Could a pair of form templates be some of most revolutionary tax tools to emerge from decades of debate over global tax rules?
The OECD announced the first seven steps of a major overhaul of international tax systems yesterday, ahead of a meeting of G20 finance ministers in Australia this weekend. The Base Erosion and Profit Shifting (BEPS) Action Plan is aimed at curbing aggressive tax schemes used by multinational companies to avoid paying taxes.
Endorsed by a total of 44 countries, including all OECD members and the G20 nations, the recommendations include plans to eliminate double non-taxation or “hybrid mismatching” (where a company uses treaty arrangements to avoid paying tax in two jurisdictions), to establish multilateral tax agreements to streamline international tax rules (as opposed to the current system of more than 3000 bilateral agreements), and create a standard for companies to report their activities and profits in each jurisdiction where they operate.
It’s that last point where these potentially revolutionary new forms comes into play. They can be found in the full 'Action 13' report, Guidance on Transfer Pricing Documentation and Country-by-Country Reporting.
The form is a template that shows the sort of information multinational businesses will, if these rules are adopted, be forced to collect and provide to tax authorities. It requires multple levels of comprehensive information on incomes, earnings and taxes paid for every jurisdiction in which the company operates.
According to some tax experts, it’s a huge step forward that will not only bring transparency to complex cross-border intra-company arrangements, but it will also arm tax authorities with data they couldn’t previously access. British tax expert and activist Richard Murphy puts it this way:
“There is no other way to get this data. Profit is, after all, a residual measure after every other allocation has been made. So, we now know that full country-by-country reporting accounts will be prepared in the future.
“And that means something else, which is that no multinational corporation can ever argue ever again that it does not have this data or that it would be too costly to publish it. The time has come for that sham to be dropped. We need country-by-country reporting data on public record and we now know we can have it.”
Taxation law expert Anthony Ting from Sydney University in Australia said the added transparency would also allow tax authorities to quickly identify and red flag operations where rules were bent or abused:
“…the country-by-country reporting regime would have a deterrent effect. As the tax benefits from an international tax avoidance structure would be disclosed to tax authorities around the world, the risk of a tax investigation would be much higher. Multinationals would likely think twice before engaging in aggressive tax structures.”
Despite the optimism, there is still a way to go before this, and any of the seven initiatives are enacted. Indeed this week’s reports are only the halfway point of a two-year process which began in July 2013. Only two of the seven reports are finalized; four are still in draft stages, and one is an interim report. To add to this, reports on a further eight initiatives are still 12 months away.
And at least one group, the Financial Transparency Coalition, has expressed disappointment that the country-by-country reporting doesn’t include making the information publicly available:
“Elements of the model template for country-by-country reporting are robust, but there’s a huge value in making this information public and they didn’t take that step,” said the group’s lead advocate in Europe, Koen Roovers, in a statement.
“The new OECD recommendations offer a veil of confidentiality that could perpetuate the very secrecy it’s intended to address.”
There’s also another significant challenge for the BEPS action plan: implementation in dozens of jurisdictions around the world. While the OECD holds no real governing authority, member countries tend to heed the organization’s recommendations and guidance.
And the sentiment so far from the 44 countries who have agreed to take part in the tax system overhaul has been positive. They represent more than 90 per cent of the world’s economy, and even if the uptake of new rules is uneven from country to country, general implementation of the overall themes of the BEPS action plan would likely create enough collective global pressure on multinational corporations to force a change in tax avoiding behaviors.
Speaking with the New York Times, KPMG’s head of international taxation Manal Corwin pointed towards Australia, France and Britain as likely early-adopters.
“The fact that they’ve reached consensus in such detail on two areas — hybrid mismatches [double non-taxation] and country-by-country reporting — suggests that we will see a pretty rapid adoption” by some countries, Ms Corwin told the newspaper.
But some lobby groups believe that poorer countries face a near-impossible task to implement the changes. International human rights activists ActionAid have repeatedly criticized the OECD for neglecting to properly negotiate with or plan around the needs of the world’s poorer countries, which could struggle with the cost and complexity of implementing the new tax plans.
On the other side of the fence, the OECD believes that the crackdown has already started to have an impact on the way corporations think about their tax structures. And the OECD official leading the overhaul, Pascal Saint-Amans, believes the very fact that the first round of initiatives have been delivered on time with broad agreement shows how committed these countries are to closing tax loopholes.
"This is extremely ambitious," he told a news conference earlier this week. "We are delivering. As soon as they are published, they will have an impact. They reflect very strong agreement."
He said the initiatives were aimed at restoring nations' right to tax, and at stamping out the use of mailbox subsidiaries in tax havens like Bermuda and the Cayman Islands.
"You multinationals stand ready," he said. "It's over."
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