UNUSUALLY for tax policy matters, the OECD’s raft of recommendations to curb tax avoidance by multinational companies appears to have the teeth required to do so.
As advisers have noted, there has been little in the way of watering-down in the seven-pronged attack on the practice, neatly divided into seven rather hefty reports (in all, they reach 736 pages).
Not only that, but as several in the tax sector have acknowledged, it’s impressive the BEPS project has made the progress it has, within the original timeframe and in deep detail.
Chief among the suggestions to deal with the digital economy is to deny treaty benefits to businesses taking advantage of double taxation arrangements, which can result in the precise opposite – what the OECD is calling double non-taxation.
Similarly, it proposes to prevent “hybrid mismatch arrangements” – whereby the difference in the tax treatment of an entity under the laws of two or more jurisdictions is exploited to drive down tax bills – by adopting a “linking rule” between the payer jurisdiction and payee’s, aligning their tax outcomes and eliminating any mismatch.
One issue with that method, highlighted by Tax Research UK’s Richard Murphy, is the need for individual bilateral agreements between business entities, which he warns could be a return to treaties and discrepancies between different jurisdictions.
Something likely to draw the approval of Murphy’s fellow tax justice campaigners is the move towards country-by-country reporting put forward by the OECD.
However, they will be dismayed to discover that such requirements won’t be public.
Instead, businesses will be compelled to make country-by-country disclosures to the tax authorities, only making that information public if they wish to.
Given the reputational kudos that could accompany such disclosures, it perhaps comes as little surprise that Barclays chose to do just that with its first unitary report – part a strategy to improve its standing in the public esteem following a string of scandals.
The move follows Europe-wide regulatory requirements for banks to publish 2013 turnover and employee numbers for all countries in which they operate, with further expected disclosure requirements in subsequent years.
Similar rules already exist in the extractive industries within Europe. Companies dealing with oil, gas, minerals and logging from primary forests report payments such as taxes on profits, royalties, and licence fees on a country and project basis, which will provide best practice examples for affected companies.
It’s a significant about-turn for the OECD given that in June 2013, director Pascal Saint-Amans – who announced the seven recommendations – told the House of Lords unitary taxation would not be introduced “any time soon”.
“…[This] would require that all jurisdictions across the world – and we have 190-plus states, plus jurisdictions which are tax-sovereign – to agree on criteria and trust each other enough to rely on the information on the consolidated accounts which will held in the headquarters of the group,” he said at the time. “I just don’t see this happening any time soon.”
Today, though, he recognises the need for its introduction. “We will know where the real economic activity is taking place through country-by-country reporting,” he said.
From a practical viewpoint for large firms and businesses, the collection and organisation of that data could initially be painful having never done so previously, but that would very much represent a one-off problem, and one any CFO worth their salt will consider – along with their advisers.
Measures to impinge on the rather vague “harmful tax practices” could see tax incentives such as the Patent Box threatened. The OECD proposes compulsory “spontaneous exchange on rulings related to preferential regimes”, although the specifics, it notes, are still under discussion.
Any imperative to repeal the Patent Box and other tax reliefs would come as a blow to the coalition government, which has made a policy of using favourable tax treatments to encourage particular industries.
Indeed, the government had to fight for the introduction of the Patent Box after the EU claimed it was discriminatory.
It has proven popular, with pharmaceutical GlaxoSmithKline repatriating hundreds of projects back to the UK in order to take advantage of the government’s Patent Box scheme on intellectual property. “The patent box has changed how we view the UK as an investment prospect,” GSK said at the time.
While the government won that particular battle, it could find itself having to defend it again given the tax arbitrage it can create.
The mood music, in general, though is relatively harmonious, with any concerns remaining minor and around the finer points of the recommendations, rather than the policies themselves.
The onus now is on the implementation, and doing so faster than the “glacial” pace Taxand chairman Frederic Donnedieu warned of.
The ATT had previously expressed concern that the legislation was overly complex and created unnecessary complications within the practical working of the new allowances
Introduced in 2013 to encourage R&D investment, the scheme allows UK businesses to pay only 10% corporation tax on profits derived from any UK or certain EU patents
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