Due to be presented before G20 finance ministers in Lima later this week, the OECD’s new measures to prevent base erosion and profit shifting (BEPS) are based on the 2013 G20/OECD BEPS action plan.
The new reforms comprise 15 action points, which look at areas including the digital economy; countering harmful tax practices; ending inappropriate treaty benefits, and more.
Angel Gurría, OECD
The most fundamental changes to international tax rules in almost a century
The OECD wants multinationals to report their tax planning so it can be broken down in to a country-by-country basis, and for more emphasis to be put on the profits created in each country, making it more difficult to shift profits to low-tax jurisdictions.
It also calls for those companies to pay local tax on any profits arising from sales in that country. It cracks down on countries allowing multinationals to set up financial subsidiaries, and sets out reforms to tackle complications arising from the digital economy such as intellectual property rights, patent box and intangible assets.
OECD secretary-general Angel Gurría said, “Base erosion and profit shifting affects all countries, not only economically, but also as a matter of trust.
“BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide.
“The measures we are presenting today represent the most fundamental changes to international tax rules in almost a century,” he added.
“They will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective.”
Revenue losses from BEPS are estimated to be $100-240bn (£66-£158bn) a year, or roughly 4-10% of global corporate income tax revenues, according to the OECD.
Today’s announcement offers governments all over the world a series of measures that can be introduced through domestic law changes. The proposals were agreed after a two-year consultation held between the OECD and G20 nations.
Everyone has a stake in reversing base erosion and profit shifting,” Gurria explained. “The BEPS Project has shown that all stakeholders can come together to bring about change.
“Swift implementation by governments will ensure a more certain and more sustainable international tax environment for the benefit of all, not just a few.”
The new OECD measures have received a mixed response. Tax partners from PwC, Deloitte and Baker Tilly all broadly welcomed the announcements.
“The OECD deserves a great deal of credit for the recommendations it has published today which provide a real opportunity to reduce tax avoidance by multinationals and ensure taxes are paid in the countries in which companies really make their profits,” said Rebecca Reading, international tax partner at Baker Tilly.
“In the UK, the government has today published its draft regulations for the implementation of country by country reporting – a key part of the OECD’s plan.
“While these fall short of demands by some campaigners to put this information into the public domain, the measures are nonetheless very significant and are likely to encourage behaviour change by multi-nationals.”
Stella Amiss, an international tax partner for Big Four firm PwC, said the proposals marked a milestone “in what remains a long and challenging journey”.
“Much hinges on whether, and how, governments worldwide decide to implement the recommendations,” Amiss said. “There's likely to be a period of uncertainty with mismatches in timing and approach.
“For areas where the OECD has found it harder to reach consensus there is the risk that countries introduce their own measures which could well result in a real risk of double taxation for businesses.”
Deloitte’s head of tax policy, Bill Dodwell, also congratulated the OECD on its publication of the new BEPS proposals, saying that the firm supported the actions.
“We support the BEPS actions published today by the OECD secretariat,” Dodwell said.
“Control of the actions now passes to the individual countries and their own tax administrations. It will be important that the Actions are implemented over the next two or three years with consistency, so as to minimise the risk of double taxation.”
He added that the OECD’s announcements should “bring an end to the idea that you can assign legal rights to a sandy island with no tax and no people and then have that company receive a lot of profits”.
The Confederation of British Industry (CBI) has called for the measures to be assessed at a national level, with governments working together to implement them in jurisdictions’ domestic laws.
Rain Newton-Smith, the CBI’s director of economics, said, “The co-operation of governments to put in place an effective, efficient and timely inter-country dispute resolution mechanism is now essential, as it is currently absent from the international tax environment.
“Our tax system should address Base Erosion and Profit Shifting activity as well as the risk of double taxation while signalling that the UK remains open to business and investment to create jobs, drive sustainable growth and public finances.”
Anders Dahlbeck, tax policy advisor for Action Aid, attacked the reforms, likened them to sticking plasters. “This tax deal has been cooked up by a club of rich countries and fails to properly tackle tax avoidance by large multinationals,” Dahlbeck said. “The global tax system needed major surgery, instead we got a sticking plaster.
“Every year developing countries lose an estimated $200bn a year to corporate tax avoidance. Healthcare, schools and other key public services are left starved of resources. By ducking the tough issues political leaders have let down the world’s poorest countries.”