Two years on from a project triggered by scrutiny of the “successful” tax avoidance structures of multinationals such as Apple, Google and Microsoft, the OECD has delivered its final package of reforms on Base Erosion and Profit Shifting (BEPS).
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?”.
One of the most important achievements of the BEPS project is the country-by-country reporting system. Information is power, and this is particularly true in the war on profit shifting by mutinationals.
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 interim report of the Senate enquiry into corporate tax avoidance is aptly titled “you cannot tax what you cannot see”.
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.
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.
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.
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 well articulated by tax professor Michael Graetz, and include the tensions of international tax competition, and the global nature of today’s economy.
Transfer pricing rules are of particular importance in this context. Examples such as Apple’s tax structure 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.
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 raising doubts about whether it will support the country-by-country system.
Australia’s anti-BEPS measures
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.
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.
The other measure introduced by the September Bill is the Multinational Anti-Avoidance Law, commonly known as the Google tax. 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.
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.