“New standards must be designed to ensure the coherence of corporate income taxation at the international level.” (DLA Piper)
Apple, Microsoft, Nike, Google, Starbucks, Amazon – a number of US companies have recently come under fire for minimizing corporate taxes by shifting revenue and profits around the world. But they aren’t doing anything illegal by taking advantage of differing international tax laws.
That could change… On July 19, 2013, the Organization for Economic Cooperation and Development (OECD) released an “Action Plan on Base Erosion and Profit Shifting,” setting forth reforms to change the way multinational corporations record income and pay taxes in the major global economies.
It will be an uphill battle, but the proposal has broad support from the G20, which could see significant gains in tax revenues if the changes are made.
Broadly speaking, the plan covers three areas. From attorneys at Skadden:
- Consistency – addressing gaps and inconsistencies between countries’ domestic tax laws that allow for double non-taxation;
- Transfer pricing – addressing the issue of tax competition that results in no or low taxation when taxable income is separated from related business activities; and
- Transparency – increasing transparency and tax disclosure to facilitate the monitoring of the BEPS issue.
Here’s a look at some specific action items:
1. Eliminate double non-taxation:
“Among the specific actions envisaged […]are actions to: [n]eutralise the effect of hybrid mismatch arrangements (e.g. arrangements which achieve unintended double non-taxation or long term tax deferral by, for instance, creating two tax deductions for one borrowing or generating deductions without corresponding income inclusions).” (Dechert)
2. Prevent abuse of international tax treaties:
“Prevent treaty abuse, notably treaty shopping, e.g., taking advantage of a tax treaty by interposing an intermediary holding company in the desired treaty jurisdiction to reduce withholding taxes or access capital gains exemptions not permitted to the ‘home country’ entity…” (Bennett Jones)
3. Increase transparency and eliminate harmful tax practices in various countries:
“[S]trengthen […] existing rules to counter harmful tax practices, with a priority on enhancing transparency. Included in the review will be the treatment of tax rulings, including rules regarding compulsory exchange of tax rulings related to preferential regimes. The review will also examine certain increasingly common preferential tax regimes, such as patent box rules, and provide guidance regarding the proper scope and implementation of such regimes.” (Skadden)
4. Clean up and reinforce transfer pricing rules:
“The Action Plan asserts that existing transfer pricing rules can be used by multinationals in some instances ‘to separate income from the economic activities that produce [it],’ allowing for anomalous results. The chief sources of these anomalies are identified as transfers of intangibles and other mobile assets for less than full value, the over-capitalization of entities in low-tax jurisdictions and the contractual allocation of risk to low-tax environments in transactions that would be unlikely to occur between unrelated parties.” (Osler)
5. Develop a plan for taxing profits earned in the digital economy:
“[The Action Plan proposes the] establishment of a task force to identify the main difficulties that the digital economy poses for existing international tax rules and development of detailed options to address those difficulties. Both direct and indirect tax will be covered, and the key areas to be addressed are (i) the definition of the concept of a permanent establishment… (ii) further consideration of the sources of value creation in the digital economy… and (iii) the treatment of services provided to users where the provider’s business model aims to attract users for reasons other than the collection of fee revenue.” (Skadden)
6. Limit tax deductions:
“[The plan proposes to] develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments.” (DLA Piper)
7. Draft a new international tax treaty:
“Particular areas on which the action plan has stated deliverables include the […] adoption of a multilateral international treaty that will automatically override existing double taxation treaties. The new treaty will contain anti-avoidance provisions, such as a limitation on benefits clause, that will reduce the opportunity for ‘treaty shopping’ and tax avoidance involving the abuse of tax treaties.” (McDermott Will & Emery)
- OECD releases “BEPS” Action Plan – a sweeping international tax effort to combat base erosion and profit shifting – DLA Piper
- International Taxation – OECD Reboot for the 21st Century – Skadden, Arps, Slate, Meagher & Flom LLP
- OECD Sets Out Ambitious Global Plan to Tackle Tax Fairness Issues – Dechert LLP
- OECD Launches Action Plan on Base Erosion and Profit Shifting – Bennett Jones LLP
- OECD/G20 International Tax Reform: Potential Impact on Canadian Companies – Osler, Hoskin & Harcourt LLP
- Rewriting the Fundamentals of International Taxation: the OECD BEPS Action Plan – McDermott Will & Emery
Read additional updates on International Tax Issues at JD Supra Law News>>