OECD BEPS DRAFT GETS A REACTION

As predicted It hasn't taken long for the  self serving "discussion" over the BEPS strategy to start . 

There is a fear in the US  that the initiative  will be a catalyst for  US businesses to relocate to other jurisdictions to avoid the outcome of double taxation  and rising compliance costs . The concerns are varied and include country by country reporting requirements . In addition to the reporting aspects the prospect of shifting the point of taxation may have a major impact on the US tax take. Interestingly , various surveys have shown that business acknowledge that the current rules are no longer fit for purpose .

The cooperation of some 90 plus jurisdictions , to implement the entire plan is likely to require a time frame of 5 years + according to the Australian Taxation Office response yesterday .The Australian position is to keep engaging with overseas investors to encourage economic activity while being mindful of the entire picture . i.e Australia is aware that everyone needs to be able to preserve their own tax base based on the economic activity .While it sounds positive , and there appears to be the political appetite to address the global tax problem  the question will always be , which part of the economic  activity is ( more ) relevant . The customers location, the producers location etc .and what will it cost "us" in revenue dollars without shredding the revenue base in favor of  other locations. A real concern is that of unilateral actions taken by jurisdictions which could very well undermine and slow down the project on a multi lateral level .While various jurisdictions may not act unilaterally , the pace of change will mean that there is a risk of a compromised outcome in the next few years . 

What is clear despite the uncertainty , which is considerable at the moment , the world has changed and the rules as we knew them , have been consigned to history. Based on this new landscape larger businesses need to consider their current models  .This includes likely reporting requirements  and what transparency of data means to the business world and competition . Who will see the data  . There is also the issue of the reality that tax compliance costs  will increase  considerably .

Critically , what will increase , is the tax take  which will impact on the profit levels previously enjoyed by business. The challenge therefore is to ensure that under the new world order that is emerging , the strategy will be focused on minimizing  double taxation . What we will see is that existing operations are likely to face  considerable rearrangement and management must start now to get a handle on these issues. 

Apple, Ireland and the European Commission

The EU Commission is suggesting that Apple should have been paying more tax and that Ireland aided them in achieving that outcome. If Apple was compliant with legislation/regulation at the time they should not be thrown under the bus of inappropriate transfer pricing practices and being a poor global (corporate) citizen.

It has been noted by many in the tax industry, that every company (large and small) seeks ways to (legally) minimize their taxation outlay. If Apple adopted transfer pricing strategies that were in keeping with the law at the time then they should not be taken to task.

The G20 approach to a multi-lateral rather than a bilateral treaty environment combined with other OECD strategies is likely to result in different outcomes in the future. However looking back must be done through the lens of what the law and guidelines were at the time. The reality is that taxation law has not and is unlikely to evolve as fast as the ongoing and rapid change in the global business environment.

Both Apple and the EU Commission present their positions in the press with quiet confidence and no doubt there will be many companies awaiting the outcome but it will be quite some time before this issue is resolved.

OECD - Global standard on information exchange - just released

OECD and BEPS – Global standard on information exchange.

For those in the cross border tax advisory arena, the world is a rapidly changing one. The changing face of business and cross border dealings including but not limited to e commerce is pregnant with issues of how business and the tax regimes can cooperate while not adding disproportionate costs (being only one of the concerns) in preserving the tax base.

Last week the OECD unveiled a uniform global standard for the automatic exchange of information between tax authorities worldwide.

Discussion about this new standard by some respected commentators and industry participants suggest that it does not achieve what it set out to do. One concern as expressed by PWC was that it caters for needs of the revenue authorities without regard to business. Concerns include costs and confidentiality. These aspects alone gives rise to serious reservations about the success of the standard.

Of particular concern was the 2 tier file system that business will need to maintain. Specifically the requirement to keep a file that meets country requirements as well as a separate “Master” file that will need additional documentation. One fear is that there will be a mismatch resulting in double taxation.

Some interesting points are also made in a paper put out by Bond University and whether the ‘modernisation’ provides a solution to BEPS or whether the solution to BEPS lies in international cooperation. The paper can be found at : http://epublications.bond.edu.au/rlj/vol23/iss1/3

Dirkis, Michael Dr. (2013) “On the eve of the global response to BEPS: Australia’s new transfer pricing rules,” Revenue Law Journal: Vol. 23: Iss. 1, Article 3.

According to the OECD, the standard is a “game changer” in terms of cooperation and transparency in the fight against tax evasion. The underlying thinking behind the strategy is an extension of the thinking behind the US legislation FATCA and general anti money laundering positions of many jurisdictions. The question is whether in fact it has given sufficient thought to the totality of the situation?

Annual data is to be automatically provided rather than on a request basis. The level of data to be provided by financial institutions and the taxpayers to whom it applies will be better known once the report is presented at the next G20 meeting in Australia on February 22nd / 23rd .
Apart from the strong reservations of PWC, other jurisdictions have made comment that they are reviewing the standard but they may not adopt it at this stage.

Hong Kong by way of example is of the view that their current legislation which was introduced in 2009 is adequate to protect against inappropriate taxation practices and in principle is in line with the OECD program. Hong Kong will seek feedback from stakeholders at this stage.

The OECD is expected to deliver a more detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.