On taxing multinationals: latest scorecard for the OECD BEPS project

Prof. Sol Picciotto

The OECD’s Base Erosion and Profit Shifting (BEPS) process is the pre-eminent global attempt to try and stop multinational corporations running rings around the world’s tax authorities. We have argued before that the OECD, a club of rich countries, has not sufficiently taken the interests of developing countries into account. We have also been involved in the setting up of a BEPS Monitoring Group, to examine how the process has unfolded.

Now, via email from Prof. Sol Picciotto, a senior adviser to TJN and the lead writer for the latest report:

“The BEPS Monitoring Group today published its  OECD BEPS Scorecard which evaluates the progress made by the OECD in the first year of its project to deal with Base Erosion and Profit Shifting (BEPS) –  in plainer words tax avoidance by multinational companies. We analyse the reports issued by the OECD on 16th September on the seven `deliverables’ for the first year. A Spanish version will be published in a couple of days.

We evaluate the proposals against the mandate given to the OECD by the G20 world leaders in their St Petersburg Declaration of September 2013, that international tax rules should be reformed to ensure that multinationals can be taxed “where economic activities take place and value is created”.

Our overall evaluation is that while significant progress has been made, there have been some unhappy compromises, some obstacles encountered, and much remains to be done. Also, fundamental problems still remain. The OECD alone is not the appropriate body to revise global rules, and its approach has been to patch up the existing rules. Effective reforms will not be possible without reconsidering some of the foundations of the system designed 80 years ago. Today’s globalized economy requires a more global approach to apportionment of the tax base of multinationals. Changes in the rules should be geared towards treating multinationals as unitary enterprises which would reflect their economic reality.”

And, for those interested in a more technical level of detail, here is a cut-and-paste of the report’s conclusion:

“The BEPS project offers an unprecedented opportunity to bring coherence and great coordination to international tax rules. To achieve this, a multilateral convention is indeed essential. To succeed, however, would require ensuring that the content of such a convention is both effective and widely acceptable. The BEPS project is hampered because although the G20 includes the world’s most powerful states, it excludes the poorest and most needy, who are also relatively more dependent on corporate tax revenues. It is clearly right that all states should be entitled to participate in the negotiation of any multilateral treaty. Nevertheless, by the nature of the process, much of the content of such a treaty would already have been determined.

This may be unavoidable, and hence be acceptable up to a point. However, the key issue to be addressed is to what extent this would be considered a package deal, and if so which provisions would be part of such a package and which might be optional. In this respect, a key question is the dispute settlement procedure, especially if it might involve binding arbitration. This is known to be a red line issue for many especially developing countries. We have two particular concerns. One is that the BEPS project may well result in a highly complex set of rules lacking coherence and likely to generate conflict. This indeed is what leads many to press for a binding arbitration procedure. However, such a procedure is an inappropriate way to attempt to resolve conflicts due to rules which are not themselves clear and susceptible to different interpretation. Secondly, the present tax dispute settlement procedures are highly secretive and hence lack legitimacy. Any strengthening of these procedures should in the first instance consider how they could be made far more transparent.”