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 global issue of multinational tax avoidance.

The perform of the OECD on the issue to date is substantial. Most notable is the adoption by numerous nations, such as Australia, of the Common Reporting Normal for the automatic exchange of tax details. This normal will let considerable inroads to be created into tax avoidance, particularly by individuals sheltering money offshore. This is the very first step in an ambitious tax reform program.

There is a extended 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 first of the OECD recommendations consists of some optimistic signs that further advances will be created. It also recognises some hard truths.

Transparency: a 3-pronged strategy

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

The most good recommendation is county-by-nation reporting, which will complement the information obtained through the Typical Reporting Common with the onus on the taxpayer to give details to tax administrations. It will also extend the net of info 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 suggestions location an emphasis on improved transparency in relation to taxpayer rulings for individual taxpayers which relate to preferential regimes. However, the concentrate will be on distinguishing among preferential regimes which encourage real activity and those which encourage profit shifting. The “spillover” effect, or the influence that 1 country’s options have on other nations, highlighted not too long ago 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. Achievement will only occur if a consensus framework is maintained. The recommended multilateral instrument is an administrative tool and, if utilized properly, will streamline processes and potentially express a nation’s in-principle commitment to tax reform.

Tough truths

I have previously argued that the current international tax method is broken and it’s going to take significant global effort to fix it.

International effort requirements to go beyond transparency. Most multinationals are not breaking the law. Morality aside, they are taking benefit of present laws which enable profit shifting by means of tax advantaged structures. These structures let the use of transfer pricing rules and treaty provisions to minimise tax, and lie at the heart of the dilemma. While acknowledging the systemic challenges of making sure income are taxed where financial activities happen and exactly where the value is developed, the initial 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 outcome of info and communication technologies. We are seeing rapidly evolving technologies and organization structures major to troubles like a nation’s potential to establish the correct to tax transactions. The OECD and G20 nations have reached a common understanding of the challenges raised by the digital economy but leave much of the operate to the rest of the Action Program. These suggestions are not due until 2015.

Much more progress has been made in relation to treaty abuse and especially 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 used to create double non-taxation.

At present, we are seeing multinationals getting positive aspects under treaties where they are a resident of neither nation. It is optimistic to see that treaty anti abuse guidelines have been drafted and will be incorporated in the OECD Model Tax Convention. Nevertheless, again, a lot more operate is needed in this region.

Progress has also been made in the area of transfer pricing, but the majority of this function will kind the basis of the 2015 recommendations.

Many of the BEPS issues are designed by the challenging truth that from a company perspective multinationals structure their operations in a actually worldwide manner. But, from a tax point of view, we continue to treat the multinational entity as having separate components. By treating a multinational as obtaining separate parts, they are in a position to shift earnings.

Despite 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 recommended by civil society groups and academics as being a feasible resolution to the existing separate entity approach.

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

At the same time, the Australian Parliament has the responsibility to legislate a resilient tax regime which is both robust and adaptable to the modern day worldwide economy. As host of the G20 in 2014 we have to 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 article was initially published on The Conversation.
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G20 host Australia faces hard truths of multinational profit shifting