tag:theconversation.com,2011:/fr/topics/beps-8435/articlesBEPS – The Conversation2017-06-13T06:31:16Ztag:theconversation.com,2011:article/785952017-06-13T06:31:16Z2017-06-13T06:31:16ZNew tax treaty will close loopholes that allow multinationals to avoid tax<p>Australia, with another 70 countries, has signed a multilateral treaty to create more coherence in fighting tax avoidance by large multinational corporations. The <a href="http://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm">Multilateral Convention to Implement Treaty Measures to Prevent Base Erosion and Profit Shifting</a>, or BEPS Convention, aims to close loopholes in the international tax system that result from differences in individual country tax systems.</p>
<p>Countries are fiercely protective of their own tax sovereignty and claim the right to set their own company tax rate and base. But this can result in lower company tax around the globe, as multinational enterprises can move capital investment to lower tax jurisdictions and take advantage of tax havens to reduce their global tax bill. This latest treaty will help to overcome this problem.</p>
<p>Since the global financial crisis, nearly a decade ago, the <a href="https://www.g20.org/Webs/G20/EN/G20/FAQs/faq.html;jsessionid=3DCFD3F11B8AF5E54833DC229C60A7BA.s3t2">G20 countries</a> have tried to reform international tax with a <a href="http://www.oecd.org/tax/beps-about.htm#BEPSpackage">Base Erosion and Profit Shifting</a> (BEPS) project. Australia has been a <a href="https://theconversation.com/the-g20-and-the-taxing-issue-of-making-big-business-pay-21466">strong supporter</a> of the BEPS project since it started, including as chair of the G20 in 2014. </p>
<p>This project resulted in <a href="http://www.oecd.org/tax/beps/beps-actions.htm">15 actions</a> that were endorsed by the G20 in 2015. The signing of this tax treaty implements action number 15 to amend existing tax treaties to limit international tax planning. </p>
<p>The other BEPS actions aim to strengthen enforcement, remove inconsistencies in national tax rules, enforce disclosure of corporate tax profits in havens and encourage sharing of tax information between country revenue agencies. </p>
<h2>Australia can’t go it alone on international tax</h2>
<p>International tax cooperation remains critical and this BEPS Convention enables an anti-abuse framework to be embedded in Australia’s treaty network.</p>
<p>In the last century, countries around the world have negotiated bilateral tax treaties, producing a network of thousands of treaties. <a href="http://www.treasury.gov.au/Policy-Topics/Taxation/Tax-Treaties/HTML/Income-Tax-Treaties">Australia</a> alone has about 45 bilateral income tax treaties. </p>
<p>The main goal of bilateral tax treaties has been to prevent double taxation of international business where it operates in more than one country. But the terms of tax treaties can also be used to minimise tax. For example, a company may have significant business sales in a country - like Google in Australia - but under a treaty rule, it may not be treated as having a business presence there.</p>
<h2>How does the BEPS Convention amend tax treaties?</h2>
<p>Without this multilateral convention, it could take decades for countries to renegotiate these bilateral tax treaties. Where countries sign up, the new rules will take effect as soon as each country has ratified the convention. </p>
<p>The BEPS Convention is the first ever multilateral tax treaty that modifies substantive tax rules. Even the speed of signing the BEPS Convention is unprecedented: from treaty mandate to signature has been only 18 months. Most multilateral treaties take much longer, such as the Trans-Pacific Partnership, which has been in negotiation for more than nine years (and may not ever be agreed).</p>
<p>A leading British tax lawyer observed that the BEPS Convention is <a href="http://www.taxsutra.com/sites/taxsutra.com/files/webform/Philip%20Baker%20reaction%20on%20MLI_0.pdf">“not tax peace in our time”</a>. But it is still significant.</p>
<p>The convention inserts a new anti-abuse rule which states that tax treaties are not to be used to abuse national tax laws, if a taxpayer uses a treaty rule for the principal purpose of reducing its tax liability in a country. The convention will also make changes to prevent mismatches in treaty tax rules and to end the artificial avoidance of a business tax presence in a country, for example by using a separate company to do its operations under a contract.</p>
<p>To push governments to resolve tax disputes, the convention inserts an arbitration clause into treaties. If two countries cannot resolve a treaty dispute, then after two years (and if no court case is on foot), it will go automatically to an independent arbitrator who can make a decision that binds the governments and taxpayer. Its controversial and many countries may not agree to arbitration but Australia has signed up to it.</p>
<p>Australia has <a href="http://treasury.gov.au/Policy-Topics/Taxation/Tax-Treaties/HTML/Multilateral-Convention-to-Implement-Tax-Treaty-Related-Measures">adopted most of the BEPS Convention measures</a>, as being consistent with its current tax treaty policy. But many countries, including Australia, will need to enact domestic legislation to bring the convention into law. </p>
<p>Once countries sign up, the treaty changes will take place immediately - this could amend as many as 30 of Australia’s treaties. </p>
<h2>The future international tax architecture - but without the US?</h2>
<p>The BEPS Convention was signed by more than 70 countries. This includes leading signatories such as China, Germany (the current G20 Chair), the United Kingdom, France and Japan and also several low tax financial centres like Singapore and Ireland. But the United States did not sign.</p>
<p>The US failure to sign is hardly surprising. It comes one week after President Trump <a href="https://www.nytimes.com/2017/06/01/climate/trump-paris-climate-agreement.html?_r=0">withdrew</a> the US from the Paris Climate Agreement. It’s another example of the US retreating from multilateral cooperation on issues affecting all nations. </p>
<p>The US also did not sign the <a href="http://www.oecd.org/ctp/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm">Tax Administrative Convention</a>, now with 111 country members, which provides the legal basis for the <a href="http://www.oecd.org/tax/beps/country-by-country-exchange-relationships.htm">country by country</a> exchanges of information about global profits for billion dollar companies, including with the <a href="https://www.ato.gov.au/Business/International-tax-for-business/In-detail/Transfer-pricing/Country-by-Country-reporting/">Australian Tax Office</a>. Instead the US insisted on “going it alone” with its Foreign Account Tax Compliance Act, or <a href="https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx">FATCA regime</a>, which demands foreign countries provide data on US citizens.</p>
<p>Many US tax treaty provisions are in line with the BEPS Convention. But surely that misses the point of multilateralism in tax or any other field of global concern. Instead, we see China is taking a leading role in multilateralism. It is unclear what the US stance will mean for international tax in the longer term. However, this treaty will give some help to other countries aiming to tax global profits of US multinationals, including Google, Apple and Uber, while those companies lobby for the US to <a href="https://www.ft.com/content/008532fa-ef7a-11e6-ba01-119a44939bb6">reform its own company tax laws</a>. </p>
<p>The pace of international tax change is usually glacial and most country co-operative efforts go nowhere. The BEPS Convention provides, for the first time, an international legal architecture for future multilateral tax reform.</p><img src="https://counter.theconversation.com/content/78595/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miranda Stewart receives funding from the Australian Research Council. </span></em></p>A treaty Australia has just signed will amend existing tax treaties to limit international tax avoidance.Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/696292016-12-01T07:13:48Z2016-12-01T07:13:48ZAustralia’s Google Tax may be the second in the world but it’s too early to tell if it’s the ‘toughest’<figure><img src="https://images.theconversation.com/files/148243/original/image-20161201-25674-1e8jhg9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">It may be a little too early to tell if certain aspects of the so-called Google Tax will be tough in practise.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>When introducing the draft legislation for the Diverted Profits or so-called “Google Tax”, Federal Treasurer Scott Morrison <a href="http://sjm.ministers.treasury.gov.au/media-release/123-2016/">claimed it would</a>:</p>
<blockquote>
<p>…reinforce Australia’s position as having amongst the toughest laws in the world to combat corporate tax avoidance. </p>
</blockquote>
<p>Australia is the second country to introduce this type of tax, <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/480318/Diverted_Profits_Tax.pdf">after the UK in April 2015</a>. So in that sense, Australia is (almost) leading the world.</p>
<p>The benchmark rate used to determine whether the tax should be applied, at 24%, might also add weight to the claim that Australia’s law is the world’s toughest. It will cover countries like Singapore and Ireland, <a href="https://www.gov.uk/government/publications/corporation-tax-to-17-in-2020">but also ironically the UK</a>, which has a standard company tax rate of 20% (scheduled to be reduced to 17% by 2020).</p>
<p>But even if the law appears to be the toughest, we will have to see it in practice to tell. The new law has a couple of critical concepts that are new and untested, namely the principal purpose test and the economic substance test. </p>
<p>Both tests require a detailed examination of the facts and circumstances of the multinational corporation in question. Experience with the existing general anti-avoidance provisions suggests that it is difficult to predict how the Australian Taxation Office (ATO) will implement the law and, more importantly, how the courts will interpret and apply these tests. </p>
<p>However, the government should be commended for taking this bold step to strengthen the tax law in the face of strong opposition on many fronts. While it may not be surprising that the business community in general is not in favour of this tax, the OECD and some countries (in particular the United States) have <a href="https://www.taxjournal.com/articles/oecd-embarrassed-uk-diverted-profit-tax-16042015">expressed reservations about the proposal</a>. They argued that this kind of unilateral action by a country will work against the international consensus reached in the OECD’s base erosion and profit shifting (BEPS) project. </p>
<p>The determination of the UK and Australia to implement the tax anyway may be partly due to political pressure from public opinion. But it could also stem from the realisation that the <a href="http://www.oecd.org/tax/beps-2015-final-reports.htm">OECD’s recommendations in its BEPS project</a> may not be always effective in dealing with international tax avoidance by multinationals.</p>
<h2>What the Google Tax will do</h2>
<p>The Google Tax will be effective from July 1, 2017. It will work along side the Multinational Anti-Avoidance Law (MAAL), which came into force on January 1 this year. </p>
<p>The MAAL has a relatively narrow scope, focusing on company tax structures that are designed to avoid having a taxable presence in Australia – similar to those of Google and Microsoft. In contrast, the Google tax will have a wider scope and will potentially be a more powerful weapon for the ATO to combat tax avoidance by multinationals.</p>
<p>It mostly follows the structural design of its counterpart in the UK. It will apply to large multinationals with annual global turnover of at least A$1 billion, unless their turnovers in Australia are not more than A$25 million and thus represent relatively small tax avoidance risks. </p>
<p>A multinational that exceeds these turnover thresholds may be subject to the tax if, among other things:</p>
<ol>
<li>It has entered into a scheme to divert profits from Australia;</li>
<li>The diverted profits are subject to an effective foreign tax rate of less than 24%;</li>
<li>The tax structure lacks economic substance; and</li>
<li>The principal purpose of the scheme is to obtain a tax benefit in Australia.</li>
</ol>
<h2>Apple as an example of how this tax works</h2>
<p>Apple’s <a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">tax structure is a useful case study</a> in how the tax will work. The ATO may have a good basis to argue that Apple has entered into a scheme to divert profits from Australia by shifting income to Ireland, where the profits booked there are not subject to any tax at all. </p>
<p>If the ATO can successfully argue that the structure lacks economic substance (for example, the Irish subsidiary has no employees, yet was found by the European Commission to have booked more than 100 billion euros (A$143 billion) in profits over 10 years since 2003) and the principal purpose of the structure is to obtain a tax benefit in Australia, then the tax may apply. </p>
<p>If the tax applies, a multinational will have to pay tax on the diverted profits at 40%, a penalty rate higher than the standard 30% company tax rate. This is a deliberate policy to discourage these companies from engaging in tax-evasion structures.</p>
<p>The draft legislation also incorporates the “pay first, argue later” policy to deter multinationals further from entering into aggressive tax-avoidance arrangements. If the ATO determines that a multinational is subject to the tax, the company must pay the tax within 21 days, and in general cannot appeal to the court until a 12-month review period expires. This policy, which is a carbon copy of the similar UK law, is another powerful measure to discourage these companies from avoiding tax in the first place. </p>
<p>The ATO can also determine whether a multinational is subject to the DPT based on information available to the Tax Commissioner. In other words, the onus is on the company to prove that it should not be subject to the DPT. </p>
<p>This point is very important in practice, as some multinationals may refuse to cooperate with the ATO and not provide necessary information about their tax arrangements. The draft legislation is designed to address this issue.</p>
<p>Of course, this Diverted Profits Tax alone will not be sufficient to cope with all forms of international tax avoidance structures. For example, stronger specific anti-avoidance rules are required to deal <a href="https://theconversation.com/multinational-tax-avoidance-is-still-a-revenue-issue-for-government-61674">with BEPS using interest deductions</a>. </p>
<p>However, the introduction of the tax is a welcoming move by the government in the war against tax avoidance by multinationals.</p><img src="https://counter.theconversation.com/content/69629/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are still a few real-world tests the Diverted Profits Tax or “Google Tax” will have to face before the government can claim it’s among the toughest in the world.Antony Ting, Associate Professor, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/580412016-05-04T01:40:58Z2016-05-04T01:40:58ZThin capitalisation – the multinational tax avoidance strategy the budget forgot<p>It is now apparent that multinational tax avoidance and aggressive tax planning is a significant fiscal risk to the country. </p>
