New proposals to stop multinational companies dodging tax were published on Tuesday. Here’s the lowdown on what’s going on…
The first formal proposals aimed at creating a single set of international tax rules and preventing multinational companies from artificially shifting profits to low-tax jurisdictions were published on 16 September by the Organisation for Economic Cooperation and Development (OECD). The Explanatory Statement gives an overview of the proposals.
Attempts by major companies to reduce their tax bills are not new, but the increasing globalisation of business, and the impetus of the global financial crisis, has brought the issue into sharp focus.
Stories of the low tax bills of companies such as Apple, Google and Starbucks have led many to conclude that the international tax system is not fit for purpose in the 21st century: the Base Erosion and Profit Shifting project – known as the BEPS Project – is a co-ordinated attempt to address the issues. It was started by the G20 countries at their meeting in 2012 and will continue until the end of 2015. The background to the project is explained here.
The proposals can be divided into three main categories.
First, there is transparency: tax authorities around the world need information in order to be able to determine whether a company is paying the right amount of tax in each country where it operates. One of the proposals published on 16 September is for improved transfer pricing documentation and a template for country-by-country reporting.
The second area is income which has not been taxed anywhere – the problem of “double non-taxation”. Technical proposals to prevent the abuse of tax treaties and the use of complex hybrid mismatch arrangements were also published on 16 September.
The final area looks at whether profits are being allocated correctly between countries, with a particular focus on the tax challenges of the digital economy. Achieving consensus on the details of these proposals will be difficult, and businesses are concerned that the final rules may lead to increased costs of compliance, and possible double taxation if countries disagree on where tax should be paid.
Further papers will be published in 2015, on topics such as interest deductibility and the need for effective dispute resolution. This is a hugely complex project, which will have implications for any company involved in international business. It remains to be seen whether the OECD can bring it to a successful conclusion within the very demanding timetable.
Heather Self is a tax partner at Pinsent Masons