G20 host Australia faces challenging truths of multinational profit shifting

By Kerrie Sadiq, Queensland University of Technologies

The G20 Finance Ministers have the opportunity this weekend to endorse the initial suggestions of the OECD on how to address the international dilemma of multinational tax avoidance.

The work of the OECD on the problem to date is substantial. Most notable is the adoption by a lot of nations, such as Australia, of the Frequent Reporting Standard for the automatic exchange of tax information. This standard will allow important inroads to be made into tax avoidance, particularly by people sheltering money offshore. This is the 1st step in an ambitious tax reform plan.

There is a extended way to go if we are to end the concern now identified as Base Erosion and Profit Shifting (BEPS). This week’s release of the first of the OECD recommendations contains some positive signs that additional advances will be created. It also recognises some hard truths.

Transparency: a 3-pronged strategy

3 key OECD recommendations address international tax transparency: country-by-country reporting, harmful tax practices, and a multilateral instrument.

The most positive recommendation is county-by-country reporting, which will complement the information obtained through the Widespread Reporting Normal with the onus on the taxpayer to supply info to tax administrations. It will also extend the net of information captured to all multinationals.

A revamp of the OECD work on harmful tax practices is also welcome. This measure focuses on nations that engage in harmful tax competition. The OECD recommendations place an emphasis on enhanced transparency in relation to taxpayer rulings for individual taxpayers which relate to preferential regimes. Nevertheless, the focus will be on distinguishing between preferential regimes which encourage genuine activity and these which encourage profit shifting. The “spillover” effect, or the effect that one particular country’s selections have on other countries, highlighted lately by the IMF, is unlikely to be examined by the OECD.

Measures towards a multilateral instrument to expedite and streamline the implementation of BEPS measures are a constructive sign. Tangible outcomes rely on nations adopting G20 endorsed suggestions of the OECD. Success will only take place if a consensus framework is maintained. The recommended multilateral instrument is an administrative tool and, if employed successfully, will streamline processes and potentially express a nation’s in-principle commitment to tax reform.

Difficult truths

I have previously argued that the present international tax program is broken and it is going to take important international work to fix it.

Global effort demands to go beyond transparency. Most multinationals are not breaking the law. Morality aside, they are taking advantage of existing laws which enable profit shifting by means of tax advantaged structures. These structures allow the use of transfer pricing guidelines and treaty provisions to minimise tax, and lie at the heart of the problem. Whilst acknowledging the systemic challenges of making sure income are taxed exactly where economic activities occur and where the worth is produced, the first set of OECD recommendations understandably raise far more questions than answers.

The most telling is the report into the challenges of the digital economy which is the result of info and communication technologies. We are seeing rapidly evolving technologies and organization structures leading to troubles like a nation’s ability to establish the appropriate to tax transactions. The OECD and G20 countries have reached a widespread understanding of the challenges raised by the digital economy but leave a lot of the operate to the rest of the Action Program. Those suggestions are not due until 2015.

Far more progress has been made in relation to treaty abuse and particularly treaty buying. Tax treaties are entered into amongst 2 countries to determine taxing rights and avert double taxation. They are not intended to be employed to generate double non-taxation.

Currently, we are seeing multinationals acquiring positive aspects beneath treaties where they are a resident of neither country. It is positive to see that treaty anti abuse rules have been drafted and will be integrated in the OECD Model Tax Convention. Nonetheless, once more, far more work is required in this location.

Progress has also been made in the location of transfer pricing, but the majority of this work will form the basis of the 2015 suggestions.

Several of the BEPS issues are produced by the challenging truth that from a enterprise point of view multinationals structure their operations in a really international manner. However, from a tax viewpoint, we continue to treat the multinational entity as possessing separate parts. By treating a multinational as getting separate parts, they are in a position to shift income.

Despite recognising the systemic challenges, the OECD is committed to addressing flaws in the present regime. It is not taking into consideration other approaches such as “formulary apportionment” which is suggested by civil society groups and academics as becoming a achievable solution to the present separate entity method.

The suggestions reflect OECD and G20 countries consensus on a number of options to finish BEPS. Australian Treasurer Joe Hockey should endorse the OECD’s advised measures as a good step to address profit shifting and market the welfare of Australia’s citizens via a sound tax regime.

At the very same time, the Australian Parliament has the responsibility to legislate a resilient tax regime which is each robust and adaptable to the modern international economy. As host of the G20 in 2014 we must also been observed to be a leader in tax reform.

Kerrie Sadiq receives funding from the International Centre for Tax and Development. She is a Senior Adviser to the Tax Justice Ne2rk (UK).

This article was initially published on The Conversation.
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G20 host Australia faces challenging truths of multinational profit shifting