<p>We have already seen major amendments to Australia’s tax regime to tackle base erosion and profit shifting (BEPS). <a href="https://theconversation.com/government-pitches-for-integrity-in-tax-and-super-experts-respond-58153">Several more significant measures</a> were announced in the federal budget, most notably the diverted profits tax, aimed at multinationals which shift tax to a lower taxing jurisdiction. </p>
<p>Yet to date, a very simple tax minimisation strategy has been largely ignored in the ongoing reforms and was ignored in the federal budget.</p>
<p>Excessive debt loading is a problem that not been afforded the same attention as other aggressive tax planning strategies adopted by multinationals. Nevertheless, excessive debt loading is a very simple technique used by multinational entities to reduce their overall tax liability. And, it is recognised as a global problem. Another term for excessive debt loading is thin capitalisation. </p>
<p>Money is mobile so a multinational can simply shift debt into high tax counties to ensure that a tax deduction is received for the interest paid. This reduces the overall profits in the high tax country, thereby reducing their tax liability. In Australia’s case, the entity loads up their Australian operations with tax-deductible debt. </p>
<p>Excessive debt loading was highlighted as an aggressive tax practice by the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance">Senate Inquiry</a> into Corporate Tax Avoidance. In part two of its <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Report_part_2">report</a>, handed down on 22 April 2016, the Senate Inquiry highlighted the fact that debt-related deductions span a number of related areas including thin capitalisation and transfer pricing. They also emphasised the difficulty in finding publicly available “real life” examples. </p>
<p>The OECD has also recognised that the ability of multinationals to adjust the amount of debt to achieve favourable tax results is a serious global problem. The <a href="http://www.oecd.org/tax/beps-2015-final-reports.htm">report</a> on Action Item 4 of the OECD/G20 BEPS program specifically addresses the BEPS risk arising from three different types of strategies:</p>
<ul>
<li><p>Groups placing higher levels of third part debt in high tax countries</p></li>
<li><p>Groups using intragroup loans to generate interest deductions in excess of the group’s actual third party interest expense</p></li>
<li><p>Groups using third party or intragroup financing to fund the generation of tax exempt income</p></li>
</ul>
<p>Australia already has a thin capitalisation regime designed to tackle this sort of behaviour. Thin capitalisation rules have existed in Australia since 1987. The current regime, introduced in 2001 and found in Division 820 of the Income Tax Assessment Act 1997, is designed to prevent multinationals from claiming excessive debt deductions to reduce their Australian taxable income. </p>
<p>The rules operate by disallowing a proportion of the otherwise deductible interest expense where the debt allocated to Australia exceeds certain limits. The limits are determined by reference to what is known as the “safe harbour” debt amount, an “arm’s length” debt amount, and a “worldwide gearing” debt amount. However, the problem of excessive debt loading still exists. </p>
<p>Of particular interest is the safe harbour debt amount generally referred to as the allowable debt to equity ratio. Prior to the budget there was a suggestion that Australia’s thin capitalisation rules would be tightened for the second time in as many years with an adjustment to the ratio. However, instead reform proposals centred around the diverted profits tax and “anti-hybrid” rules, with thin capitalisation ignored. </p>
<p>When the OECD’s final report on BEPS was released last October, Treasurer Scott Morrison indicated in a <a href="http://sjm.ministers.treasury.gov.au/media-release/003-2015/">media release</a> that Australia had already tightened its thin capitalisation rules and intimated that no further changes would be made. Clearly, the Federal Government is again sending a message that it does not see any problems with the current regime. </p>
<p>However, Australia is not moving towards the OECD’s suggested “best practice” approach. The Federal Government seems to be at pains to ensure the OECD leaves it alone when it comes to thin capitalisation rules. </p>
<p>No one doubts that thin capitalisation rules require a balance between maintaining the integrity of the tax base, or preventing BEPS, and not impeding the efficient allocation of capital. The OECD however points out that there is evidence that excessive debt loading is a serious problem to the erosion of the tax base. It provides a model which it argues is best practice for domestic law. The ratio aspect of the OECD recommendation is similar to Australia, but the approach is not. </p>
<p>Australia’s current approach relies on a ratio of debt to equity. The OECD BEPS recommendation is a fixed ratio rule but one that is a percentage of its earnings before interest, taxes, depreciation and amortisation (EBITDA). It then recommends a ratio of between 10-30%. Alongside the fixed ratio, the OECD recommends a group ratio rule. </p>
<p>There is an argument that Australia’s current regime is relatively close to the common approach suggested by the OECD. There is a ratio test, albeit based on different factors. There is also a worldwide gearing option similar to the OECD’s group ratio rule. However, the different ratio approach can make a significant difference. Australia links its ratio to debt and equity of the entity, an approach that the OECD argues is easy to manipulate. The OECDs model links its ratio to interest and earnings. This approach is aimed at ensuring that net interest deductions are directly linked to the taxable income generated by its economic activities. </p>
<p>The OECD proposals are designed to ensure that profits are taxed where the underlying economic activity occurs and where value is created. We need to ask ourselves whether a thin capitalisation regime that focuses on debt, equity and assets achieves this goal. Perhaps this is a forgotten means of aggressive tax planning that needs to be explored and also targeted for reform.</p><img src="https://counter.theconversation.com/content/58041/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kerrie Sadiq has previously received funding from the International Centre for Tax and Development and CAANZ. She is a Senior Adviser to the Tax Justice Network (UK).</span></em></p>Loading companies with excessive, tax deductible debt is a commonly used by multinationals to avoid tax - so why has the government ignored it?Kerrie Sadiq, Professor of Taxation, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/538692016-02-01T19:05:32Z2016-02-01T19:05:32Z‘War’ on tax avoidance overlooks some obvious legal fixes<p>The war on tax avoidance by multinational enterprises achieved another important milestone last week with the signing of a multilateral agreement on exchange of information.</p>
<p>Australia signed the agreement with 30 other countries - including France, Germany, Ireland, Italy, Japan, Luxembourg, Netherlands and the UK - to enable automatic exchange of country-by-country tax information of multinational enterprises. </p>
<p>The government says it has <a href="http://www.kellyodwyer.com.au/coalition-bolsters-ato-in-fight-against-multinational-tax-avoidance/">“instituted a raft of measures</a> to take aggressive action against multinational tax avoidance behaviour”, but changes to Australian law are still to be made to comprehensively deal with the problem.</p>
<p>The multilateral agreement signed last week is an important achievement of the OECD’s base erosion profit shifting <a href="https://theconversation.com/the-g20-and-the-taxing-issue-of-making-big-business-pay-21466">(BEPS) project</a>. It is important because the Australian Taxation Office will have timely access to much needed global tax information about multinationals. </p>
<p>In the past, it was difficult for the ATO to obtain groupwide tax information of a multinational from its local subsidiary. This issue has hindered the ATO from effectively assessing tax risks and identifying audit targets. As the subtitle of the interim report of the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance">Senate Economics References Committee inquiry into corporate tax avoidance</a> correctly says: “You cannot tax what you cannot see.” </p>
<h2>The US position</h2>
<p>A key player missing from the multilateral agreement is the US. It refused to sign the agreement. Instead, it claims that it intends to exchange the country-by-country reports through bilateral agreements entered into separately with individual countries. </p>
<p>The <a href="http://www.ey.com/Publication/vwLUAssets/US_Treasury_and_IRS_issue_proposed_regulations_on_country-by-country_reporting/$FILE/2015US_CM6101_US%20Treasury%20and%20IRS%20issue%20proposed%20regs%20on%20CBCR.pdf">US Treasury has indicated</a> it would enter into such bilateral agreements with countries that agree to restrict the use of exchanged data to “assessing high-level transfer pricing … tax risks and, where appropriate, for economic and statistical analysis”. </p>
<p>The US insists on restricting the use of the country-by-country reports because it is concerned other countries may use the data to determine how much tax its multinationals should pay in those countries. It is unclear why the US is more concerned about this issue than the 31 countries that have signed the multilateral agreement. In any case, this US position is consistent with its general attitude towards the OECD BEPS project, as summarised in a <a href="http://boustany.house.gov/114th-congress/boustany-statement-on-european-commissions-beps-directives/">recent statement</a> by a US congressman: </p>
<blockquote>
<p>“The OECD’s BEPS recommendations are deeply troubling …the aggressive attempt to impose substantial changes on the international community … seems to unnecessarily target American companies.” </p>
</blockquote>
<h2>‘Success’ of a Google tax</h2>
<p>Without the strong support of the US, will the war against BEPS destined to fail? </p>
<p>There may be hope as demonstrated in some success of unilateral actions such as the <a href="https://theconversation.com/australia-eyes-missing-billions-with-very-own-google-tax-35249">“Google tax”</a> imposed by the UK. It has been reported previously that in response to the tax,<a href="https://theconversation.com/amazon-shows-google-tax-can-work-despite-arguments-against-it-43545"> Amazon has started to pay tax on its sales in the UK</a> rather than in Luxembourg.</p>
<p>Another high profile multinational has responded to UK’s Google tax, suggesting the war against BEPS can achieve and is achieving results. Google announced on January 22 January that it had reached a settlement with the tax authority in the UK to pay £130 million as back taxes and interest covering the 2005-2015 tax periods. It will also start paying UK tax on revenue from UK-based advertisers.</p>
<p>The settlement between Google and the UK tax authority has been controversial. The amount of £130 million appears small compared to the billions of pounds of income generated from the UK over the period. The controversy has been fuelled by the fact that the legal basis of the settlement has been kept secret. This has led to accusations of a <a href="http://www.abc.net.au/news/2016-01-24/google-agrees-to-pay-back-taxes-to-britain/7110044">“sweetheart deal”</a>. The settlement will be subject to an upcoming parliamentary enquiry in the UK this month, as well as potentially investigated by the EU which has a strong stand against secret tax rulings.</p>
<p>All will be watched closely by Australian regulators and policymakers. Australia has introduced a similar “Google tax” known as the Multinational Anti-Avoidance Law. It’s possible that Google will similarly agree to pay back taxes for its income generated from Australian customers in response to this tax. The ATO may also learn from the UK experience and avoid similar controversy.</p>
<h2>Limiting interest deductions</h2>
<p>Of course, it will be a long battle to combat BEPS, and there are areas in Australia’s tax law that should be strengthened. A typical example is the aggressive use of interest deductions by multinationals to erode their tax base in Australia. </p>
<p>Despite the government’s repeated claim that tax law has been improved in this area, the current law still allows a multinational enterprise to claim deductions for excessive interest expenses that are artificially created by intra-group debt. It is even possible for an Australian subsidiary of a multinational to claim interest deductions that are more than the total interest expenses incurred by the whole group. </p>
<p>A <a href="http://www.smh.com.au/business/the-economy/chevron-loses-longrunning-battle-with-ato-faces-multimilliondollar-tax-bill-20151023-gkgk6y.html">recent tax case involving Chevron</a> highlights the problem. While the Chevron group as a whole borrowed at 1.2%, its Australian subsidiary attempted to claim deductions of interest expenses on an intra-group loan at 9%. The Federal Court held that 9% was excessive and adjusted it down to around 5%. It is a welcoming win for the ATO, as the result is possibly the best possible outcome under the current tax law. </p>
<p>However, it is puzzling why the tax law allows the group to claim interest expenses at 5% in Australia while the group’s “real” interest expenses paid to third parties are at 1.2%.</p><img src="https://counter.theconversation.com/content/53869/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Global measures to crack down on tax avoidance by multinationals will take some time to deliver. And there’s still work to be done locally.Antony Ting, Associate Professor, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/536692016-01-26T12:34:49Z2016-01-26T12:34:49ZIf you want Google to pay more tax, change the law<figure><img src="https://images.theconversation.com/files/109175/original/image-20160125-19645-1bf7av2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Fotos593 / Shutterstock.com</span></span></figcaption></figure><p>Globalisation – and the global economic crisis – have contributed to the erosion of national tax bases and in recent years some of the biggest multinationals, among them Apple, Vodafone, Amazon, Google, Starbucks and Microsoft, have been scrutinised for their aggressive tax planning practices. Using (among other techniques) transfer pricing, inter-company lending, royalty payments for licensing agreements, cost-sharing agreements and offsetting group losses, multinational groups can achieve very low effective tax rates. </p>
<p>The ability to shift profits into low or no-tax jurisdictions with little corresponding change in business operations has also been criticised. Fuelled by <a href="http://www.theguardian.com/business/taxavoidance,">media attention</a> the reporting of these practices has in some countries led to <a href="http://www.mirror.co.uk/news/uk-news/tax-avoidance-soars-35billion-under-2362328">public outcry</a> and politicians seem to have jumped on this bandwagon.</p>
<p>Google’s £130m tax deal with HMRC is the latest instalment in a “UK vs Google” saga. Google’s encounters with the UK’s parliamentary public accounts committee had already been recorded in a report: “<a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/tax-avoidance-google/">Tax Avoidance – Google</a>. At the time, the committee questioned how Google, which generated US$18 billion (£12.6 billion) in revenue from the UK between 2006 and 2011, could only pay the equivalent of just US$16m (£11.2m) of UK corporation taxes in that same period. </p>
