sounds of triumph ring when the G20 leaders declare the project a success.

Real success would involve the restoration of an element of stability in the international tax system. Key for businesses would be the certainty of outcome when they trade or invest across borders. Ideally, there would be a consensus worldwide as to the principles of the new international tax order, and this consensus would ensure the removal of the barriers to trade and investment that can arise from double taxation, or from uncertain and unpredictable interventions by revenue authorities. Ideally, success would involve a reduction in disputes over cross-border taxation, or at least it should involve an improved resolution mechanism for tax disputes. Arguably, success should involve a greater revenue contribution from the large multinationals (though this is debatable, given that the burden of that larger contribution is going to flow to the public in one way or another).

And what is failure?

Taking these as criteria of success, failure can be identified as the converse. The BEPS project will be seen to be failing if it is clear that agreement between the countries participating is becoming more and more delayed, and elements of the 15 point action plan are being abandoned. One difficulty here is that the work on the 15 action point is being delivered at different times: the first tranche is delivered for September 2014, and the second tranche for September 2015. However, in reality, these elements are interlinked and it may prove difficult (if not impossible) to get full agreement on the first tranche until it is clear what the second tranche is going to look like.

The project will also be seen to be failing if it is clear that certain countries are not on board to implement the conclusions. That would involve not only countries that do not join in the approval of some of the BEPS outcomes, but also countries that may appear superficially to approve but in practice are unlikely to implement the outcomes.

In the long term, failure of the project will be seen in a continuing instability in the international tax system and a lack of certainty of the outcomes for businesses trading and investing cross-border. It will be seen in countries adopting unilateral measures, rather than acting by way of consensus, and by unrelieved double taxation becoming more and more of a barrier to trade and investment. In that environment, tax disputes may also increase, with more and more of them remaining unresolved. Curiously, a greater revenue contribution from large multinationals may itself be evidence of failure, particularly if that contribution is passed on in lower wages and fewer employment opportunities in some countries, particularly developing countries.

The dangers to the OECD

Both success and failure may have implications for the institutional structure of the international tax order. The OECD has dominated the work on international tax since the late 1950s, but its role in that position is something of a historical accident, caused by the decision of the UN to close down its Fiscal Commission when it became mired in Cold War arguments. There is no logical reason why the OECD should not yield up that role now that the Cold War is over.

There are dangers to the OECD both in success and failure. As far as success is concerned, the BEPS project is a venture driven by the G20, with the OECD acting as secretariat, cheerleader and works foreman. However, if the G20 can deliver a major success, why should it not become the leading body on international taxation? In fact, why should the G20 not establish a World Tax Organisation to take forward the work?

On the other hand, a clear failure of the project would be labelled as the OECD’s failure. It will have failed to deliver consensus or solutions to the problems. In that situation, there are quite a number of other bodies waiting in the wings to take over the institutional mantle from the OECD. These include the United Nations; this is probably the best candidate in terms of its having the broadest representation, but the UN could not take on this work under its current institutional structure, where the work of the Committee of Experts covers only a very narrow agenda. Other candidates are the World Bank and, in particular, the IMF – which is already making a claim to broader representation.

The BEPS project has already lasted for a year without any overt debate on the criteria on success or failure. In part, this is due to the rapidity with which the project was initiated. However, as the project enters its second year, it is appropriate to give some thought to what success or failure will ultimately look like.