Analysis: OECD aims to fix corporate taxes within two years

TWO DEVELOPMENTS LAST WEEK suggested a growing sense of urgency among OECD officials and lawmakers seeking to reform the international tax system.

A broad consensus in favour of change was reflected in a televised discussion at the OECD in Paris and a UN report, whose signatories included David Cameron, addressed the need for a “more equitable” system.

Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, reported strong political support from G20 countries for action to tackle “base erosion and profit shifting” (BEPS).

He confirmed that an action plan will be reported to G20 finance ministers next month. “We are impatient. We cannot afford to take ten years to solve the problem. We aim to solve this problem in the next two years with new instruments to deal with hybrid mismatches, transfer pricing, tax treaties and [to promote] increased tax transparency,” he said.

“This action plan will be ambitious. It may even include the idea of a multilateral convention in order to short circuit the re-negotiation of 3,000 bilateral tax treaties.”

Riding on the OECD’s message came a new agenda on Friday from the UN’s high-level panel on the post-2015 development agenda, co-chaired by UK prime minister David Cameron and the presidents of Liberia and Indonesia, called A new global partnership: Eradicate poverty and transform economies through sustainable development.

The report talked of a “crackdown” on the abuse of transfer pricing rules, a transparency revolution and a more equitable system of corporate tax. Cameron has vowed to put tax and transparency on the agenda for this month’s G8 summit in Northern Ireland.

Double non-taxation

At last week’s OECD Forum, Saint-Amans was addressing a session titled “Too Big to Pay Tax?”. There was an issue on tax avoidance, he said,  but it could not be measured, adding: “We are not naive and we don’t want to come up with figures. Plenty of people are very good at coming up with figures which are all fake, so we don’t do that. But we say there is an issue.

“You have some indicators. When you see that the British Virgin Islands is in the top ten investors in Russia, China and the Netherlands, that tells you something about the way it operates that is probably wrong.”

He told the meeting, chaired by the Financial Times‘s Vanessa Houlder, that a growing network of bilateral treaties designed to eliminate double taxation may have helped to create double non-taxation, which was “not politically or economically acceptable”.

‘You need to change the law’

The fact that some businesses were not being taxed “at the statutory rate” was not the fault of big business, he suggested. “It’s legal. If you don’t like the outcome you need to change the law. How do you make sure that the international tax rules are implemented between country A and country B?”

The arm’s-length principle for transfer pricing worked “pretty well”, he said, between two countries – but the measurement of intangible assets and the potential to use those measurements ostensibly for optimum tax treatment needed to be addressed: “How do you price the reward to the owner of the intangible, and what if the owner of the intangible is in Bermuda, where nothing else happens except maybe a trustee going to the beach every day but not really managing the business?”

BEPS update

The OECD published an update on the BEPS project after last week’s ministerial-level meeting of the OECD council. Its February 2013 report had noted that BEPS constitutes “a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike”.

Following a press briefing, The Guardian quoted Saint-Amans as saying there should be new rules governing “how much debt is loaded on subsidiaries with the specific aim of avoiding taxes”. He added: “We have to ask: is the royalty too high and is it going to the wrong place? A royalty should be charged from the place where it was developed.”

The OECD update reported on meetings with business and civil society. An essential debate had now been set in motion about whether the international tax rules are still fit for purpose. “Strong political support, not only from OECD countries … but also from the G20, demonstrates that the time is ripe to address the issues raised by this debate on a multilateral basis.”

But the OECD warned that unilateral and uncoordinated actions by governments to address the issue could result in the risk of double, and possibly multiple, taxation: “This would have a negative impact on investment, and thus on growth and employment globally.”

The OECD’s Business and Industry Advisory Committee (BIAC) had called for a common definition of “economic substance”, and proposed the creation of a joint OECD/business group to work on issues related to the digital economy, supported the establishment of uniform international rules on controlled foreign companies and on interest deductibility, and offered to work on a business code of tax conduct as part of the BEPS agenda.

NGOs had expressed strong support for the BEPS project and presented a policy paper, “No More Shifty Business”, signed by 58 different NGOs.

Morality and ethics

At the “Too Big to Pay Tax?” session Loretta Minghella, director of Christian Aid, said the tax issue was “about real people’s lives”. Christian Aid wanted a solution to the “scandal” of poverty and hunger that would enable developing countries not to be dependent on aid. “We want them to be able to stand on their own feet by having the tax revenues that they deserve.”

Some multinationals were “choosing to channel their profits in a way that means they pay as little tax as possible”. People had stressed that this was perfectly lawful, she noted. “It may be lawful, but I ask you – does it not have a moral dimension, when you think about the implications for the funding of public services?”

Will Morris, global tax policy director at General Electric, said he did not believe that morality was the right word to use. “However, I do believe that there are a string of other adjectives which probably are appropriate,” he said.

“We have to acknowledge that when we look at these issues, at the heart of it there is a question of law. There is no way around that … Is it a question of morality? If you start with a system of rules, then that is the starting point. However, you do need to interpret those rules in a sensible, proportionate and responsible way.

“You may call that morality if you want to. I would rather regard that as a question of interpretation. There is something very visceral about the word morality. It’s something which goes to your gut. When you’re talking about a system of rules which have to be applied equally to a very wide range of people you need to move beyond that, because morality is something which comes and goes quite quickly with moods.”

Professional ethics were important, he added, and accountants, lawyers and others “should certainly be ethical” in interpreting the law.

Andrew Goodall is a freelance tax writer and journalist