<p>The company used the now-defunct <a href="http://www.economist.com/news/finance-and-economics/21625876-irish-government-plans-alter-one-its-more-controversial-tax">"double Irish” structure</a> to achieve these low effective tax rates. Central to Google’s tax planning was the position that sales of advertising space to UK clients took place in Ireland. The public accounts committee found this “<a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/tax-avoidance-google/">deeply unconvincing</a>” back in 2013. But arguments against Google’s position relied on concepts of morality and fairness rather than clear tax rules – and this is the problem. </p>
<p>Google has now agreed to pay £130m in back taxes. To put this into context, consider that Google made more than £3 billion in UK sales in 2013 alone. Some (mainly the chancellor of the exchequer and HMRC) <a href="http://www.mirror.co.uk/news/uk-news/downing-street-refuses-back-george-7242096">see this as a big success</a>, while <a href="http://www.bbc.co.uk/news/uk-35390692">others have labelled it</a> as “derisory” and “a sweetheart deal”.</p>
<p>These stories provide fertile ground both for the government and the opposition to raise the stakes: the government is arguing that it is doing more to curb tax avoidance than previous (Labour) governments and the opposition is arguing that this government is not doing enough.</p>
<h2>Letter of the law</h2>
<p>What underpins the whole anti-Google, anti-Starbucks, anti-Vodafone rhetoric is the idea that multinationals should follow the spirit and not just the letter of the law – and pay taxes accordingly. This is buttressed by an overriding concept of “tax morality” or “tax justice” which trumps the actual legislation. </p>
<p>By contrast, what underpins the comments of those who defend the tax planning practices of these multinationals is the idea that legality and illegality is determined according to whether or not they complied with the law. If people disapprove of tax planning practices, whether perceived to be aggressive or not, but still legal, then they should press their governments to change the relevant tax laws.</p>
<p>You can understand why words like “morality”, “fairness” and “justice” are attractive in this context, but the reality of the situation is that most of these instances of aggressive tax planning (or stateless income, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1791769">as coined in the US</a>) are not technically illegal. In other words, current domestic tax laws and the vague non-binding principles of international tax law seem to facilitate such tax planning – some might even say, encourage it.</p>
<h2>New initiative</h2>
<p>What has clearly emerged in the last few years of “tax crusades” is the inadequacy and unsuitability of existing principles of international tax law to deal with the internationalisation of business. Some argue that existing tax rules on jurisdiction in particular need to be adapted to new business models such as digital. Others argue that existing principles are sufficient but there is discord as to how tax authorities ought to apply them. </p>
<p>The OECD/G20, in the context of its <a href="http://www.oecd.org/ctp/beps.htm">Base Erosion and Profit Shifting (BEPS)</a> project, has tried to find solutions to some of these issues through consensus – something initially thought of as nearly impossible. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/109178/original/image-20160125-19680-x14hdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/109178/original/image-20160125-19680-x14hdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=365&fit=crop&dpr=1 600w, https://images.theconversation.com/files/109178/original/image-20160125-19680-x14hdc.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=365&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/109178/original/image-20160125-19680-x14hdc.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=365&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/109178/original/image-20160125-19680-x14hdc.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=459&fit=crop&dpr=1 754w, https://images.theconversation.com/files/109178/original/image-20160125-19680-x14hdc.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=459&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/109178/original/image-20160125-19680-x14hdc.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=459&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The OECD launched its BEPS action plan on multinational tax minimisation in 2015.</span>
<span class="attribution"><span class="source">OECD</span></span>
</figcaption>
</figure>
<p>However, to the surprise of some, the OECD did meet its deadlines and produced recommendations for the issues raised in an <a href="http://www.oecd.org/ctp/BEPSActionPlan.pdf">action plan</a>. These recommendations were set out in the final reports it <a href="http://www.oecd.org/ctp/beps-2015-final-reports.htm">published in October 2015</a>. Whether the BEPS project will make it easier (and more transparent) for tax authorities to tackle aggressive tax planning <a href="https://theconversation.com/double-trouble-why-landmark-oecd-tax-reform-is-doomed-before-it-starts-48115">remains to be seen</a>. However the international tax community, through the OECD/G20, is making an effort to address existing problems and should be at the very least congratulated for its efforts and encouraged to continue.</p>
<p>The European Union has also been at the forefront of these developments. While most associate the European Union with open borders and market liberalisation – with member states’ budgetary concerns of secondary importance – the European Commission has seized on this unique political momentum to further its agenda. The various commission action plans and recommendations evince the inception of a strong <a href="http://www.ft.com/cms/s/0/dfd1f942-733a-11e5-bdb1-e6e4767162cc.html">EU policy against international tax avoidance</a>. The <a href="http://europa.eu/rapid/press-release_STATEMENT-15-5881_en.htm">recent state aid actions</a>, also spearheaded by the commission – which prevent national governments from giving corporations “an unfair competitive advantage” – seem to corroborate this.</p>
<p>Whether or not one agrees with the EU’s – some would say slightly overkill – approach, it should nevertheless remain a priority for those working in tax to address the inadequacy of the existing rules with new or refined rules and principles – not with the injection of vague notions of morality and fairness. The UK has made a valiant attempt to (partially) address the problems with its <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/385741/Diverted_Profits_Tax.pdf">Diverted Profits Tax</a> also known as “Google Tax”. This legislation broadly allows HMRC (under certain circumstances) to tax the profits of multinationals arising from business activities taking place in the UK when there is no taxable presence, because of contrived arrangements diverting these profits from the UK.</p>
<p>While this unilateral stance has been criticised for going against the spirit of multilateralism in the BEPS project, it is a welcome example of rules – some would say imperfect rules – filling in the gaps of the international tax system. The enemy is not just complacency – it is also uncertainty and vagueness.</p><img src="https://counter.theconversation.com/content/53669/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christiana HJI Panayi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Pointing the finger at multinationals for tax minimisation won’t change things – international tax law needs to changed.Christiana HJI Panayi, Senior Lecturer in Tax Law, Queen Mary University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/486142015-10-09T12:02:36Z2015-10-09T12:02:36ZHow governments are helping big companies pay less tax<p>Corporate tax policy says more about power than anything else. Corporations seek to minimise the tax they pay – and, while governments ordinarily try to maximise their revenues, in the case of transnational corporations (TNCs) they also understand that they have to tread carefully. Governments have come to accept that they <a href="http://onlinelibrary.wiley.com/doi/10.1111/hojo.12112/pdf">hold fewer and fewer cards as capital has become more mobile</a>. </p>
<p>They’ve worked on their electorates in order to drive this message home. During the early period of the 2010-2015 coalition, George Osborne and David Cameron <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/193239/Corporation_tax_road_map.pdf">set out their own views</a> by stating that they needed to ensure: “that the way the tax system operates for UK headquartered multinationals does not inhibit commercial business practices or make them unattractive to international investment”.</p>
<p>Trade and competition rules mean that some of the traditional methods of protecting businesses – the imposition of tariffs and the allocation of business subsidies – have been challenged. In such an environment, governments have looked for new inducements to maintain existing, or capture new, business investment <a href="http://onlinelibrary.wiley.com/doi/10.1111/hojo.12112/pdf">and corporate taxation has offered new opportunities in this regard</a>.</p>
<p>The key developments in national tax policies begin to make a lot of sense against this background, especially when we factor into the mix higher public debt levels and large national deficits. Governments have seldom been as desperate to capture the revenues owed to them and close the various tax avoidance schemes that prevail. International interest in corporation tax peaked in the aftermath of the post-2008 economic crisis. And the manner in which the UK Parliament’s Public Account’s Committee, <a href="http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/report-tax-avoidance-the-role-of-large-accountancy-firms-follow-up/">chastised some of the largest and most successful companies for tax avoidance</a> caught many, including the companies involved, by surprise. Parliament wasn’t supposed to talk to major corporations in this way.</p>
<p>We shouldn’t separate the investigations of the Public Accounts Committee from the context of the crisis. For a brief moment at least, major corporations were on the back foot. Public trust in big business – and in the banks in particular – was at an all-time low. The government had an opportunity to tackle the problem of corporate tax abuse and of closing the substantial deficit. However, many governments also recognised that, in the area of tax, they had to act multilaterally in order to ensure that they didn’t simply scare off investors to more favourable tax regimes. And it is out of this that international initiatives, including the <a href="https://theconversation.com/double-trouble-why-landmark-oecd-tax-reform-is-doomed-before-it-starts-48115">OECD’s Base Erosion and Profit Shifting initiative (BEPS)</a>, have evolved.</p>
<h2>Pay little pay late</h2>
<p>The basic strategy for most corporate tax avoidance is simple: TNCs seek to design their businesses so that they pay as much income as possible in countries where taxes are low and as many costs as possible in jurisdictions where the statutory tax rate is high. Low standards of transparency in corporate financial reporting, differences in what should be included in estimates and disagreements over the meaning of corporate tax avoidance have produced varying estimates. The UK government estimates that the difference between the amount of tax expected and the actual amount paid was <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/249146/mtg-2012.pdf">£4.1 billion in 2010/11</a> (the most recent estimation year available), although independent estimates put the figure at around <a href="http://www.taxresearch.org.uk/Blog/2012/10/18/why-hmrcs-tax-gap-still-makes-no-sense/">£12 billion</a>.</p>
<p>Avoidance stems from a similar set of pressures to corporate tax competition: <a href="http://onlinelibrary.wiley.com/doi/10.1111/hojo.12112/pdf">corporate lobbying</a> and <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9442.2011.01650.x/abstract">structural pressures on successive governments to induce businesses to invest</a>. These same drivers have created a vast range of broadly defined <a href="http://money.cnn.com/2013/05/24/news/">tax benefits</a> – which increase the opportunities for tax avoidance and <a href="http://ctj.org/ctjreports/2013/04/ten_of_many_reasons_why_we_need_corporate_tax_reform.php#.VhPtrCt0Z2A">help to lower the effective tax rate</a>.</p>
<p>Findings from the UK have revealed the fuzziness of the rules regarding corporation tax. Creativity in the interpretation of tax rules is embedded in the institutional processes used to develop them. Large accountancy firms second staff to the Treasury to <a href="http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/870/87002.htm">provide advice on formulating tax legislation</a> so that when they return to their firms, they have inside knowledge of how to identify loopholes in new legislation and advise their clients on how to take advantage of them.</p>
<h2>Playing the system</h2>
<p>The ability of firms to interpret tax rules creatively also reflects the imbalance of resources between accountancy firms and tax authorities. In 2009, the four major accountancy firms alone employed nearly 9,000 people and earned £2 billion in the UK and as much as US$25 billion globally from their tax work; <a href="http://www.theguardian.com/business/2009/feb/07/tax-gap-avoidanceschemes">an estimated 50% of their fees now come from “commercial tax planning” and “artificial avoidance schemes”</a>. In 2012, HMRC reported that it had 1,200 staff overseeing <a href="http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/716.pdf">783 large businesses</a>, in respect of which £25 billion in tax was potentially outstanding. There are now around <a href="http://www.wired-gov.net/wg/wg-news-1.nsf/article/Continuing+weakness+of+HMRC+in+its+efforts+to+deal+with+tax+avoidance+26042013131000?open">four times as many staff working for the accountancy firms on transfer pricing alone</a>. And even where companies have been accused by HMRC of having underpaid taxes, the outcome has tended to be a negotiated settlement – an unequal process given the different resources available to the two sides and governments’ need to create a pro-business environment.</p>
<p>The potential weaknesses of co-operative approaches are illustrated by the UK’s <a href="https://www.gov.uk/guidance/disclosure-of-tax-avoidance-schemes-overview">Disclosure of Tax Avoidance Schemes (DOTAS)</a>, which requires companies engaging in tax avoidance to disclose their avoidance activities to HMRC which, in turn, rules on their legality. If legal, the tax avoidance scheme can be used for financial gain until HMRC acts to close the loophole that makes it possible. Unsurprisingly, DOTAS has had <a href="http://www.nao.org.uk/wp-content/uploads/2012/11/1213730.pdf">little impact on the use of aggressive schemes</a>, largely because HMRC lacks the necessary resources to take effective pre-emptive measures.</p>
<h2>Cosy deals</h2>
<p>It isn’t just companies that governments are doing battle with over taxation, it is also other states. Apple has negotiated a special tax rate with the Irish government, resulting in its <a href="http://www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-profit-shifting-and-the-us-tax-code_-part-2">affiliates paying 2% or less since 2003</a>. Starbucks has also apparently reached a similar <a href="http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/716/716.pdf">“secret” deal with the Netherlands tax authorities</a>. Amazon’s tax deal with Luxembourg is so generous that the <a href="http://www.ft.com/cms/s/0/44fbcf44-4e36-11e4-adfe-00144feab7de.html#axzz3ntleyE82">European Union is currently investigating it as potential state aid to the company</a>. </p>
