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Base Erosion and Profit Shifting – Australia’s role in a global project


This article has been repurposed in Bloomberg's Tax Planning International Review, November 2013.

“Base Erosion and Profit Shifting” (BEPS) has become a shorthand term for many developed economies to describe a symptom of declining corporate tax revenues around the world. Causes of declining revenues continue to be the subject of speculation. Theories for declining revenues include, at the extreme end, aggressive tax planning by MNCs who are seen to be seeking to take advantage of gaps in international tax rules (through, for example, transfer pricing, tax havens, hybrid entities and thin capitalisation). Following an OECD report in February 2013 which highlighted this problem, the OECD recently issued an Action Plan on BEPS which sets the stage for further international development.

The Australian Government itself released a “scoping paper” in July 2013 which set out the government’s intention to take action. In addition, the Australian Treasurer and the UK Chancellor of the Exchequer issued a joint media release in August expressing an agreement to “combat tax avoidance and evasion”. It is a safe prediction that BEPS will be a priority topic when Australia hosts the G20 next year. Taxand Australia investigate the motivations for BEPS and what this means for multinationals moving forward.

Motivations for a global project on BEPS

Reviews into the so-called practice of international tax planning by multinationals are not a new phenomenon. OECD member countries have grappled with the appropriate allocation and exercise of taxing powers between nations, including how to address the use of tax havens and how to enforce transfer pricing for a long time. Many countries, including Australia, already have detailed domestic laws and processes to address the concerns (actual and perceived) arising from international tax planning activities. Australia recently made a range of amendments to its own transfer pricing laws, for example.

But the Australian government and the OECD have embarked upon a renewed push to resolve what they believe to be a growing problem. This may be influenced by further declines in revenues at a time when governments can least afford them, or a general acceptance that despite the existence of domestic anti-avoidance rules in countries like Australia, the problem can no longer be addressed by one country acting alone. In the background, certain economists have for some time predicted a gradual reduction in the global corporate tax base. This was a feature of the 2009 report Australia’s future tax system (the Henry Review).

The Australian BEPS scoping paper covers a lot of ground and sets out a range of statistics to reinforce the existence of the problem and a variety of explanations for it. It is suggested that BEPS is increasing as a result of globalisation, in terms of increased mobility of investment, flexibility in location of intellectual property and intangibles, and also internet-based business. These factors are perceived to create a fertile environment for multinationals to exploit inconsistencies in international tax rules and tax rates by, for example, realising value from sales in low-tax country A even though the sales are generated from customers in higher-tax country B. In terms of recommendations, the paper proposes:

  • greater publication of taxation statistics involving international dealings
  • ten-year reviews of all bilateral tax treaties
  • expanded tax information exchange arrangements
  • an endorsement of the OECD’s Action Plan. 

The paper does not seek to distinguish the Australian position from the OECD’s Action Plan in any material respect. Rather, the scoping paper acknowledges that “there are unlikely to be substantial additional policy reforms that Australia could enact unilaterally in the short term to address [BEPS]”. To this end, the substance of the recommendations in the paper appear to be directed at highlighting the existence of BEPS by greater publication of statistics and promoting international co-operation. The scoping paper makes it clear that such co-operation will be sought through the OECD but also directly with other jurisdictions by encouraging periodic reforms to Australia’s tax treaties and information exchange arrangements. In this regard, it is observed that most of Australia’s bilateral tax treaties predate current tax treaty policy settings and recent developments in international tax practices.  

The paper acknowledges that there are limits to Australia’s ability to protect its interests by “asserting its power based on economic weight”, and goes on to describe Australia itself as a “middle power”. That being the case, there is some suggestion that the OECD and other international forums such as the G20 are Australia’s best chance to advance a case for reform. It is possible that this sentiment reflects the attitude of most OECD member countries with moderate to high corporate tax bases.

In summary, the “scoping paper” identifies a problem and sets a path for Australia (with other countries) to proceed with intent in search of the solution.

Features of the Action Plan

The OECD Action Plan contains a set of fifteen “actions”. The OECD BEPS project is still in its early stages - evident from some of the broad objectives which appear to be directed more at solidarity and to identifying the cause of the perceived problem, rather than recommending particular solutions at this time. A summary of the actions is as follows.

  1. Address the tax challenges of the digital economy
  2. Neutralise the effects of hybrid mismatch arrangements

  3. Strengthen controlled foreign company rules

  4. Limit base erosion via interest deductions and other financial payments

  5. Counter harmful practices more effectively, taking into account transparency and substance

  6. Prevent treaty abuse

  7. Prevent artificial avoidance of permanent establishment status

  8. Address transfer pricing arrangements for intangibles

  9. Address transfer pricing arrangements related to risks and capital

  10. Identify and address other high risk transfer pricing arrangements

  11. Establish methods to collect and analyse data on BEPS

  12. Increased disclosure of aggressive tax planning arrangements

  13. Re-examine transfer pricing documentation

  14. Make dispute resolution mechanisms more effective

  15. Develop a multilateral instrument

Each of these actions will be accompanied by further research and reporting of recommendations between September 2014 and December 2015. 

The path ahead

There is some evidence that OECD governments believe that the first task in achieving this significant project is to encourage negative perceptions about relevant corporate behaviours. For example, via the demonising of multinational groups who engage in activities that governments and others believe are highly questionable, notwithstanding that they may conform to current law. 

In late 2012, Assistant Treasurer David Bradbury shone the spotlight on Google, citing a low effective tax rate in Australia on certain transactions. In the UK, widely publicised campaigns against a number of taxpayers were accompanied by appearances before the UK Public Accounts Committee by MNCs with significant value in intangibles. These activities led to statements by Starbucks suggesting that it would pay millions of pounds in taxes voluntarily in response to public pressure.  

Your Taxand contacts for further queries are:
Craig Milner
T. +61 2 9210 6072

Simon Mifsud
T. +61 2 9210 6197

This article has been repurposed in Bloomberg's Tax Planning International Review, November 2013.

Taxand's Take

There is a limit to how much assistance governments can obtain by encouraging public support at home. Legislating to prevent an entity which may not be locally resident from arranging its commercial affairs in a foreign jurisdiction may require fundamental changes to accepted treaty rules (around for example, the source of income and residence). This not only requires public support, but buy-in from a wide range of jurisdictions, including international low-tax and no-tax jurisdictions that are alleged to enable the corporate behaviours underlying BEPS.

One thing for certain is that Australia has marked itself as intent on playing a leading role in the campaign to fight BEPS, and its role in hosting the G20 is likely to provide the perfect platform.

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