In July 2013 the OECD unveiled the Action Plan on Base Erosion and Profit Shifting (BEPS), which aims to develop a new set of standards to prevent double non-taxation and ensure that profits are taxed where they are actually generated. By Grace Perez-Navarro, Deputy Director, and Raffaele Russo, Head of the BEPS Project, Centre for Tax Policy and Administration.
- 1.OECD/ G2O EFFORTS TO TACKLE TAX EVASION AND TAX AVOIDANCE 06 February 2014
2. Importance of this agenda Tax evasion and avoidance deprive governments of revenues needed to foster growth, job creation and income distribution If left unchecked, will undermine voluntary compliance of all taxpayers Undermines trust in government more generally Shifts more of the tax burden on to honest citizens 2 3. Global Forum on Transparency and Exchange of Information Making a difference in offshore tax evasion and improving ability of tax administrations to apply their laws Over 120 member jurisdictions, including all financial centres Over 1100 new EOI arrangements up to the standard Over 600 recommendations made and about 300 recommendations addressed relating to bank secrecy, bearer shares, access to accounting and ownership information and removing other barriers to effective international co-operation in exchange of information on request GF published ratings of jurisdictions as Fully Compliant, Largely Compliant, Partially Compliant or Not Compliant. 3 4. Global Forum Ratings New compliance ratings for 50 jurisdictions: Compliant: Australia, Belgium, Canada, China, Denmark, Finland, France, Iceland, India, Ireland, Isle of Man, Japan, Korea, New Zealand, Norway, South Africa, Spain and Sweden Largely Compliant: Argentina, the Bahamas, Bahrain, Bermuda, Brazil, Cayman Islands, Estonia, Germany, Greece, Guernsey, Hong Kong, Italy, Jamaica, Jersey, Macao, Malta, Mauritius, Monaco, the Netherlands, Philippines, Qatar, San Marino, Singapore, Turks and Caicos, United Kingdom, United States Partially Compliant: Austria and Turkey Non-Compliant: British Virgin Islands, Cyprus, Luxembourg and the Seychelles 14 jurisdictions not rated, pending further improvements to their legal and regulatory frameworks for exchange of information in tax matters. Botswana, Brunei, Dominica, Guatemala, Lebanon, Liberia, Marshall Islands, Nauru, Niue, Panama, Switzerland, Trinidad and Tobago, the United Arab Emirates and Vanuatu . 4 5. From Exchange on Request to Automatic Exchange In April 2013 the G20 Finance Ministers and Central Bank Governors first endorsed automatic exchange as the expected new standard. Leaders welcomed in St. Petersburg This is another step change in international tax transparency driven by developments around the globe, with unprecedented political support for automatic exchange of information. Release of new global standard: 13 February 20145 6. Basic approach Account HolderBankCountry A1. Model 1 IGA reporting 2. Model 1 IGA exchanges 3. Leveraging on Model 1 IGA implementation to develop standardised automatic exchange in a multilateral context USBankAccount HolderCountry B Account Holder Bank 6 7. CRS + CAA = exchange standard Account HolderBankCountry AReporting of information based on Common Reporting and Due Diligence Standard (CRS) implemented via domestic lawAutomatic exchange of information based on MTC Article 26 or MAC, & Model CAACountry BAccount HolderBankReporting of information based on Common Reporting and Due Diligence Standard (CRS) implemented via domestic law 7 8. Key features To prevent taxpayers from circumventing the CRS, it is specifically designed with a broad scope across three dimensions: Broad scope of information reported: Personal data: name, address, tax residence, TIN Financial data: account balance, all investment income (including sales proceeds) Broad scope of financial institutions required to report: Banks, custodians, and other financial institutions (brokers, certain collective investment vehicles, and certain insurance companies) Broad scope of account holders subject to reporting: Individuals Entities (including trusts and foundations) Controlling persons (i.e., beneficial owners) of entities8 9. Present Main differences from FATCAIndividuals Residence (not citizenship) No thresholds Residence address test for pre-existing accounts building on EU Savings Directive Simplified indicia searchEntities Look-through for professionally managed investment entities in non-participating jurisdictionsLow risk FIs and products General exclusion for country specific low-risk reporting financial institutions and accounts9 10. Future Next steps Ongoing business consultationPost Sep 14 Feb 14Presentation of CRS to G20Jun 14Sep 14Presentation of commentaries and other technical modalities to G20 CFA approval of commentaries and other technical modalities1. Continued work on commentaries and other technical modalities 2. Consistent implementation (living system) 3. Effective use of information exchanged 4. Alignment with TRACE 5. AEOI of other types of income (in collaboration with the EU)10 11. Future Roles & responsibilities CountryWP101. Enact legislation adopting CRS 