<p>Evidence of bespoke tax deals reached between corporations and governments throws into question the very sustainability of the corporate tax system and raises serious questions about the alignment of government and corporate interests and its effects on tax revenues and public spending in future. It also raises questions about the lengths governments will have to go to in future to entice companies to invest and suggests that international agreement on corporate tax competition may be further away than is presently thought.</p>
<p>The key question is whether BEPS will reduce corporate tax avoidance. The OECD, upon releasing its <a href="http://www.oecd.org/tax/aggressive/beps-2015-final-reports.htm">final report</a>, stated that the new tax agreement will increase the corporation tax take and restore trust in the fairness of tax systems. But there is still a <a href="https://theconversation.com/oecds-new-tax-proposals-wont-stop-companies-shifting-profits-to-tax-havens-48466">long way to go</a> before the BEPS reforms can really be considered to offer a way of tackling tax avoidance. </p>
<p>Country-by-country reporting, for example, will provide country-level disclosures that are unlikely to be transparent and readily available in anything like the format required to facilitate true international cooperation to act on tax avoidance. Moreover, while the rules about taxing economic activity are clearer, there has been no movement on the taxation of corporate subsidiaries so that they will still be treated as independently trading entities. This will do very little, therefore, to eradicate tax avoidance through transfer pricing.</p>
<p>Of course, no international agreement will reduce the pressure, much of it self-imposed, on governments to compete vigorously with other governments in the area of taxation. The UK government has a clear strategy to compete in such terms and has laid out its own stall by setting one of the <a href="https://stats.oecd.org/Index.aspx?DataSetCode=REV">lowest rates of corporation tax in the OECD</a>. </p>
<p>There is nothing surprising about the fact that corporations should seek to minimise their tax bill. What is more surprising and worrying is the extent of the problem and the fact that <a href="http://www.theguardian.com/commentisfree/2015/jul/10/corporate-welfare-budget-tax-money">governments also appear to be colluding in the practice</a>. The battleground is no longer between corporations and governments, but between governments and governments, each one keen to attract new private sector investment with increasingly attractive inducements to companies to facilitate such investment. With all this going on, the big transnationals may be excused for thinking that such permissiveness is simply part of the overall package of inducements.</p><img src="https://counter.theconversation.com/content/48614/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Fooks is a member of the Labour Party, has previously received money from the National Institutes of Health in the US and Cancer Research UK, and currently receives funding from Cancer Research UK.</span></em></p><p class="fine-print"><em><span>Kevin Farnsworth does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Governments may pledge to stop big companies from exploiting tax avoidance loopholes, but are they being honest?Kevin Farnsworth, Senior Lecturer, Social Policy, University of YorkGary Fooks, Corporate Criminologist, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/486812015-10-07T03:42:53Z2015-10-07T03:42:53ZOECD plan means governments no longer taxing in the dark<p>Two years on from a project triggered by <a href="http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html">scrutiny</a> of the “successful” tax avoidance structures of multinationals such as Apple, Google and Microsoft, the OECD has delivered its <a href="http://www.oecd.org/tax/beps-2015-final-reports.htm">final package of reforms</a> on Base Erosion and Profit Shifting (BEPS).</p>
<p>Is the BEPS project a success? The answer is as elusive as the answer to the classic question “is the glass half full or half empty?”.</p>
<p>One of the most important achievements of the BEPS project is the country-by-country reporting system. <a href="https://theconversation.com/information-is-power-oecd-tax-plan-puts-apple-and-google-on-notice-31472">Information is power</a>, and this is particularly true in the war on profit shifting by mutinationals. </p>
<p>It’s difficult for tax administrations to make the right decisions if they do not have full information about the allocation of income, profits, and tax payments of a multinational in all the countries where it carries on its business. On this issue, the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Report_part_1">interim report</a> of the Senate enquiry into corporate tax avoidance is aptly titled “you cannot tax what you cannot see”.</p>
<p>The OECD has recommended the country-by-country system be implemented around the world. This will have two key effects. First, it will put the Australian Taxation Office (ATO) in a much better position to assess the tax structures of multinationals and identify targets for tax audits.</p>
<p>Second, the increased transparency will make tax planning more difficult for multinationals. As the risk of being caught or subject to a tax audit increases, the country-by-country system may even deter some multinationals from engaging in aggressive tax structures in the first place.</p>
<p>The deterrent effect will be stronger if the information is made available to the public. However, significant pushback of this idea by the business community has been successful. The OECD recommends the information be restricted to the eyes of tax administrators. This recommendation may not be the most effective policy to counter BEPS, but should go a long way to address the information asymmetry issue between multinationals and tax administrations.</p>
<h2>The challenges</h2>
<p>The OECD anti-BEPS recommendations face two significant challenges. First, instead of a fundamental reform of the existing international tax regime, the OECD recommends fine tuning of the existing tax rules. The problems of this approach are <a href="http://www.usyd.edu.au/video/play.php?video=http://sydney.edu.au/law/events/2015/Apr/RP_Lecture_M_Graetz_20042015.mp3&poster=http://sydney.edu.au/law/images/content/video/SLS_Podcasts_Poster.jpg&widescreen=false">well articulated</a> by tax professor <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2664976">Michael Graetz</a>, and include the tensions of international tax competition, and the global nature of today’s economy.</p>
<p>Transfer pricing rules are of particular importance in this context. Examples such as <a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">Apple’s tax structure</a> highlight that existing transfer pricing rules are often ineffective to prevent BEPS. Strong objection from business and the US appears to be a major reason for the absence of any significant reform of those rules in the OECD final reports.</p>
<p>The second significant challenge is the actual implementation. Countries may cherry pick tax policies in the final reports, and may even take no action at all. For example, the US Congress has been <a href="http://www.forbes.com/sites/joeharpaz/2015/06/11/will-u-s-congress-throw-a-wrench-in-beps/">raising doubts</a> about whether it will support the country-by-country system.</p>
<h2>Australia’s anti-BEPS measures</h2>
<p>The Australian government introduced a Bill in September to implement the country-by-country system. This measure complies with the OECD recommendation. In fact, Australia was one of the first countries to do so, and this should be congratulated. As explained above, this move will provide the ATO with much needed information to more effectively deal with tax avoidance by multinationals.</p>
<p>The September Bill will also double the penalties for BEPS by large multinationals. Together with the country-by-country system, the measures should provide some deterrent effect against aggressive tax avoidance.</p>
<p>The other measure introduced by the September Bill is the Multinational Anti-Avoidance Law, commonly known as the <a href="https://theconversation.com/amazon-shows-google-tax-can-work-despite-arguments-against-it-43545">Google tax</a>. While a Google tax is not covered in the OECD final reports, a close look at the Bill suggests the government has been very careful in the design of the law to ensure it is largely consistent with the OECD recommendations.</p>
<p>Time will tell if and how the OECD anti-BEPS recommendations will be implemented by countries around the world. In any case, it appears certain multinationals will continue to pursue the goal of minimising their tax costs. At the same time, tax administrations, including the ATO, will have a better picture of multinational tax structures and allocations of profits around the world through the country-by-country system. They may become better equipped and therefore more willing to challenge tax structures of multinational. And it’s possible we’ll see more tax disputes and litigation in the years ahead.</p><img src="https://counter.theconversation.com/content/48681/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Country-by-country reporting is the big achievement of the OECD’s plan to help stop multinational tax avoidance.Antony Ting, Associate Professor, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/404752015-04-21T20:11:20Z2015-04-21T20:11:20ZThe “Netflix tax” - coming to a country near you<p>The arrival of Netflix in Australia has brought into sharp relief the GST base erosion problem caused by global digital commerce. Along with the non-taxation of low-value imported goods, the absence of GST on services and digital products imported by consumers represents an omission from the tax base that is increasingly untenable.</p>
<p>A Netflix tax – as the media has dubbed it – is not a radical new idea but an inevitable and necessary development. It is qualitatively different from the base-broadening involved in removing GST exemptions for food, education, health, and other social goods and is more appropriately described as base-restoration.</p>
<h2>A bit of history goes a long way</h2>
<p>When Australia’s GST law was being drafted, no country was effectively collecting GST/VAT on imported digital products. In 1998 - the year the introduction of a GST was announced - the OECD released its <a href="http://www.oecd.org/tax/consumption/1923256.pdf">Ottawa Taxation Framework Conditions for electronic commerce</a>. The main recommendations for consumption taxes have since been widely accepted:</p>
<ul>
<li><p>GST should apply in the country of consumption; and</p></li>
<li><p>GST on cross-border services supplied to businesses should ideally be collected from the customer, rather than the supplier.</p></li>
</ul>
<p>Australia included the second principle in its GST from the outset. Businesses must “reverse charge” GST to themselves if they import services, but only if they would not be entitled to fully credit that GST against the tax (if any) on their own outputs.</p>
<p>Because our GST base is broad – and because social policy exemptions are “GST-free”, which means that the tax on inputs to the exempt goods and services can be credited – this reverse charge on imported services is primarily relevant to banks and other financial service providers.</p>
<p>But while recognising that the first principle would have allowed GST to be imposed on services imported by consumers, Australia chose not to do so. The problem was that in 1998 it was unclear whether GST on services imported by consumers could effectively be collected. </p>
<p>Collecting GST from suppliers with no presence in Australia would be difficult. Asking consumers to pay GST on their own purchases was impractical and unlikely to meet with high levels of compliance. Walter Hellerstein, Francis Shackelford Distinguished Professor in Taxation Law at the University of Georgia School of Law, refers to this option as a “tax on honesty”, with obvious implications.</p>
<h2>New global appetite for reform</h2>
<p>Fast forward to 2015 and the issue of GST/VAT on imported services and intangibles is now part of the OECD’s <a href="http://www.oecd.org/ctp/beps.htm">Base Erosion and Profit Shifting</a> (BEPS) project. The global digital economy has expanded significantly but the tax principles applicable to GST remain the same, as does the collection problem. However, in part because of BEPS, the international tax climate has shifted and a much clearer consensus is emerging about the solution.</p>
<p>The OECD’s <a href="http://www.oecd.org/ctp/consumption/discussion-draft-oecd-international-vat-gst-guidelines.pdf">draft guidelines</a> for imposing GST on sales of services and intangibles to consumers were released for consultation only late last year, but it was not hard to predict the core principles they would establish, and these are unlikely to change: (1) Taxing digital products at the place of consumption means that tax is due where the consumer is resident; and (2) The most effective way to collect the tax in cross-border business-to-consumer transactions is to collect it from the foreign supplier. </p>
<p>Treasurer Joe Hockey has been reported as describing this as taxing at the source, but in GST terms it is known as taxing at the destination. Hockey is simply referring to the fact that the GST will be collected by the supplier.</p>
<h2>What are other countries doing?</h2>
<p>The OECD recommendations are consistent with EU practice. Non-EU businesses have been required to collect VAT on supplies of electronic services to EU consumers since 2003. Different rules applied within the EU, but from 1 January 2015 all cross-border supplies of electronic services to EU consumers must be taxed in the Member State of residence, even when supplied from other EU countries. Similar rules apply to broadcasting and telecommunications consumed in the EU.</p>
<p>Other countries have also jumped the gun on the OECD guidelines. South Africa introduced rules to tax specified categories of inbound digital services from 1 July 2014. In February 2015, Japan introduced a draft law to impose the Japanese consumption tax on such services. Both Canada and New Zealand, where Netflix is also selling at GST-exclusive prices, are considering changes to their GSTs. Many countries in Africa have had versions of the EU rules in place for some time. Taxes on inbound broadcasting are widespread.</p>
<h2>Should Australia jump on the bandwagon</h2>
<p>Following the herd is not a good reason to change tax policy. But the fact is that we should be taxing the consumption of digital products by Australian consumers, regardless of origin. It is part of Australia’s consumption tax base and for the most part it is not one of the “social goods” that routinely give rise to exemptions from consumption taxes. </p>
<p>The same is true of proposals to tax low-value imported goods, which also should be taxed, at least to the extent that it is cost effective to do so. While the electorate might be resistant, it ought to be easier to shift public opinion on this than it would be to persuade voters that GST should apply to food, education, and health.</p>
