New Germany-UK tax treaty undermines OECD tax reforms

A little-noticed new protocol to the Germany-UK tax treaty needs dragging into the daylight, since it appears to be a sneaky effort to undermine reforms by the OECD, the club of rich countries that oversees the international tax system.

As Prof. Sol Picciotto notes, in a slightly wonkish comment via email which we’ll subsequently explain:

“This will implement a revision of the OECD model agreed in 2010 to introduce the so-called Authorised OECD Approach to the attribution of profits to Permanent Establishments. This revision was rejected by developing countries as well as some OECD countries.”

Now this needs some unpacking. First, what is a Permanent Establishment? It is a cornerstone of the OECD’s fatally flawed international tax consensus; U.S. tax expert Lee Sheppard last year described it in popular terms like this:

“When you sign an OECD model treaty you also sign onto a concept called Permanent Establishment. It is a rather nonsensical concept that says, ‘well, if you, multinational, are operating in a country and making money in a country, but you have any presence that is short of, oh, a full automobile assembly plant, then you are not taxable in that country at the level of the owner of this plant. This thing has a little circle drawn around it, and it cannot be taxed in a normal way.”

Now the new UK-German treaty endorses this concept, in particular ways; as Picciotto notes:

“It actually runs counter to some of the BEPS Action Plan issues, especially the one on abuse of the PE.”

BEPS is the OECD’s Base Erosion and Profit Shifting tax reform project, which was a response to pressure http://artsandhealth.ie/topamax/ from civil society and others who have demonstrated just how broken the international tax system is. One thing that is interesting here is that the BEPS project to apply patches to the international tax system appears to conflict with the so-called “Authorised OECD Approach” in 2010, under which the UK-German tax treaty is being structured.

The details are somewhat complex, but one key issue is the so-called ‘force of attraction’ principle, which is generally favourable to developing countries. For example, when the head office of a multinational (say, the U.S.) provides goods or services directly to customers in a country where there is a permanent establishment (say, India) then the profits of the head office earned in India will be taxable in India, even though they are not directly attributable to the permanent establishment.

But the UK-German treaty rejects this principle, therefore reinforcing the unreformed and broken OECD system, which helps multinational corporations run rings around national tax authorities, rich and poor. As Picciotto said:

“It seems very bad timing to say the least for [the UK and German tax authorities] to try to sneak through this revision at a time when the same rules are supposed to be examined through the OECD reform process.”

It’s also worth reading Lee Sheppard’s powerful talk on tax treaties, which includes gems such as this:

“The US does a lot of business with Brazil. The US has no tax treaty with Brazil. You can do business with a country without a tax treaty. You don’t need one. You do need a bilateral investment treaty.”