2. Issue regulations and guidance incorporating more detailed rules of CRS 3. Enter into CAAs 4. Commence IT and other process implementation including exchange infrastructure 5. Ensure confidentiality of information 6. Effective use of information exchanged 7. Ensure consistent implementation going forward1. Continued work on commentaries and other technical modalities 2. Develop best practices on the effective use of information exchangedGFTEI / AEOI Group 1. Assist developing countries 2. Monitor and review implementation 3. Liaise with WP10 (including via delegation to WP10)3. Resolve issues arising during implementation to ensure consistent application going forward and achieve objectives of CRS 4. Alignment with TRACE 5. AEOI of other types of income (in collaboration with the EU)11 12. Automatic Exchange The Multilateral Convention on Mutual Administrative Assistance in Tax Matters provides a legal basis for automatic exchange. The Multilateral Convention also provides a basis for assistance in collection. Bilateral treaties (and some TIEAs) may also provide a legal basis for bilateral exchange. Over 60 countries have signed Convention and UK and others have extended coverage to their dependencies and overseas territories 12 13. BASE EROSION AND PROFIT SHIFTING (BEPS) PROJECT February 2014 14. I. WHAT IS BEPS?14 15. Background International constraints due to tax sovereignty lead to double taxation Core work of the OECD is to remove barriers to cross-border trade and investment. In tax area we do this by designing international standards / rules to eliminate double taxation Many rules work well but have also resulted in double nontaxation Post-crisis priorities: governments not only need money but they need to ensure the fairness of the tax system If we want to maintain our ability to eliminate double taxation, better to have respected and internationally aligned rules and therefore to fix deficiencies 15 16. OECD Work on Taxation Prevention of double taxation remains core work but there is now recognition that the issue of double non-taxation due to base erosion and profit shifting (BEPS) should also be tackled What is BEPS? There are a number of structures which take advantage of asymmetries in domestic and international tax rules Artificial separation of taxable profits from the jurisdiction where economic activities take place Most BEPS planning is legal if governments and parliaments are unhappy with results, the rules should be changed 16 17. Why is BEPS a problem? It distorts competition o Businesses that operate cross-border may profit from BEPS opportunities which gives them competitive advantages compared to enterprises that operate mostly at the domestic level It distorts investment decisions o towards activities that have lower pre-tax rates of return but higher after tax rates of return this may lead to an inefficient allocation of resources It is an issue of fairness o If other taxpayers think that MNEs can legally avoid paying income tax, it will undermine voluntary compliance by all taxpayers17 18. Increased Attention on BEPS Increased attention on corporate tax affairs Spreading perception that MNEs dodge taxes all around the world and in particular in developing countries Debate on BEPS issues has reached a high political level Parliamentary hearings in a number of countries G20 discussions18 19. Increased Attention on BEPS19 20. II. FEBRUARY 2013 THE DIAGNOSIS REPORT20 21. Report: Addressing BEPS Addressing Base Erosion and Profit Shifting published on 12 February 2013 identifies main pressure areas leading to opportunities for BEPS calls on governments to address these areas: in a nutshell, if governments are not happy with the results under the laws, they must change the lawsSent to and discussed at G20 Finance Ministers meeting in Moscow on 15-16 February 2013: [W]e welcome the OECD report on addressing base erosion and profit shifting and acknowledge that an important part of fiscal sustainability is securing our revenue bases. We are determined to develop measures to address base erosion and profit shifting, take necessary collective actions and look forward to the comprehensive action plan the OECD will present to us in July21 22. How Big a Problem Is BEPS? (1) Debate on Statutory vs. Effective Corporate Income Tax Rates Statutory tax rates do not provide a reliable measure of the burden that a tax system imposes on corporate income while ETRs, in particular backward-looking ones, could in principle provide useful indications of whether base erosion and profit shifting is indeed taking place. Review of studies relating to BEPS Available studies on Effective Tax Rates (ETRs) of MNEs are useful but there are barely two studies using the same methodology. The use of different methodologies to calculate ETRs (in particular backward-looking ones) results in very divergent conclusions regarding the level of taxation imposed on MNEs. 23. How Big a Problem Is BEPS? (2) Data on corporate income tax revenues: Corporate tax receipts vs. GDP have remained stable even though tax rates have been falling over time (although applie