<p>The current rules lack neutrality, with Australian suppliers at a disadvantage because they are required to pay GST when Netflix and other foreign suppliers are not. (Some press reports suggest that a new Netflix tax would result in iTunes downloads becoming subject to GST, but anyone who has an Australian iTunes account would know – if they read the Terms and Conditions – that these are already subject to GST. This is because Apple supplies to Australians through a local subsidiary. Netflix could have chosen to do this but did not.)</p>
<p>If imported digital content is not taxed, Australian companies might be tempted to shift overseas, offshoring jobs and profits, as well as further reducing the GST revenue.</p>
<p>It is not to the point to argue that Australian businesses could be more efficient or charge lower prices. The GST is, after all, only 10%, and if Australian prices are unnecessarily high, adding tax to inbound products is not going to overcome that problem. The Netflix tax will not make Australian products more competitive; nor will it remove the threat that on-demand streaming poses to traditional broadcasting services. But it will create a level playing field so far as GST is concerned.</p>
<h2>What kind of Netflix tax should Australia adopt?</h2>
<p>The question is not whether we should have a Netflix tax - with or without its sister, the Amazon tax on imported goods - but what form it should take. A Netflix tax should level the playing-field without stifling innovation or <a href="http://www.dailymail.co.uk/money/smallbusiness/article-3044964/My-VAT-rules-ruined-firms-says-Eurocrat-m-not-blame.html?ITO=1490&ns_mchannel=rss&ns_campaign=1490">destroying businesses</a>.</p>
<p>A number of technical questions will need to be resolved through public consultation. Should GST be extended to all imported services not currently subject to GST, or only to a narrower subset of services that more closely follows current international trends? Should it apply to sales to both businesses and consumers, as the new South African rules do, or only to consumer sales, which is again more consistent with international practice? </p>
<p>Should we follow the OECD suggestion and EU practice by introducing a new, “simplified” system, under which foreign digital commerce suppliers report and pay the GST they’ve collected but make separate annual claims for the refund of any input tax they incur?</p>
<p>One thing is certain: there should be a threshold. There is nothing to be gained from – as the EU has done – imposing GST on micro-businesses supplying, for example, 2 or 3 <a href="https://ravelledsleeve.wordpress.com/2014/10/14/in-which-tax-is-definitely-taxing/">knitting patterns</a> a year to customers in Australia. As with low-value imported goods, the benefits must outweigh the costs.</p><img src="https://counter.theconversation.com/content/40475/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rebecca Millar has previously received funding from the Australian Research Council for her work on the international tax rules for consumption taxes. She was an external expert advisor to the Board of Taxation for its Review of the Application of GST to Cross-Border Transactions. She is also a pro bono academic advisor to the secretariat of OECD Working Party 9, which is working to develop the International VAT/GST Guidelines. In her former work for the International Monetary Fund, she assisted developing countries to write value added tax laws in which a type of 'Netflix tax' was included.</span></em></p>The arrival of Netflix in Australia has brought into sharp relief the GST base erosion problem caused by global digital commerce. Along with the non-taxation of low-value imported goods, the absence of…Rebecca Millar, Professor of Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/389772015-03-23T19:14:07Z2015-03-23T19:14:07ZTax transparency can work for companies if they do it right<figure><img src="https://images.theconversation.com/files/75617/original/image-20150323-14614-1xngoou.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Naming and shaming is not really the main agenda of tax transparency.</span> <span class="attribution"><span class="source">Bart Maguire/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p>The <a href="http://europa.eu/rapid/press-release_IP-15-4610_en.htm">Tax Transparency Package</a> released by the European Commission last week comes amid global moves by the G20 and others to make it more difficult for companies to avoid paying their fair share of tax.</p>
<p>But as serious information sharing plans are hammered out between nations around the world, the Australian government is considering protecting the privacy of some of Australia’s richest people, diluting transparency measures aimed at private companies.</p>
<p>Citing what Senator Josh Frydenberg called the “legitimate concern” of the potential for kidnapping, the Australian government is reportedly planning to <a href="http://www.smh.com.au/business/the-economy/coalition-to-wind-back-tax-disclosure-laws-over-kidnap-fears-20150317-1m1a0k.html">wind back tax disclosure laws</a> to protect the privacy of individuals who own companies with turnovers of more than A$100 million.</p>
<p>Surely no-one believes this is a valid concern, given many of the people in question already feature regularly in magazine rich lists, with their photos, personal wealth, age, location, business ventures, and family details published. Wouldn’t this be the “go-to” list for wannabe kidnappers? Or, are they waiting for the Commissioner of Taxation to publish taxpayer name and ABN, total income, taxable income and tax payable? Keep in mind the taxpayer name will be that of a corporate entity.</p>
<h2>The reason transparency matters</h2>
<p>In reality, transparency measures are not aimed at naming and shaming corporate taxpayers. Large corporate entities and multinationals are complying with the law but often pay very little in tax. Ultimately, the transparency measures are a step in determining how and why this is the case. The broader agenda to address base erosion and profit shifting is about addressing the laws which allow this to happen. </p>
<p>Corporate entities may choose to react to disclosures according to their own circumstances. Some entities will see no need to respond, while others will explain their position. </p>
<p>Voluntary reporting is already on the agenda for public companies. Last week Rio Tinto voluntarily disclosed its <a href="http://www.abc.net.au/news/2015-03-17/rio-hints-at-tax-avoidance-while-spruiking-contribution/6325554">taxes paid in 2014</a>. BHP Billiton has indicated it will follow later in the year. Interestingly, publicly at least, Rio Tinto reported the taxes as an “economic contribution to public finances”, not as a cost of doing business. </p>
<h2>Informing the debate</h2>
<p>The rationale for increased transparency measures is to allow policy makers and the Australian public to be better informed about the levels of tax being paid by large and multinational businesses in Australia. This enables informed debate about the efficiency and equity of the corporate tax system. </p>
<p>The measures introduced are just one response to the concerns that international tax rules have not kept pace with the global economy. These are the same concerns that have been raised by the G20 and the OECD. </p>
<p>The European Commission is examining the feasibility of public disclosure of certain tax information by multinationals. No doubt, Australia has gone further than other countries by already legislating for disclosure. But this is neither good nor bad of itself. The question is whether the measures will meet their stated objectives. </p>
<h2>Shade of secrecy</h2>
<p>The idea of improving the transparency of Australia’s business tax system was first raised by the previous government in February 2013. The consultation process that followed saw nine of the 25 submissions received marked as confidential. This was followed by a Senate inquiry into the proposed legislation, with nine similar submissions received. </p>
<p>The arguments for and against increased transparency broadly fell into two categories. First, those who believed greater transparency of tax affairs would assist in a community debate on the appropriateness of our current tax rules. Second, those who believed it would lead to a misunderstanding by the general public who could potentially jump to incorrect conclusions. Risk of kidnapping did not seem to be a concern, the potential for naming and shaming clearly was. </p>
<p>If we dismiss the kidnapping argument, a much more likely concern of affected taxpayers is reputational risk and consumer backlash. </p>
<p>The published data will be minimal, revealing limited information about taxpayers. The real story will be one about a taxpayer earning profits in Australia and either contributing to its tax system or not. The likely response by taxpayers who believe their reputation has been affected is voluntary disclosure. Further information may be made public to provide context to the mandatory information published. This also leads to the Australian public being better informed. </p>
<h2>Selling the public short</h2>
<p>Corporate entities are selling the public short if they believe there is no way to address reputational risk and consumer backlash from any disclosed information. </p>
<p>The Australian public understand that international tax rules are broken and are simply asking why. The public also understands that tax is a contribution that individuals and corporations alike should make. Perhaps some of these privately held companies should also start viewing tax as a positive contribution to this country rather than a cost that should be minimised at an expense.</p><img src="https://counter.theconversation.com/content/38977/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kerrie Sadiq has previously received funding from the International Centre for Tax and Development. She is a Senior Adviser to the Tax Justice Network (UK).</span></em></p>Companies that embrace tax disclosures and remind the public they are contributing to the economy could actually benefit from greater transparency.Kerrie Sadiq, Professor of Taxation, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/342372014-11-16T19:21:17Z2014-11-16T19:21:17ZG20 tax reform plan should prevent another Lux leaks<figure><img src="https://images.theconversation.com/files/64642/original/qqd36xbs-1416132183.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">OECD Centre for Tax Policy and Administration Director Pascal Saint-Amans has been leading the charge against tax avoidance.</span> <span class="attribution"><span class="source">Dominika Lis/G20 Australia</span></span></figcaption></figure><p>The G20 Communique is good news on the international tax reform front. As part of the G20 commitment to boost economic resilience the Communique commits G20 nations to taking action to ensure fairness in the international tax system. This means they are looking at ways to ensure profits are taxed where economic activities deriving the profits are performed and where value is created. </p>
<p>The most positive statement is the endorsement of the global Common Reporting Standard for the automatic exchange of information between revenue authorities. The G20 also provides strong support for the recommendations coming out of the OECD project on Base Erosion and Profit Shifting (BEPS). And so it should. </p>
<p>The reform program is ambitious and not yet finished but the G20 has committed to continuing the reform program in 2015. As such, the tax scandals we have seen recently coming out of <a href="https://theconversation.com/luxembourg-leaks-how-harmful-tax-competition-leads-to-profit-shifting-33940">“Lux leaks”</a> as well as multinationals such as Apple, Google and Starbucks being named as engaging in highly aggressive tax planning strategies will hopefully become a thing of the past.</p>
<p>Despite the ongoing nature of the OECD BEPS project we have broad agreement from the world’s largest economies on what are complex and multifaceted problems. Developing nations will also be pleased to see a commitment to deeper engagement with them to address their concerns.</p>
<p>There is a great deal of work still to be done and it would be easy to argue that the OECD has not gone far enough in its proposal for reform, but now is not the time to do so. Now is the time to take a breath and reflect on achievements to date. These achievements, reflecting a half-way point in the reform program for the OECD are significant. It is also time to consider the next step for nations which have endorsed the OECD recommendations. </p>
<p>The high level support requires action at a domestic level. Top down political support is apparent but that needs to translate into action. The political will must exist if outputs are to be realised in a practical sense. Governments are going to continue to be lobbied by those with vested interests. Some groups and authors suggest multinationals are doing nothing wrong, while others suggest there are no solutions to a broken tax system. Clearly, the G20 leaders do not agree and these voices are likely to become less vocal. </p>
<h2>Government action must be coordinated</h2>
<p>Governments must act but need to do so in concert with other governments. A coordinated effort is needed and this is not lost on the OECD. Here we are already seeing cracks appear with some too slow, others too fast and some just not wanting to play. </p>
<p>Australia was slow to agree to endorse the Common Reporting Standard for the automatic exchange of information. Fortunately it has now done so. Other nations are potentially too keen. On Friday Pascal Saint-Amans, Head of the Centre for Tax Policy at the OECD, raised concerns about too much momentum. As he said, unilateral action may lead to chaos. </p>
<p>Mexico is one such example of a nation keen to enact new laws to curb BEPS. In fact, it did so earlier this year. </p>
<p>India is also a good example of a nation not liking some of the recommendations. It has made it clear it is opposed to the proposal to make arbitration binding and mandatory under the mutual agreement procedure (MAP) to resolve disputes in tax treaties. India argues such a requirement will impinge on its sovereign rights. </p>
<p>Despite the need for domestic legislation to introduce new rules, the OECD reform program is about nations agreeing to common rules. However, nations have options: agree to the common rules or act unilaterally. The latter would be less than satisfactory as tax evasion is a global problem that must be addressed with global solutions. In fact, as we have seen recently with the Lux leaks scandal, often it’s because nations act unilaterally that base erosion is occurring. </p>
<p>We are yet to see whether Jean-Claude Juncker, current European Commission President, and previous Prime Minister of Luxembourg views tax avoidance in the same way as other nations or sees it as an important issue. On Saturday he said that he is in favour of tax competition as long as it is “fair” tax competition in Europe. </p>
<p>It is easy to blame multinationals, and no doubt, they deserve some of the blame. But once the behaviour of the multinationals is addressed, it is necessary to look at what nations themselves are doing. Nations offer tax incentives to attract investment. The question becomes one of when do such incentives constitute legitimate tax competition and when do they constitute harmful tax practices. Patent boxes, or the preferential tax treatment of intellectual property is one such area of dispute amongst countries. </p>
