Lawmakers seem to feel that by calling companies to testify publicly about their tax affairs they will suffer reputational damage that will cause them to change their behavior. Tim Cook, CEO of Apple, testified before Congress about his company’s tax affairs. In the UK, Google, Starbucks and Amazon have come under scrutiny by a parliamentary committee for their tax arrangements. At issue, among other concerns, was lawmaker’s focus on so called “stateless income” or income that allegedly goes untaxed by any country due to the tax planning structures that large multinational companies engage in on a frequent basis. Countries are clearly cracking down on what they perceive to be tax abuses by large multinational enterprises. In this post we highlight what companies need to be aware of and planning for as a result of the G20 tax initiative.
Planning For a Changing World
In July of 2013 the Organization for Economic Cooperation and Development (OECD) issued a 15 point plan to deal with Base Erosion and Profit Shifting (BEPS) by multinational enterprises. The thrust of the plan appears to rest on four basic objectives:
- Generate fundamental change in member country tax systems in the G20 (and in developing countries)
- Put pressure on countries to observe fundamental principles of international taxation
- Reduce tax competition among member countries
- Produce the perception that the G20 is doing the right thing on tax policy among member countries
The impact of the digital economy is particularly prominent in the efforts of the OECD. The ability of a company to have a “significant digital presence in the economy of another country without being liable to taxation” is of special concern to the OECD and is prominent as Action 1 of the 15 point OECD action plan.
The OECD acknowledges that tax policy will continue to be set by national governments but has suggested that a multinational treaty could be put in place to reduce the potential for tax avoidance by multinational companies. This strikes some observers as very difficult to implement as a practical matter. Large countries, it appears, are relying on this initiative to impose fiscal discipline on smaller countries that have used low tax rates to attract business form larger states in the past. G20 finance ministers have endorsed the OECD approach. It seems the G20 wishes to isolate competition of businesses in member countries to commercial considerations while eliminating tax matters as a competitive differentiator. While opinions vary about the likelihood of the BEPS initiative achieving success there is no doubt that cash starved governments are serious about trying to increase tax revenue from multinational corporations.
Alberto Pluviano, Principal, Transfer Pricing with Charles River Associates, Paris, France has suggested to us that “the BEPS project has such a strong political support that the OECD is totally committed to bring it to practical conclusions within the deadlines.”
In support of his perspective he cites the example of Action 7, Artificial Avoidance of PE Status. On October 22, 2013 the OECD invited interested parties to provide brief descriptions of strategies that might be considered to result in artificial avoidance of PE status. They set the response date at November 15, 2013 thus allowing respondents less than a month to provide comment. This aggressive time frame suggests strongly just how seriously the OECD is taking this effort.
Simplify, simplify, simplify
While we appreciate the thoughtful approach of the OECD, we respectfully suggest that a better approach to international tax policy would be to lower corporate tax rates, simplify the rules and to limit the sourcing of income to territorial limits of countries rather than allowing some countries to impose tax on worldwide income such as with the US and a few other countries. Since that is not likely to happen we would urge companies to become familiar with the OECD initiative and begin to analyze the implications of the OECD approach on their tax structures.
What we would like to see added to the OECD approach is some modest relief from complexity for small businesses who wish to expand internationally. We work regularly with small businesses based in foreign countries who wish to enter the US market. The internet age has made communications, information sharing and supply chain management much more efficient thus promoting international expansion opportunities for small enterprises. Tax matters though are often an expensive hurdle to clear. The single most troublesome issue they often confront is that of transfer pricing. Developing and documenting a transfer pricing policy can be complex and expensive for the small business and is sometimes viewed as an insurmountable barrier that deters management from proceeding with expansion. We would urge the OECD to develop “safe harbor” rules for small businesses to conform to in the transfer pricing area so as to reduce cost and uncertainty in the international expansion process.