G20 nations announce action plan to fix gaps between tax systems in various countries

In a bid to put an end to tax avoidance by multinational companies, a global action plan was announced in Paris on Monday. Developed over the last three years by the Organisation of Economic Cooperation and Development (OECD) at the behest of G20 nations, the Base Erosion and Profit Shifting (BEPS) project, has brought together 60 countries, including India.

BEPS has become a serious problem as gaps between tax systems in different countries are exploited by multinational enterprises to make profits ‘disappear’ or shift to low tax jurisdictions and tax havens. Tax planning has turned into core business for many companies and practices such as transfer pricing are catered to by an entire industry. Globalisation and digital economy exacerbate this problem and international tax rules designed to prevent double taxations have ended up facilitating double non-taxation as well. BEPS lead to annual national revenue losses from 4-10 per cent of global corporate income tax revenues, i.e., $100-240 billion annually, according to a research conducted by OECD since 2013.

These new measures intend taxing enterprises “where economic activities take place and where value is created.” Model provisions have been developed to prevent treaty abuse, including through treaty shopping for which a number of countries work like hubs. Transfer pricing rules have been reinforced, according to the OECD.

This set of 15 measures will be introduced for the renovation of international tax standards and will be presented to and are likely to be adopted by the G20 Finance Ministers on the October 8 in Lima. The instrument will be open for signature to all interested countries in 2016 for information exchange to start from 2017-18. According to OECD, there is large scale consensus for these treaties.

MNEs such as Amazon and Starbucks have announced tax policy shifts to fall in line with BEPS. It’s being hailed as “the most significant rewrite of the international tax rules in a century”. But critics say BEPS will fail to reach the stated objective of ensuring that multinational corporations pay their taxes ‘where economic activities take place and value is created’.

BEPS AT A GLANCE

Rules to help collect value-added tax based on the country where the consumer is located in the case of cross-border business-to-consumers transactions Domestic and treaty rules aimed at neutralising hybrid products to put an end to double non-taxation Reinforced rules to tackle transfer pricing – one of the most litigated tax issues in India Measures to limit use of interest deductions and other financial payments to siphon off profits to tax havens Counter harmful tax practices, including patent boxes A minimum standard to prevent treaty shopping (a number of MNEs come to India via Mauritius) Change of definition of permanent establishment (misused via replacement of distributors with commissionaire arrangements or via the artificial fragmentation of business activities) New rules for transfer pricing (the technique most used by multinationals to avoid tax) New indicators for measuring and monitoring BEPS in order to take effective counter measures Recommendations requiring taxpayers to disclose their aggressive tax planning arrangements Country by country reporting for transfer pricing documentation (reportedly applicable only to enterprises worth euro 750 million or above) Dispute resolution mechanisms (to avoid double taxation becoming an obstacle to cross-border trade and investment) A multilateral instrument to be opened it for signature in 2016

“There will be some amount of strengthened cooperation and more information about what’s going on for tax administrations in OECD and G20 countries,” Tove Ryding of Eurodad, a network of 46 NGOs from 20 European countries, told Businesss Standard. “But this action plan doesn’t abolish patent boxes, in fact, it legitimises their use; there’s no agreement on the use of the profit-split method; transfer pricing guidelines are turning more and more complex and the outcome on country by country report is weak,” said Ryding. He feels the lack of clarity in rules is likely lead to an increase in conflicts between tax administrations and multinational corporations. India had earlier said mandatory binding arbitration to resolve tax treaties disputes will impinge on its sovereign rights.

Experts groups say the rich country group OECD is not the appropriate body to set tax cooperation rules and a new global body which offers equal representation should be formed.