<p>As I said, the G20 is supporting an ambitious tax reform program by the OECD so this is a “good news” story for the international community. Now we need to keep up the momentum.</p><img src="https://counter.theconversation.com/content/34237/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kerrie Sadiq receives funding from the International Centre for Tax and Development. She is a Senior Adviser to the Tax Justice Network (UK).</span></em></p>The G20 Communique is good news on the international tax reform front. As part of the G20 commitment to boost economic resilience the Communique commits G20 nations to taking action to ensure fairness…Kerrie Sadiq, Professor of Taxation, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/338902014-11-11T19:30:57Z2014-11-11T19:30:57ZKey events in the G20 push on tax avoidance<figure><img src="https://images.theconversation.com/files/63919/original/89qy3hf3-1415324913.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Pressure is building ahead of the Brisbane G20 Leaders' Summit for action on tax avoidance by multinationals.</span> <span class="attribution"><span class="source">Andrew Sutherland/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Tax avoidance by multinational enterprises is not new. But the current level of political will and public outcry on the issue is uncommon in the history of taxation. </p>
<p>The upcoming G20 meeting in Brisbane promises to keep the momentum and reiterate the determination of political leaders to address base erosion and profit shifting by corporate groups.</p>
<p>The timeline below reviews the development and key events of the anti-corporate tax avoidance movement so far.</p>
<p><em>To navigate the timeline below, hover your mouse on the right (and on the left to move back). If you can’t see the timeline, click refresh on your browser.</em></p>
<iframe src="https://s3.amazonaws.com/cdn.knightlab.com/libs/timeline/latest/embed/index.html?source=1y-etB1UmOUXFec2Bdr_VAfj0jRpkoUROxVzhD-A9AWc&font=Bevan-PotanoSans&maptype=toner&lang=en&height=650" width="100%" height="650" frameborder="0"></iframe>
<p><strong>Further reading</strong></p>
<p><a href="https://theconversation.com/irelands-move-to-close-the-double-irish-tax-loophole-unlikely-to-bother-apple-google-33011">Ireland’s move to close the ‘double Irish’ tax loophole unlikely to bother Apple, Google</a></p>
<p><a href="https://theconversation.com/g20-host-australia-faces-hard-truths-of-multinational-profit-shifting-31514">G20 host Australia faces hard truths of multinational profit shifting</a></p>
<p><a href="https://theconversation.com/information-is-power-oecd-tax-plan-puts-apple-and-google-on-notice-31472">Information is power: OECD tax plan puts Apple and Google on notice</a></p>
<p><a href="https://theconversation.com/whats-needed-for-australia-to-seriously-tackle-tax-avoidance-32272">What’s needed for Australia to seriously tackle tax avoidance</a></p>
<p><a href="https://theconversation.com/multinationals-unfazed-by-g20-tax-crackdown-23421">Multinationals unfazed by G20 tax crackdown</a></p>
<p><a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">Apple iTax: made in Ireland, designed in the US</a></p><img src="https://counter.theconversation.com/content/33890/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Tax avoidance by multinational enterprises is not new. But the current level of political will and public outcry on the issue is uncommon in the history of taxation. The upcoming G20 meeting in Brisbane…Antony Ting, Associate Professor, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/315142014-09-17T06:34:40Z2014-09-17T06:34:40ZG20 host Australia faces hard truths of multinational profit shifting<figure><img src="https://images.theconversation.com/files/59245/original/64njsjjz-1410926066.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Finance Ministers meeting in Cairns is a chance for Treasurer Joe Hockey to show leadership on OECD-recommended tax reform.</span> <span class="attribution"><span class="source">Dan Himbrechts/AAP</span></span></figcaption></figure><p>The G20 Finance Ministers have the opportunity this weekend to endorse the initial <a href="http://www.oecd.org/ctp/beps-2014-deliverables.htm">recommendations</a> of the OECD on how to address the global problem of multinational tax avoidance.</p>
<p>The <a href="http://www.oecd.org/ctp/BEPSActionPlan.pdf">work</a> of the OECD on the issue to date is substantial. Most notable is the adoption by many nations, including Australia, of the Common Reporting Standard for the automatic exchange of tax information. This standard will allow significant inroads to be made into tax avoidance, particularly by individuals sheltering money offshore. This is the first step in an ambitious tax reform program. </p>
<p>There is a long way to go if we are to end the issue now known as Base Erosion and Profit Shifting (BEPS). This week’s release of the first of the OECD recommendations contains some positive signs that further advances will be made. It also recognises some hard truths. </p>
<h2>Transparency: a three-pronged approach</h2>
<p>Three key OECD recommendations address international tax transparency: country-by-country reporting, harmful tax practices, and a multilateral instrument.</p>
<p>The most positive recommendation is county-by-country reporting, which will complement the information obtained via the Common Reporting Standard with the onus on the taxpayer to provide information to tax administrations. It will also extend the net of information captured to all multinationals. </p>
<p>A revamp of the OECD work on harmful tax practices is also welcome. This measure focuses on nations that engage in harmful tax competition. The OECD recommendations place an emphasis on improved transparency in relation to taxpayer rulings for individual taxpayers which relate to preferential regimes. However, the focus will be on distinguishing between preferential regimes which encourage real activity and those which encourage profit shifting. The “spillover” effect, or the impact that one country’s choices have on other countries, highlighted recently by the <a href="http://www.imf.org/external/np/pp/eng/2014/050914.pdf">IMF</a>, is unlikely to be examined by the OECD. </p>
<p>Steps towards a multilateral instrument to expedite and streamline the implementation of BEPS measures are a positive sign. Tangible outcomes rely on nations adopting G20 endorsed recommendations of the OECD. Success will only occur if a consensus framework is maintained. The suggested multilateral instrument is an administrative tool and, if used effectively, will streamline processes and potentially express a nation’s in-principle commitment to tax reform.</p>
<h2>Hard truths</h2>
<p>I have previously <a href="https://theconversation.com/developing-nations-need-more-than-words-from-g20-tax-reform-30608">argued</a> that the current international tax system is broken and it’s going to take significant global effort to fix it. </p>
<p>Global effort needs to go beyond transparency. Most multinationals are not breaking the law. Morality aside, they are taking advantage of current laws which allow profit shifting through tax advantaged structures. These structures allow the use of transfer pricing rules and treaty provisions to minimise tax, and lie at the heart of the problem. While acknowledging the systemic challenges of ensuring profits are taxed where economic activities occur and where the value is created, the first set of OECD recommendations understandably raise more questions than answers. </p>
<p>The most telling is the report into the challenges of the digital economy which is the result of information and communication technologies. We are seeing rapidly evolving technologies and business structures leading to problems including a nation’s ability to establish the right to tax transactions. The OECD and G20 countries have reached a common understanding of the challenges raised by the digital economy but leave much of the work to the rest of the Action Plan. Those recommendations are not due until 2015. </p>
<p>More progress has been made in relation to treaty abuse and specifically treaty shopping. Tax treaties are entered into between two countries to determine taxing rights and prevent double taxation. They are not intended to be used to generate double non-taxation. </p>
<p>Currently, we are seeing multinationals obtaining benefits under treaties where they are a resident of neither country. It is positive to see that treaty anti abuse rules have been drafted and will be included in the OECD Model Tax Convention. However, again, more work is needed in this area. </p>
<p>Progress has also been made in the area of transfer pricing, but the majority of this work will form the basis of the 2015 recommendations.</p>
<p>Many of the BEPS problems are created by the hard truth that from a business perspective multinationals structure their operations in a truly global manner. Yet, from a tax perspective, we continue to treat the multinational entity as having separate parts. By treating a multinational as having separate parts, they are able to shift profits. </p>
<p>Despite recognising the systemic challenges, the OECD is committed to addressing flaws in the current regime. It is not considering other approaches such as <a href="http://en.wikipedia.org/wiki/Formulary_apportionment">“formulary apportionment”</a> which is suggested by civil society groups and academics as being a possible solution to the current separate entity approach. </p>
<p>The recommendations reflect OECD and G20 countries consensus on a number of solutions to end BEPS. Australian Treasurer Joe Hockey should endorse the OECD’s recommended measures as a positive step to address profit shifting and promote the welfare of Australia’s citizens through a sound tax regime. </p>
<p>At the same time, the Australian Parliament has the responsibility to legislate a resilient tax regime which is both robust and adaptable to the modern global economy. As host of the G20 in 2014 we must also been seen to be a leader in tax reform.</p><img src="https://counter.theconversation.com/content/31514/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kerrie Sadiq receives funding from the International Centre for Tax and Development. She is a Senior Adviser to the Tax Justice Network (UK).</span></em></p>The G20 Finance Ministers have the opportunity this weekend to endorse the initial recommendations of the OECD on how to address the global problem of multinational tax avoidance. The work of the OECD…Kerrie Sadiq, Professor of Taxation, QUT Business School, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/314722014-09-16T20:26:05Z2014-09-16T20:26:05ZInformation is power: OECD tax plan puts Apple and Google on notice<figure><img src="https://images.theconversation.com/files/59130/original/3zxkvw4k-1410851353.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Google books much of its Australian profit to offshore operations.</span> <span class="attribution"><span class="source">Tawel/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Public outcries over tax avoidance by multinational enterprises like Apple and Google have pushed politicians to act. The unprecedented international political will to combat base erosion profit shifting by multinationals led to the <a href="https://theconversation.com/the-g20-and-the-taxing-issue-of-making-big-business-pay-21466">endorsement of the G20</a> in September 2013 for the OECD to embark on an ambitious project aiming to eliminate double non-taxation. </p>
<p>The OECD has just released the first package of proposals addressing seven action items. These will be presented to G20 Finance Ministers in Cairns this weekend. </p>
<p>One of the key proposals is to increase transparency through a country-by-country reporting regime. Under the proposal, multinationals would have to report the amount of income, profit before tax and income tax paid in each of the countries where they have operations. In addition, they would have to disclose their total employment, capital and assets in each of the countries.</p>
<p>A properly designed country-by-country reporting regime is critical in the war on profit shifting for two reasons. First, it would provide much needed information for tax authorities to identify targets for tax investigations. For example, if such reporting were in place when Apple implemented its <a href="https://theconversation.com/apple-itax-made-in-ireland-designed-in-the-us-24061">international tax avoidance structure</a>, the substantial profits booked in Ireland and the minimal tax paid in that country would be immediately apparent to the ATO. </p>
<p>Second, the country-by-country reporting regime would have a deterrent effect. As the tax benefits from an international tax avoidance structure would be disclosed to tax authorities around the world, the risk of a tax investigation would be much higher. Multinationals would likely think twice before engaging in aggressive tax structures.</p>
<h2>Multinationals are campaigning against change</h2>
<p>The strong opposition from business against the country-by-country reporting regime suggests it would be an effective anti profit shifting weapon for tax authorities. The OECD consultation on this regime has been one of the most controversial action items of the profit shifting project so far. It has attracted over 130 submissions in total, with 79 from businesses and 43 from tax lawyers and accountants. </p>
<p>The overwhelming enthusiasm from the business and professional communities reflects their strong desire to keep as much tax information as possible “hiding from light”. One of their arguments against the country-by-country reporting regime is the compliance costs associated with preparing the required information. But compliance costs under the proposed reporting regime are likely to be a small fraction of the tax advisory fees that multinationals are willing to pay for tax avoidance structures. </p>
<p>In a recent US congressional hearing it was revealed Caterpillar Inc, an iconic US multinational, paid US$55 million to PwC for a tax structure under which it has successfully shifted US$8 billion from the US to Switzerland. </p>
<h2>Transparency compromised</h2>
<p>NGOs and academics, on the other hand, have argued for the country-by-country information to be made public. The deterrent effect is likely to be more powerful if the information is disclosed in the public financial statements of the multinational. The reputational issue is now a boardroom concern and can be a deal breaker when a multinational contemplates a profit-shifting structure. </p>
<p>But the concerns of multinationals have made inroads in the OECD proposal, in which the country-by-country information would be reserved for the eyes of tax authorities and not disclosed to the public. It appears that the OECD’s preference hinges to a large extent on its focus of the first function of the regime, namely, providing essential information for tax authorities to identify tax audit targets.</p>
<p>A successful implementation of the country-by-country reporting regime would be good news for “honest” companies which pay their fair share of tax. As the regime helps tax administrators to focus on the right targets for tax investigations, it would minimise the risk of wasting time and effort on honest taxpayers.</p>
<p>Of course, the devil may be in the detail. The OECD will undertake additional work in the coming months to develop detailed implementation and reporting rules. </p>
<p>It is unclear at this stage how much additional useful information will become readily available to tax authorities. For example, the proposal suggests that information about related party transactions of a multinational in a country would be provided to that country in a “local file”. It is not clear if these local files would be readily available to other countries where the multinational has operations. </p>
<h2>Possible loopholes</h2>
