This submission laid out the Tax Justice Network’s position on the necessary reforms of international corporate tax rules, as the ‘BEPS 2.0’ process began in early 2019. There was much to celebrate, as the process had embraced three of the key arguments of the tax justice movement. But at the same time, it was already clear that the obstacles to following through on these were many (as it has since proved).
These are the three areas we welcomed, in which BEPS 2.0 had, initially, moved on from the damaging and unnecessary constraints of the original BEPS process 2013-2015). First and foremost, a political shift. Whereas BEPS (the Base Erosion and Profit Shifting Action Plan) was initiated by the G20 and dominated by OECD member states, BEPS 2.0 began with the trumpeting of a new dawn: the Inclusive Framework, made up of more than 100 countries and jurisdictions, would now set the path of international tax reform – and explicitly on the basis of a global redistribution of taxing rights. The downside was that they all had to accept the BEPS Action Plan, despite most having had no meaningful input at all; but the upside was that they were now (claimed to be) in a position of power.
The second and third areas of progress were more directly related to policy space. The second is that under ‘pillar one’, BEPS 2.0 began from the explicit decision to go ‘beyond’ the arm’s length principle – whereas BEPS 1 was hampered from the start by OECD members insisting on retaining the ALP and the separate entity accounting approach set by the League of Nations in the 1920s and 1930s, despite being clearly unfit for purpose in recent decades. The third is that the proposed area for ‘pillar two’ is the creation of a global minimum corporate tax rate – which if effectively delivered would draw a line under the harmful worldwide race to the bottom.
Altogether, BEPS 2.0 offered – albeit only briefly, as it turned out – the potential for great strides in the global redistribution of taxing rights: creating a genuinely more inclusive decision forum, and eliminating much of both of the incentive to shift profits to ‘tax havens’, and the gaping flaws of the arm’s length principle that facilitate it.
But our submission identified key risks to the entire agenda. Politically, that OECD members would derail the Inclusive Framework if the secretariat did not stand for the broader interests; and practically, that powerful interests would lobby to limit the scope of any unitary tax component, and against the effectiveness of any minimum tax rate. Overall, we identified the potential for complexity without any serious progress.
A specific issue we highlighted was the urgent need for better data, to allow all parties to assess whether proposals would indeed lead to substantial and progressive redistribution of global taxing rights. That required both the OECD country by country standard to converge towards the far more rigorous standard then being developed by the Global Reporting Initiative; and for the data to be made public, ideally at company level but at the very least on a partially aggregated, bilateral basis.
Key findings
- The framing of BEPS 2.0 is a breakthrough reflecting the tax justice movement’s longstanding calls to go beyond the arm’s length principle, and to set a global floor on corporate tax rates, and setting the somewhat broader Inclusive Framework, rather than OECD member states alone, as the decision-makers.
- Unitary tax approaches provide the only way to make progress on the G20’s consensus aim for the initial BEPS process in 2013, of better aligning profits with the location of real economic activity and of the three selected by the Inclusive Framework for evaluation, the G24 proposal offers substantial progress in this direction.
- It is crucial that the Inclusive Framework remain the decision-making body, for the outcomes and the OECD itself to retain legitimacy.
- Ensuring and demonstrating progress towards alignment of profits with real activity will depend on country by country reporting, based on a robust tax accounting standard which in practice means replacing the current OECD standard with that of the Global Reporting Initiative, and ensuring data are public.
Key recommendations
- Ensure the Inclusive Framework retains decision-making power, not OECD member states (nor the secretariat).
- Provide full, public assessment of the three proposals chosen by the Inclusive Framework, in terms of the stated variable of concern: the global distribution of taxing rights between states.
- Pursue apportionment approaches that reflect the location of employment as well as sales, based on country by country reporting, in order to align taxable profits better with real economic activity and ensure a fairer global distribution of taxing rights.
- Make OECD country by country reporting public, and converge towards the much more rigorous Global Reporting Initiative standard including the requirement for reconciliation with consolidated accounts.