G20 host Australia faces difficult 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 global issue of multinational tax avoidance.

The operate of the OECD on the situation to date is substantial. Most notable is the adoption by numerous nations, which includes Australia, of the Widespread Reporting Common for the automatic exchange of tax information. This common will let substantial inroads to be produced into tax avoidance, particularly by individuals sheltering income offshore. This is the very first step in an ambitious tax reform system.

There is a extended way to go if we are to finish the situation now known as Base Erosion and Profit Shifting (BEPS). This week’s release of the first of the OECD recommendations contains some positive signs that further advances will be made. It also recognises some challenging truths.

Transparency: a 3-pronged approach

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

The most positive recommendation is county-by-nation reporting, which will complement the data obtained by way of the Widespread Reporting Standard with the onus on the taxpayer to provide details to tax administrations. It will also extend the net of details captured to all multinationals.

A revamp of the OECD perform on harmful tax practices is also welcome. This measure focuses on nations that engage in damaging tax competition. The OECD suggestions place an emphasis on enhanced transparency in relation to taxpayer rulings for individual taxpayers which relate to preferential regimes. Nonetheless, the focus will be on distinguishing among preferential regimes which encourage real activity and those which encourage profit shifting. The “spillover” effect, or the effect that a single country’s alternatives have on other countries, highlighted lately by the IMF, is unlikely to be examined by the OECD.

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

Hard truths

I have previously argued that the current international tax system is broken and it is going to take important worldwide work to repair it.

International work requirements to go beyond transparency. Most multinationals are not breaking the law. Morality aside, they are taking advantage of current laws which let profit shifting through tax advantaged structures. These structures permit the use of transfer pricing rules and treaty provisions to minimise tax, and lie at the heart of the issue. Even though acknowledging the systemic challenges of guaranteeing earnings are taxed where financial activities take place and where the worth is developed, the 1st set of OECD suggestions understandably raise more questions than answers.

The most telling is the report into the challenges of the digital economy which is the outcome of information and communication technologies. We are seeing rapidly evolving technologies and business structures major to issues including a nation’s capacity to establish the correct to tax transactions. The OECD and G20 countries have reached a widespread understanding of the challenges raised by the digital economy but leave much of the operate to the rest of the Action Strategy. These suggestions are not due till 2015.

A lot more progress has been made in relation to treaty abuse and particularly treaty buying. Tax treaties are entered into in between 2 nations to establish taxing rights and avoid double taxation. They are not intended to be used to generate double non-taxation.

Presently, we are seeing multinationals obtaining advantages below treaties exactly where they are a resident of neither nation. It is optimistic to see that treaty anti abuse rules have been drafted and will be included in the OECD Model Tax Convention. Nevertheless, again, a lot more work is necessary in this area.

Progress has also been produced in the area of transfer pricing, but the majority of this function will form the basis of the 2015 suggestions.

Several of the BEPS troubles are produced by the hard truth that from a enterprise perspective multinationals structure their operations in a really international manner. But, from a tax point of view, we continue to treat the multinational entity as possessing separate components. By treating a multinational as getting separate parts, they are able to shift earnings.

Despite recognising the systemic challenges, the OECD is committed to addressing flaws in the present regime. It is not contemplating other approaches such as “formulary apportionment” which is suggested by civil society groups and academics as getting a achievable remedy to the current separate entity strategy.

The recommendations reflect OECD and G20 countries consensus on a number of options to finish BEPS. Australian Treasurer Joe Hockey ought to 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 identical time, the Australian Parliament has the responsibility to legislate a resilient tax regime which is each robust and adaptable to the modern day global economy. As host of the G20 in 2014 we need to also been noticed to be a leader in tax reform.

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

This write-up was initially published on The Conversation.
Study the original post.

G20 host Australia faces difficult truths of multinational profit shifting