<p>Taking Apple’s tax structure as an example, Apple Australia buys products from Apple Singapore, which in turn buys the products from Apple Ireland. The ATO would have the local file showing the information about the intra-group sales between Australia and Singapore. However, unless it can readily obtain information about the intra-groups sales between Singapore and Ireland, the ATO would not have enough information to complete the puzzle. Without a global understanding of the whole tax structure, it would still be difficult for the ATO to effectively assess and challenge the arrangement.</p>
<p>Obtaining full global information about the tax structure of a multinational is the correct first step in the battle against profit shifting. However, it will take much more to win the war. </p>
<p>The tax structures of Apple and Google, etc. are in full compliance of tax law. Even with the whole picture of Apple’s tax structure in front of the ATO, it will still need effective tax law to collect the fair amount of tax. The challenge for the ATO is: how can it lay its hands on the profits booked in Ireland that have not been taxed anywhere in the world? The current tax law does not empower the ATO to claim a share of that income. Tax administrators in most countries are in the same boat.</p>
<p>This is the most challenging part of the project. A fundamental rethink of the underlying principles of the taxation of multinationals is necessary for a comprehensive solution to the profit shifting issues. The OECD will have to do much more work on some highly controversial issues in the coming months. International consensus would likely to be more difficult to achieve on these issues.</p><img src="https://counter.theconversation.com/content/31472/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Antony Ting does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Public outcries over tax avoidance by multinational enterprises like Apple and Google have pushed politicians to act. The unprecedented international political will to combat base erosion profit shifting…Antony Ting, Senior Lecturer of Taxation Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/249012014-04-16T20:30:05Z2014-04-16T20:30:05ZG20 tax reform mired in shadowy world of lobbying<p>Researchers estimate the US loses more than US$90 billion annually in corporate income tax revenues from tax loopholes and tax havens, also known as base erosion and profit shifting (BEPS). With a growing perception that multinationals <a href="http://www.theguardian.com/technology/2013/apr/22/google-eric-schmidt-tax-avoidance">consider income taxes voluntary</a>, international tax reform is <a href="https://theconversation.com/the-g20-and-the-taxing-issue-of-making-big-business-pay-21466">on the agenda</a>.</p>
<p>However, prospects for significant reform are dim as large, well-funded groups successfully lobby the US – where corporate tax reform has stalled – to maintain the status quo. At the OECD, proposals to replace current toothless transfer pricing rules are off the table.</p>
<p>In the most developed nations, lobbying statutes are enacted to promote transparency. In the US, both the firms that lobby and their lobbyists are required to register with <a href="http://www.senate.gov/pagelayout/legislative/g_three_sections_with_teasers/lobbyingdisc.htm#lobbyingdisc=lda">Congress</a> and publicly disclose their clients, fees earned, and lobbying issues. But the lack of lobbying disclosure requirements at the OECD creates an army of ghost lobbyists who are invisible to the public and yet are shaping international tax policy.</p>
<h2>Paying to fall between the cracks</h2>
<p>The corporate players behind the scenes of OECD tax reform proposals use associations and law firms to hide their identity from the public.</p>
<p>During 2013, lobbying expenses in the US were <a href="http://www.opensecrets.org/lobby/index.php">US$3.21 billion</a>. But there is no doubt it is a good investment – a recent <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1375082">study</a> found a return of $220 for every $1 spent - a boggling 22,000% - on lobbying expenses for firms seeking a one-time tax holiday on international earnings.</p>
<p>OECD tax policies are not just important for its 34 member nations. These policies have implications for developing nations’ ability to raise revenue and create a level playing field for local businesses.</p>
<p>One of the most successful of the groups lobbying the OECD is the Digital Economy Group (DEG), fronted by the prominent US law firm <a href="http://www.bakermckenzie.com/aboutus/">Baker & McKenzie</a>, which has had considerable success in pressuring the OECD to maintain favourable tax rules on web-based sales, and sourcing of income from intellectual property.</p>
<p>At Baker & McKenzie, former OECD staffer <a href="http://www.bakermckenzie.com/Mary-C-Bennett/">Mary C. Bennett</a> represents DEG, and <a href="http://www.bakermckenzie.com/CarolineSilberztein/">Caroline Silberztein</a>, who headed OECD’s transfer pricing unit for 10 years and initiated their intangible transfer pricing work, gives DEG members backchannels to the OECD staff.</p>
<p>While not individually identified, DEG members also <a href="http://www.biac.org/news/2013/131220_BIAC_Comments_on_Digital_Economy.htm">belong</a> to the Business and Industry Advisory Committee to the OECD (<a href="http://www.biac.org/aboutus.htm">BIAC</a>), an association with a strong, formalised connection with the OECD, and charged with advocating business perspectives.</p>
<p>The <a href="http://soprweb.senate.gov/index.cfm?event=selectfields">public database</a> maintained by the US Senate shows no record of DEG or BIAC. In the US, BIAC members lobby individually and through other groups like the Business Roundtable which spent US$12 million lobbying in 2013.</p>
<p>The public remains in the dark about DEG membership. The OECD does not require lobbying disclosures by association members and Baker & McKenzie won’t identify the firms bankrolling their lobbying efforts. Amazon, Google and other large US internet-based firms are speculated to be key players. </p>
<p>Firms use trade associations or coalitions to lobby. The benefit of lobbying in a group includes building greater constituency with Congress, increasing economies of scale and more importantly, providing cover.</p>
<p>Like tax law, the US lobbying disclosure laws are also riddled with loopholes. Trade associations’ lobbying expenses are public but linking expenses to specific firms’ contributions is impossible. Further, membership lists which are required to be public disappear from websites after the group disbands.</p>
<p>Public trust is eroded when relationships between private corporations, rule making bodies and regulators appear to be too cozy. In fact, the OECD has asked governments to increase <a href="http://www.oecd.org/corruption/ethics/lobbying.htm">lobbying transparency</a> and <a href="http://www.oecd-ilibrary.org/governance/post-public-employment_9789264056701-en">prevent conflicts of interest</a> that arise from the “revolving door” between public service and private employment. </p>
<p>Ironically, neither information on the OECD’s own lobbying guidelines nor public disclosure of lobbyists are readily available on their website. </p>
<h2>The lobby’s lobby</h2>
<p>Historically, the US has played an outsized role in international tax policy at the OECD, being the organisation’s single largest funder, providing over one-fifth of the OECD budget. It is unsurprising then, that US policymakers are engaged in the OECD at the behest of their constituents. The OECD’s earlier work to eliminate tax havens changed from a “<a href="https://www2.hhh.umn.edu/publications/7102/document.pdf">bombshell to a damp squib</a>” after US interests intervened.</p>
<p><a href="http://soprweb.senate.gov/index.cfm?event=getFilingDetails&filingID=fd84e71b-36b0-4d71-8890-d2fae6136b49&filingTypeID=69">Ebay’s 2013 Q3</a> lobbying disclosure lists, for instance, includes meeting with US Congress members, the Internal Revenue Service and the US Treasury department on “OECD proposals to modify international tax rules” among other items reported for the US$565,265 in lobbying expenditures during the period.</p>
<p>If international tax reform went ahead, resulting in worldwide tax harmonisation and the elimination of transfer pricing loopholes, firms would likely see increased tax liabilities but reduced tax risk and uncertainty.</p>
<p>Vodafone shareholders are aware of the cost of tax uncertainty. The firm is losing a tax dispute with India worth US$2.6 billion, related to sales through a tax haven subsidiary. Two months after the Indian Supreme Court ruled in Vodafone’s favour, the government retroactively changed the tax code back to 1962 to ensure the transaction would be illegal. </p>
<p>But in most cases, multinationals don’t want to give up the secrecy provisions and the transfer pricing policies for uncertain tax reforms. In other words, better the devil you know.</p>
<h2>State by state</h2>
<p>The long-term prospects for tax reform are not entirely dim. Recent actions by some US states suggest a growing impatience with the federal and international tax reform efforts.</p>
<p>Hearings before the US Senate and House of Commons Public Accounts Committee have made the public aware of spectacular tax avoidance strategies. But it’s not just public ire that has been the impetus for state tax reform. The reasons for expanding state corporate tax revenues are two part.</p>
<p>US states are unable to borrow to fund government deficits, so when tax revenues decline, they enact austerity measures which face considerable backlash. In a lawsuit brought by local school boards, for example, the Kansas State Supreme Court found the school funding reductions there to be so severe as to be <a href="http://www.nytimes.com/2014/03/08/us/kansas-school-spending-ruling.html">unconstitutional</a>.</p>
<p>Local government officials are also concerned that the deck is stacked against local businesses that do not buy complicated international tax strategies from well-heeled tax lawyers and accountants.</p>
<p>Three types of state laws are effectively closing down the most aggressive tax planning strategies. First, states are moving away from separate company reporting (similar to that used in international taxation) and instead are adopting combined, or unitary, reporting. Unitary or combined reporting eliminates the benefits of shifting profit to subsidiaries in no-tax states.</p>
<p>Second, states are also enacting “economic nexus” laws which subject firms to tax based upon an economic, not physical, presence in the state. Digital economy firms and others with significant intangible property are aggressively fighting these laws, but the US Supreme Court has decided not to hear their pleas.</p>
<p>Third, states are enacting legislation to impose tax on corporate revenues earned in tax havens, even if this income is not subject to tax at the federal level. A recent <a href="http://www.uspirg.org/reports/usp/closing-billion-dollar-loophole">study</a> shows that California would raise US$3.3 billion by taxing corporate profits sent to tax havens. </p>
<p>But states are being lobbied as well, and not just by corporations. Representatives from Luxembourg and Lichtenstein have written to Maine – population 1.3 million – to argue against a bill <strong>that would have closed a loophole allowing multinationals to use tax havens to evade tax.</strong></p>
<h2>No change soon</h2>
<p>According to a PricewaterhouseCoopers survey, 81% of US CEOs believe the current international tax system has not changed to reflect how multinational corporations operate today. Yet, only 7% believe the OECD will achieve substantial reform of the international tax system within the next couple of years.</p>
<p>Due to successful lobbying efforts, US <a href="http://www.nytimes.com/2014/04/02/business/tax-lobby-works-to-defeat-overhaul-it-once-cheered.html?_r=1">tax reform</a> has stalled and now US multinationals believe the OECD is merely studying BEPS, rather than doing something about it.</p><img src="https://counter.theconversation.com/content/24901/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Researchers estimate the US loses more than US$90 billion annually in corporate income tax revenues from tax loopholes and tax havens, also known as base erosion and profit shifting (BEPS). With a growing…Raquel Alexander, Associate Professor of Accounting, Washington and Lee UniversityJohn Barrick, Associate Professor of Accountancy, Brigham Young UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/234212014-02-24T05:38:37Z2014-02-24T05:38:37ZMultinationals unfazed by G20 tax crackdown<p>The G20 finance ministers have once again <a href="https://theconversation.com/g20-finance-ministers-agree-to-growth-target-experts-react-23566">agreed</a> to cooperate to counter aggressive cross-border tax avoidance by multinationals. </p>
<p>Many US firms are using tax avoidance schemes for their non-US earnings while they shamelessly claim they are paying appropriate taxes in the source countries in which they operate.</p>
<p>The OECD responded to earlier requests for action from the G20 by initiating the “Base Erosion and Profit Shifting” (BEPS) project, and since then has published an action plan to address the issue. The aim of the OECD is to develop measures to counter aggressive tax avoidance in both member and non-member countries, and to limit the risk of double taxation.</p>
<p>When US multinationals assert that their entire non-US income is derived through the <a href="http://www.investopedia.com/terms/d/double-irish-with-a-dutch-sandwich.asp">double Irish</a> scheme (see explanation below), and is subjected to a very low rate of tax, the artificial and contrived nature of the arrangements is obvious. The OECD is making progress, but there does appear to be some unintended consequences for the OECD and national governments as they develop measures to counter tax avoidance.</p>
<p>Despite the extra scrutiny facing US multinationals since 2012, when <a href="http://www.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUSBRE89E0EX20121015">Starbucks</a> agreed to “voluntarily” pay company tax in the UK, tax avoidance activities appear not to have slowed.</p>
<h2>Yahoo betting against BEPS project?</h2>
<p>Since the BEPS project commenced it would be expected that US multinationals not using the double Irish scheme would at least hesitate before implementing it. And that other US multinationals might consider unwinding the arrangement. Regrettably, the reverse appears to be taking place with the announcement that Yahoo is moving to Ireland in March to exploit the double Irish scheme.</p>
<p>Yahoo is moving the headquarters for its European operations from Switzerland to Ireland and has boldly asserted that the move is not motivated by tax reasons. Twitter set up a double Irish scheme when it was floated last year after the BEPS project commenced. </p>
<p>The news that Yahoo is moving to Ireland and that other US multinationals may follow suggests an unforeseen consequence of BEPS may have been to highlight the aggressive avoidance opportunities available to US multinationals. </p>
<p>There may be pressure within the management of US multinationals that are paying higher amounts of foreign tax on non-US earnings to use the double Irish scheme to reduce their foreign tax liability. It appears US multinationals are betting BEPS is unlikely to be significant. </p>
<p>Yahoo would be incurring transaction costs in moving to Ireland and it would be pointless to move to a double Irish structure if the BEPS project were to eliminate the tax advantages that Ireland is able to provide to US multinationals. Moreover, Yahoo’s decision would have been based on advice from its accountants and lawyers on the tax benefits of the move, especially in light of the BEPS project.</p>
