G20 host Australia faces hard 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 issue of multinational tax avoidance.

The operate of the OECD on the issue to date is substantial. Most notable is the adoption by a lot of nations, such as Australia, of the Common Reporting Regular for the automatic exchange of tax info. This standard will enable significant inroads to be produced into tax avoidance, particularly by men and women sheltering funds offshore. This is the very first step in an ambitious tax reform plan.

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

Transparency: a 3-pronged approach

3 key OECD suggestions address international tax transparency: nation-by-country reporting, damaging tax practices, and a multilateral instrument.

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

A revamp of the OECD function on harmful tax practices is also welcome. This measure focuses on nations that engage in dangerous tax competitors. The OECD recommendations place an emphasis on improved transparency in relation to taxpayer rulings for person taxpayers which relate to preferential regimes. Nonetheless, the concentrate will be on distinguishing in between preferential regimes which encourage genuine activity and these which encourage profit shifting. The “spillover” effect, or the influence that one country’s selections have on other nations, highlighted recently by the IMF, is unlikely to be examined by the OECD.

Steps towards a multilateral instrument to expedite and streamline the implementation of BEPS measures are a good 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 suggested multilateral instrument is an administrative tool and, if employed properly, will streamline processes and potentially express a nation’s in-principle commitment to tax reform.

Challenging truths

I have previously argued that the present international tax method is broken and it’s going to take substantial global work to repair it.

Global work needs to go beyond transparency. Most multinationals are not breaking the law. Morality aside, they are taking advantage of current laws which allow profit shifting by way of 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 problem. Whilst acknowledging the systemic challenges of guaranteeing earnings are taxed exactly where financial activities take place and where the worth is produced, the initial set of OECD suggestions understandably raise more queries than answers.

The most telling is the report into the challenges of the digital economy which is the result of data and communication technologies. We are seeing rapidly evolving technologies and business structures leading to problems such as a nation’s potential to establish the right to tax transactions. The OECD and G20 countries have reached a frequent understanding of the challenges raised by the digital economy but leave a lot of the perform to the rest of the Action Plan. These recommendations are not due till 2015.

Far more progress has been made in relation to treaty abuse and particularly treaty shopping. Tax treaties are entered into between 2 countries to figure out taxing rights and avert double taxation. They are not intended to be utilised to generate double non-taxation.

At the moment, we are seeing multinationals getting rewards beneath treaties where they are a resident of neither country. It is good 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 function is needed in this location.

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

A lot of of the BEPS problems are produced by the hard truth that from a business viewpoint multinationals structure their operations in a actually international manner. Yet, from a tax viewpoint, we continue to treat the multinational entity as obtaining separate components. By treating a multinational as having separate parts, they are able to shift income.

Regardless of recognising the systemic challenges, the OECD is committed to addressing flaws in the existing regime. It is not thinking about other approaches such as “formulary apportionment” which is suggested by civil society groups and academics as being a attainable solution to the present separate entity method.

The recommendations reflect OECD and G20 nations consensus on a quantity of solutions to end BEPS. Australian Treasurer Joe Hockey ought to endorse the OECD’s recommended measures as a optimistic step to address profit shifting and market the welfare of Australia’s citizens by way of a sound tax regime.

At the exact 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 Improvement. She is a Senior Adviser to the Tax Justice Ne2rk (UK).

This post was originally published on The Conversation.
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G20 host Australia faces hard truths of multinational profit shifting