OECD/G20 Launch the BEPS Project to Counter Multi-National Corporate Tax Policies

On October 8th in Lima, Peru, the G20/OECD project to address an estimated £155 billion tax shortfall lost through base erosion and profit shifting took its first tentative steps.

The BEPS projects, a 2-year program focussed on changing the behaviour of multinationals in framing and implementing tax policy in order to; according to Pascal Saint-Adams, OECD Tax Director:

“move away from an era when tax planning had become part of core business models”.

I’m sure Mr. Saint-Adams would love to name names; but it seemed very clear that he has Google, Starbucks, and Amazon clearly in his cross hairs.

The reforms frame a set of areas where the OECD and G20 will seek to influence corporate policy such as treaty shopping, transfer pricing, profit shifting and obfuscating the mechanics of how money flows around the globe.

Response to the move has been mixed. Chairman of the influential Ways and Means Committee of the US Congress has framed it as a potential challenge to the primacy of the United States’ ability to make and implement its laws.

The Tax Justice Network commented; “many of the proposals are weak” and did nothing to challenge the behaviour of state actors who tailor tax rates to attract businesses and the promise of inward investment, new jobs and the attendant economic and political benefit.

The markets were uninterested in the change, with no discernable reaction being evident.

The reforms focus on 5 key areas:

  • Promoting the disclosure of business information to domestic tax authorities on a country by country basis. At present information is submitted on a piecemeal basis giving authorities no actionable intelligence to work with. This is the “sunshine law: aspect of the reforms bringing transparency where previously there was none.
  • Treaty shopping, transfer pricing and hybrid mismatch arrangements where companies can exploit anomalies between tax jurisdictions will be evened out to ensure withholding tax is paid where it was not and reliefs are challenged more by authorities.
  • The reliefs and benefits available by routing investment through a third party jurisdiction will be capped. At present 40% of all investment bound for India goes through Mauritius to gain a tax break on its way.
  • There will be tougher rules on what does and does not constitute a taxable business. This is squarely aimed at Amazon and their large warehouses in jurisdictions where full tax is not paid.
  • Tighter definitions will be produced with regard to offshore and onshore operations where sales are booked in one jurisdiction and taxed in another. Google are manifestly in the spotlight here.

Are these changes the end for corporate behaviour of this nature? No, I would suggest not. The self-interest of state actors and their willingness to make themselves attractive to inward investment with always – to an extent – trump collective moves toward action.

Will it change the world? No. Does it provide a good framework for change and bring the minutiae of the debate into focus? Yes. And for that reason it’s a positive.