<h2>No excuses</h2>
<p>National governments need revenue and they want to ensure that US multinationals deriving income from within their borders pay an appropriate amount of tax, which is not unreasonable. In these source countries, US multinationals get the benefit of infrastructure and reliable legal systems provided by governments. </p>
<p>Unlike national governments, US multinationals engaging in aggressive tax avoidance are well funded. US multinationals are <a href="http://www.hsgac.senate.gov/subcommittees/investigations/hearings/offshore-profit-shifting-and-the-us-tax-code_-part-2">estimated</a> to be holding more than US$1.7 trillion in undistributed foreign earnings. One of the largest tax avoiders is Apple Inc, which in 2013 was reported to have US$102 billion in offshore untaxed foreign earnings.</p>
<p>Information on Apple’s tax position was first exposed in 2012 by the US Congress’ Permanent Subcommittee on Investigations. The Subcommittee was able to obtain insight into the foreign taxes that Apple Inc’s subsidiaries paid on their foreign earnings which is information that is not made publicly available for US listed companies. </p>
<p>It was disclosed that Apple negotiated a tax rate with the Irish government of 2% compared to the normal low company tax rate of 12.5%. In 2011, one of Apple Inc’s Irish subsidiaries, Apple Sales International, had a foreign tax rate of 0.05% on non-US earnings of US$22 billion. Apple Inc’s first tier subsidiary, Apple Operations International (AOI) is incorporated in Ireland, but claims it is not a tax resident in any country and accordingly it does not submit tax returns in any country. AOI’s entire foreign income of US$29.9 billion for the period 2009-12 was untaxed and represents 30% of the Apple group’s entire income during this period. The artificial nature of the arrangement is reflected in the fact that AOI has no employees.</p>
<p>In comparison, Yahoo Inc’s annual reports indicate it has paid relatively higher amounts of foreign tax on its non-US earnings. It is impossible to make a direct comparison of Yahoo’s and Apple’s effective rate of foreign tax on non-US earnings because Yahoo’s tax returns are confidential; the only source of information is the annual report of US listed companies which is an accounting statement and is different to the tax returns that the foreign subsidiaries of US listed companies lodge in their countries of tax residence. </p>
<p>Yahoo’s 2012 Annual Report does not report the foreign “cash taxes paid” by Yahoo subsidiaries. In Yahoo Inc’s 2012 Annual Report the provision for non-US tax (which is a prediction) on non-US income indicates that its average rate of tax for the period 2010-12 was 26.42%. </p>
<p>The tax information in Yahoo’s 2012 annual report suggests the reason for its migration to Ireland is to reduce the foreign taxes it pays on permanently deferred income. As the OECD develops consensus measures in response to BEPS, the stakes for governments appear to be rising.</p>
<hr>
<h2>How the Double Irish Dutch Sandwich scheme works</h2>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/42290/original/xyvq3sbb-1393205483.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/42290/original/xyvq3sbb-1393205483.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/42290/original/xyvq3sbb-1393205483.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/42290/original/xyvq3sbb-1393205483.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/42290/original/xyvq3sbb-1393205483.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/42290/original/xyvq3sbb-1393205483.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/42290/original/xyvq3sbb-1393205483.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The “Double Irish Dutch Sandwich” involves shifting profits between multiple offshore subsidiaries in order to reduce tax liabilities.</span>
<span class="attribution"><a class="source" href="http://www.flickr.com/photos/roboppy/8426510262/sizes/l/">roboppy/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>US multinationals are exploiting a gap in US domestic tax law that allows for tax on foreign income to be deferred indefinitely. The foreign income is only subject to tax when the income is remitted to the US parent with a credit for any foreign tax paid. This in turn provides US multinationals with the incentive to avoid taxes in the source countries in which they derive income and then indefinitely defer remitting the income to the US parent company. </p>
<p>The commonly used “Double Irish Dutch Sandwich” scheme involves shifting profits from an Irish to Dutch subsidiary, and then a second Irish company headquartered in a tax haven, such as Bermuda. The practice, known as tax avoidance rather than tax evasion, is not currently illegal. Tax evasion is fraud, such as not declaring income, whereas tax avoidance is legal but conflicts with the spirit of the law.</p>
<hr><img src="https://counter.theconversation.com/content/23421/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Kobetsky does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The G20 finance ministers have once again agreed to cooperate to counter aggressive cross-border tax avoidance by multinationals. Many US firms are using tax avoidance schemes for their non-US earnings…Michael Kobetsky, Global Professor of Law, New York UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/214662014-01-05T19:10:19Z2014-01-05T19:10:19ZThe G20 and the taxing issue of making big business pay<figure><img src="https://images.theconversation.com/files/38331/original/6b4q7krj-1387494336.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Profit shifting by multinationals will be a key focus of the G20 under Australia's presidency this year.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Australia has officially commenced its presidency of the <a href="http://www.g20.org/">G20</a> and preparations are underway for the <a href="http://www.dpmc.gov.au/g20/">November 2014 Summit</a>, when the leaders of the world’s biggest economies will meet in Brisbane. </p>
<p>The G20 has a range of topics on its agenda (see <a href="http://theconversation.com/what-does-the-g20-actually-do-17464">here</a>). In 2014, as in the last couple of years, international taxation of multinational corporations is a big part of it.</p>
<h2>Base erosion and tax arbitrage</h2>
<p>A key focus will be further work on the OECD Base Erosion and Profit Shifting (<a href="http://www.oecd.org/ctp/beps.htm">BEPS</a>) project which the G20 “fully endorsed” at the September 2013 <a href="http://www.oecd.org/g20/meetings/saint-petersburg/">St Petersburg Summit</a>. As I’ve <a href="http://theconversation.com/the-tussle-over-australias-company-tax-16354">explained</a>, the OECD BEPS <a href="http://dx.doi.org/10.1787/9789264202719-en">Action Plan</a> states that company tax bases of governments are at risk because tax rules “may not have kept pace with changes in global business practices” and “the tax practices of some multinational companies”. The OECD, and <a href="http://www.ato.gov.au/Business/.../Large-business-bulletin--June-2013">Australia</a>, are throwing considerable resources at the BEPS project. </p>
<p>Many BEPS reforms will be unilateral country tax law “fixes” that aim to prevent international tax arbitrage, resulting from the mismatch in country tax treatment of corporate financial and business arrangements (for a discussion, see <a href="http://sydney.edu.au/law/parsons/ATTA/docs_pdfs/conference_papers/Cross_Border_Tax_Arbitrage_and_convergence_of_tax_systems_a_law_and_economics_approach.pdf">here</a>). </p>
<p>Successful international tax arbitrage does not breach any one country’s tax rules. It reduces a multinational enterprise’s global tax burden by exploiting the mismatch in tax treatment - for example, for hybrid finance instruments as illustrated <a href="http://theconversation.com/chasing-tax-across-countries-a-test-case-14756">here</a>. The aim is to deliver co-operative international tax approaches to prevent arbitrage and align key company tax rules. Unilateral tax change is hard enough in this complex area. More challenging is the BEPS goal to establish multilateral rules or treaty provisions that all G20 countries could sign up to, so as to ensure consistent taxation of hybrid instruments.</p>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38326/original/xv22qn9v-1387492786.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Australia has officially commenced its presidency of the G20.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<h2>Thin capitalisation</h2>
<p>Another big issue is “thin capitalisation” or “debt loading” by multinationals. For example, debt loading occurs when a multinational corporation that is foreign-owned with Australian operations or Australian-owned with foreign operations, leverages high levels of debt in Australia, and this debt carries interest that is tax-deductible in Australia. The interest deduction reduces the net profit subject to Australian tax, contributing to “erosion” of the company tax base. </p>
<p>The previous Labor government had announced law reform to limit the scope for debt loading. Most countries cap tax-deductible interest by limiting the debt to equity ratio of multinationals (although specific rules vary widely). Australia allows a generous debt: equity ratio of 3:1, that is, 75% debt to 25% assets, compared to many other countries. Former treasurer Wayne Swan <a href="http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2013/065.htm&pageID=003&min=wms&Year=&DocType=0">proposed</a> to limit this ratio to 1.5:1, that is, 60% debt to 40% assets. Swan also planned to eliminate a deduction for Australian debt that finances foreign investment. These BEPS measures were expected to raise A$1.5 billion over the next four years.</p>
<p>New Coalition treasurer Joe Hockey will <a href="http://jbh.ministers.treasury.gov.au/media-release/017-2013/">continue</a> with the policy of reducing debt loading, setting a debt:equity ratio of 1.5:1, but has abandoned the other reform proposed by Swan. He says this is too difficult to administer - it’s too hard to trace Australian debt that finances foreign investment - so instead he will introduce a targeted anti-avoidance rule to address abuse of debt deductions. According to the estimates, this will still raise about A$900 million to help the budget bottom line.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38134/original/ddnnbw2p-1387339865.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">G20 countries are sharing more information to strengthen the tax system.</span>
<span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Information exchange</h2>
<p>The G20 appears to be well on the way to strengthening international tax cooperation in tax administration and information exchange as well as joint country tax audits and enforcing tax debts. The “new standard” of automatic exchange of tax information and enhanced cross-country assistance in tax enforcement and collection have been widely accepted. The G20 <a href="http://www.oecd.org/g20/meetings/saint-petersburg/">expects</a> to begin to exchange tax information automatically by the end of 2015. </p>
<p>Many G20 countries including Australia are <a href="http://www.treasury.gov.au/ConsultationsandReviews/Consultations/2012/Intergovernmental-agreement-to-implement-FATCA">signing agreements</a> for their banks to provide financial information to the US under its strict Foreign Account Tax Compliance Act (FATCA) regime. Meanwhile, in Jakarta, the November 2013 meeting of the <a href="http://www.oecd.org/tax/exchange-of-tax-information/a-boost-to-transparency-and-international-tax-cooperation.htm">Global Forum</a> saw tax havens Liechtenstein and San Marino become the 62nd and 63rd signatories to the <a href="http://www.oecd.org/ctp/exchange-of-tax-information/MAC_Background_Brief_for_Jounalists_November_2013.pdf">Multilateral Convention</a> on Mutual Administrative Assistance in Tax Matters. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=692&fit=crop&dpr=1 600w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=692&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=692&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=869&fit=crop&dpr=1 754w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=869&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/38329/original/pwf2vw3x-1387493455.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=869&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Russia rates poorly for corruption, a problem for G20 countries.</span>
<span class="attribution"><span class="source">AAP</span></span>
</figcaption>
</figure>
<p>While the legal architecture for international tax cooperation is developing rapidly, not all taxpayers will be comfortable knowing that their tax information may be provided automatically to countries, including previous G20 president Russia, where individual freedoms are often under attack. Russia ranks 133 out of 174 countries in Transparency International’s latest <a href="http://www.transparency.org/cpi2012/results">Corruption Index</a>. It’s crucial for legitimacy of the system that G20 countries demonstrate that the rule of law will be respected in tax matters.</p>
<h2>Some tensions</h2>
<p>The G20 also <a href="http://theconversation.com/for-g20-leaders-poverty-is-a-taxing-issue-17963">says</a> that fixing global tax regulation is key to fighting poverty. A 2012 UN General Assembly <a href="http://www.un.org/en/ga/search/view_doc.asp?symbol=%20A/RES/66/191">Resolution 66/191</a> calls on the international community to develop effective international company tax rules and to increase participation of developing countries in tax policy processes. But as I explain <a href="http://elgarblog.wordpress.com/2013/07/03/tax-law-and-development-by-miranda-stewart/">here</a> it is only recently that OECD member countries have begun to acknowledge that their own tax rules and harmful tax competition are making it more difficult for developing countries to raise adequate taxes.</p>
<p>There may be some tensions in the G20 about how to reform our fundamental international tax principles for the future. The OECD BEPS project mostly aims to protect the residence basis of taxation for multinationals. This will help prevent corporate tax base erosion for rich, capital and intellectual property-exporting countries. Current OECD profit shifting rules, which emphasise the <a href="http://www.oecdguidelines.nl/guidelines/taxation/">arm’s length transfer pricing principle</a>, can be strengthened. But these current rules for allocation of the right to tax business profits between countries are under attack from capital importing countries who seek to protect and enhance source taxation of business activity. </p>
<p>India, South Africa, Brazil and China may benefit more from a “formulary apportionment” approach, which has also been <a href="www.oxfam.org/sites/www.oxfam.org/files/fix-the-cracks-in-tax.pdf">called for</a> by activist organisations such as Oxfam and Christian Aid. We might begin to see cracks in the G20 on these fundamental international tax principles in 2014.</p><img src="https://counter.theconversation.com/content/21466/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miranda Stewart receives funding from the Australian Research Council.</span></em></p>Australia has officially commenced its presidency of the G20 and preparations are underway for the November 2014 Summit, when the leaders of the world’s biggest economies will meet in Brisbane. The G20…Miranda Stewart, Professor and Director of Tax Studies, Melbourne Law School, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.