Pressure on governments around the world to tackle corporate tax avoidance and make sure multinationals pay their “fair share” is mounting. The OECD’s Base Erosion and Profit Shifting (BEPS) proposals, announced this week and set to be presented to G20 finance ministers on Thursday, have been specifically designed to combat this.
In the making since 2013, this package of measures is meant to ensure a co-ordinated global approach to reform the international tax system. As well as creating a more coherent international taxation policy, the idea is that they’ll also increase transparency, ensuring that multinationals are prevented from shifting their profits to low or no-tax jurisdictions, and instead pay tax in the countries where their profit generating activities actually take place.
The BEPS recommendations have commendably been delivered on time against a tight timetable, but the real test of success is implementation. The key phrase here is “co-ordinated international approach” – the success of the BEPS project rests entirely on full cooperation by all OECD countries to implement the recommendations on a consistent, multilateral basis.
While it is encouraging that the OECD has announced that 90 countries are now engaged in negotiating the multilateral instrument, which is being designed to enable synchronised modification of all existing tax treaties, there is no guarantee that all 90 will actually sign up to finally negotiated product.
Furthermore, US Congress has already expressed reservation on the implementation of some aspects of the proposals, and unilateral action by some governments – including the UK’s, with its introduction of the Diverted Profits Tax (DPT) – is casting doubt on whether the BEPS recommendations will achieve their full potential.
From a UK perspective, a number of recent changes to the corporation tax regime (like the simplification of the anti-avoidance rules that target controlled foreign companies, the taxation of foreign branch profits and the introduction of the patent box), coupled with the lowering of the corporation tax rate, have led many commentators to herald Britain as an attractive place for multinationals to invest and base themselves.
The argument is that, by introducing the DPT ahead of the BEPS recommendations, the UK government has taken the initiative, and is sending a clear statement that Britain is open for business – and that multinationals are welcome to benefit from a competitive tax regime, on the proviso that they do not artificially divert profits generated here.
But other implications of the BEPS recommendations must also be considered. For example, the significant administrative burdens that will be created for firms. This pursuit of tax transparency will require organisations to file detailed tax reports in every country in which they do business.
And while the UK has already committed to implementing the OECD’s suggested country-by-country template, it must not be underestimated just how burdensome such a process could be. What’s more, the BEPS recommendations on limitations to interest deductibility have the potential to adversely impact one of the key attractions of the UK’s corporation tax regime – and we don’t yet know how the government will address this issue.
But despite these challenges, the OECD and G20’s proposals will no doubt be received well by the media and public alike. It remains to be seen, however, how swiftly, and to what extent, the BEPS proposals will be implemented by governments.