BEPS: Countering tax moves

Posted on February 6, 2017 by ATB Chartered Accountants

The OECD have agreed to create a solution for multinational profit shifting, but can they make it stick?

Base erosion and profit shifting (BEPS) are the OECD coined term for those tax avoidance strategies used by multinational corporations. The OECD are attempting to use a framework of over 100 countries and jurisdictions to rewrite the laws of taxation, in attempt to stop these tax avoidance behaviours.

BEPS usually occurs by multinationals shifting profits from countries with high-tax jurisdiction, such as the US, to one with little-to-no tax. BEPS is becoming a growing issue globally, with recent data coming to light that some of the world’s most profitable companies, such as Google, Apple and Ikea are not paying the taxes they should be. These profit shifting practices are increasing with the rise of the digital economy, making it easier for these corporations to shift profits. Since the GFC, taxes are more important than ever in the global economy so the OECD is introducing the BEPS to ensure all companies are being taxed fairly.

DRIVEN BY INJUSTICE

Tax avoidance was ranked as the number one tax issue requiring reform in Australia in a 2016 BDO survey. For countries that lose out on both tax revenue, as well as domestic companies which are at a competitive disadvantage to tax-dodging multinationals, BEPS are a growing concern. Many cases, including the most recent in August 2016 involved Apple having to pay €13 billion to Ireland through the use of fair trade laws, as they routed their profits through Ireland due to their low tax rates.
This is the main issue the OECD are seeking to resolve. The director of the Centre for Tax Policy and Administration at the OECD, Pascal Saint-Amans, noted that due to an international framework of obscure tax laws, it has been made possible for multinational corporations to find a way around paying the appropriate taxes. In October 2016, three years after beginning work on them, the OECD finalized reports on 15 BEPS action items. The next step are for these to be properly implemented across all jurisdictions involved to ensure all countries are meeting the minimum standards.

MAKING IT WORK

The implementation of these 15 actions creates a whole new problem though. Countries will have to implement these policies at different speeds in accordance with their own legislations already in place. Even worse however, countries including Australia, the US and the UK have chosen to take their own legislative routes in parallel with, or ahead of the OECD guidelines. As a result of this, there is expected to be a period of uncertainty where global rules on multinational taxation are unclear.
Concerns about double-tax on the same income have been raised throughout the BEPS discussion process. If individual countries implement the legislation as they see fit and it is not uniform globally, it may cause more problems, and have the potential to cripple businesses who may be expected to pay taxes in multiple countries.

Many of the concerns being raised have the potential of being addressed by the OECD before implementation begins. As an example, the US Government have a draft limitation on benefits rule, which intends to block profit shifting using shell companies. There are concerns that this limitation will lead to double taxing income that had already been taxed at the operating company level, and even triple taxed if the individual shareholder is included.

COMPANY VIEWS

In a 2016 survey conducted by Deloitte, it was found that 63% of respondents were expecting significant legislative changes in their country as a consequence of BEPS. Over half of those interviewed had developed new corporate policies and procedures, and 55% had changed their tax planning measures. It is under the general consensus that BEPS will bring about greater scrutiny over tax structures, and multinationals will need to rethink the way they tax plan.