What will BEPS fix, and who will gain?

Prof. Sol Picciotto, a TJN Senior Adviser and co-ordinator of the BEPS Monitoring Group

A guest blog by Sol Picciotto, co-ordinator of the BEPS Monitoring Group.

What will BEPS fix, and who will gain?

The launch this week of the final reports from the G20/OECD project on Base Erosion and Profit Shifting (BEPS) has sparked two frequently asked questions. The first is: can we give examples of methods used for tax dodging by multinationals which will not be fixed by these proposals?

The answer is: they will not “fix” any.

They provide some tools for tax authorities to tackle some of the more obvious structures, as explained in the General Evaluation by the BEPS Monitoring Group. The proposals will therefore open a new phase of the tax avoidance game. There will be quite a lot of new and more complicated rules, which will make the game more difficult to play. We have also given some examples of structures which the changes will not fix.

Another key question asked is, who will benefit? First, and above all, the army of international tax specialists, who have spent the last two years debating every clause and paragraph. Secondly, of course, the large multinationals who are able to pay for their services. It remains to be seen what strategies these two groups adopt for the changed game, and what they make out of it.

Much also depends on the politicians, who will decide what changes to make, and what resources to provide for tax authorities to play their part in the game. Governments are ambivalent about this, even hypocritical. Many have been calling for action to end international tax loopholes, and even enacting laws to do so, generally responding to public opinion and tax justice campaigns. But on the other hand, they also talk of national ‘competitiveness’, and are concerned that tax measures should not discourage investment, responding in this case to business pressures. This contradictory attitude helps to explain the nature of the BEPS project package, which was weakened as each government tried to protect its preferred tax breaks for business.

One key player, the USA, has special problems adapting to the changes. It still has a relatively high headline corporate tax rate of 36% plus state taxes. However, in practice its multinationals pay far less, due both to domestic tax breaks, and especially to their ability to reduce the tax they pay on non-US income, often to an effective rate of 4-6%. Various proposals have been made to sort this out, generally involving reducing the headline rate while applying at least a reasonable minimum tax on foreign income. This will need a major international tax reform to be agreed, which is very unlikely between President Obama and the Republican-dominated Congress. So the BEPS package was also designed so that it would not depend on enactment of new US laws. The US Treasury asserts that it can introduce country-by-country reporting, one of the key BEPS measures, through regulations under existing statutory powers, although some have challenged this view. Congressional leaders have written twice to the administration asking to be consulted on US implementation of BEPS, but so far have had no reply.

While the US delays, others are taking action to staunch at least some of the outflows adding to the untaxed billions that US multinationals have stashed offshore: e.g. the UK with its diverted profits tax, and Australia with its multinational anti-avoidance law. The British also protected the measures introduced in 2012 to make the UK an attractive base for MNE headquarters, by watering down the BEPS proposals on CFCs (controlled foreign corporations), so that foreign profits wil continue to be largely untaxed in the UK. The aim is to lure (amongst others) US firms, to use some of their cash piles to acquire UK companies and ‘invert’, or shift their headquarters to the UK. So far not even these threats have produced a more coherent response in Washington.

As the players adapt to this changing game, discussions will also continue on issues which remain left over. These could result in more far-reaching changes, since they do need to try to tackle the more fundamental defects in the system. These have been revealed most clearly by the digitalisation of economic activity, as outlined in the report on BEPS Action 1. That report identifies, although without recommending, three types of measures which countries may introduce, to claim new tax rights over digitalised business, although some of these may depend on negotiations with treaty partners. Work will also continue on the profit split method in transfer pricing, and other profit attribution rules. These continuing discussions offer an opportunity to tackle more directly the central issue which was not tackled directly in the first phase of the BEPS project. That is, whether it is possible to agree clearer and simpler rules for apportioning the profits of multinationals, instead of leaving this to be decided by ability of the various players to understand and take advantage of the complex rules.