G20 R

G20 FINANCE MINISTERS MEETING OF FEB 15-16, 2013 – MOSCOW – : WHEN THE DEBATE OVER BASE EROSION AND PROFIT SHIFTING (BEPS) IS REACHING THE POLITICAL LEVEL AND REMAINS A KEY ISSUE ON THE AGENDA OF THE OECD.

As declared by Mr. Masatsugu Asakawa, Chair of the OECD Committee on Fiscal Affairs and Deputy Vice – Minister of Finance for International Affairs, Japan, “fiscal consolidation has become an inescapable reality in the aftermath of the biggest financial crisis of our lifetime while the necessity for growth has recently been more and more emphasized. Corporate tax policy, and in particular its international side, may need a new look.”

Today, due to the recent financial and economic crisis, Corporate loss utilization through aggressive tax planning  has become a real issue as the amount of global corporate losses has grown significantly.

Over and above the immediate tax revenue impact of these losses as a result of the normal operation of countries’ loss relief rules, these losses also raise tax compliance risks, in particular if companies turn to aggressive tax planning as a means of increasing and/or accelerating
tax relief on their losses.

While these corporate tax planning strategies may be technically legal and rely on carefully planned interactions of a variety of tax rules and principles, the overall effect of this type of tax planning is to erode the corporate tax base of many countries in a manner that is not intended by domestic policy.

The financial and economic crisis has also a devastating impact on bank profits, with loss-making banks reporting global commercial losses of hundred billions since 2008.

This level of commercial losses has brought tax risks for both banks and revenue bodies.

These risks affect banks’ profits, their capital base, and their level of certainty.

For revenue bodies, the concern is that aggressive tax planning involving losses will further reduce already depleted tax revenues as a result of the crisis.

Time has now come to build transparent tax compliance by banks and regulate the role that banks do play in the provision of aggressive tax planning arrangements.

For all those reasons, there is a growing perception that governments lose substantial corporate tax revenues because of planning aimed at eroding the taxable base and / or shifting profits to locations where they are subject to a more favorable tax treatment.

Beyond this perception based on a number of high profile cases, there is a more fundamental policy   issue : The international common principles
drawn from national experiences to share tax jurisdiction may not have kept pace with the changing business environment.

Domestic rules for international taxation and internationally agreed standards are still grounded in an economic environment characterized by a lower degree of economic integration across borders, rather than today’s environment of global taxpayers, characterized by the increasing
importance of intellectual property as a value-driver and by constant
developments of information and communication technologies.

The debate over Base Erosion and Profit Shifting (BEPS) has now reached the political level and has become a very important issue on the agenda of several OECD and non-OECD countries.

Today, the need to prevent base erosion and profit shifting  since the last G20 Leaders meeting in Mexico on 18-19 June 2012 and the G20 finance ministers meeting of 5-6 November 2012 is a major statement calling for coordinated action to strengthen international tax standards and to
identify possible gaps in tax laws.

Such a concern was also voiced by US President Obama in his framework for Business Tax reform where it is stated that “the empirical evidence suggests that income-shifting behavior by multinational corporations is a significant concern that should be addressed through tax reform”.

The OECD will be delivering a progress report to the G20 on February 12, 2013 on actions to tackle the issue of BEPS, including strategies to detect and respond to aggressive tax planning and ensure better tax compliance.

Again, in a global economy where multinational enterprises (MNEs) play a prominent role, transfer pricing is high on the agenda of tax administrators and taxpayers alike.

Governments need to ensure that the taxable profits of MNEs are not artificially shifted out of their jurisdictions and that the tax base reported by MNEs in their respective countries reflects the economic activity undertaken herein.

This report is focusing  on whether rules developed in the past are
still fit for purpose in today’s business environment .

In addition to a clear need for increased transparency on effective tax rates of MNEs, the report outlines strategies to detect and respond to some aggressive tax planning schemes such as :

  • International mismatches in entity and instrument characterization including hybrid mismatch arrangements and
    arbitrage.
  • Application of treaty concepts to profits derived from the delivery of digital goods and services.
  • The tax treatment of related party debt-financing, Captive insurance and other inter-group financial transactions.
  • Transfer pricing, in particular in relation to the shifting of risks and intangibles,  the artificial splitting of ownership of
    assets between legal entities within a group, and transactions between such entities that would rarely take place between independents.
  • The effectiveness of anti-avoidance measures, in particular GAARs, CFC regimes and thin capitalization rules.
  • The availability of preferential regimes for certain activities.

It will be discussed at the G20 finance ministers meeting of February 15-16 2913 in Moscow  since OECD* member countries share a common
interest in establishing a level playing field among countries while ensuring that domestic businesses are not disadvantaged vis-à-vis multinational corporations.

Failure to collaborate in addressing BEPs issues could result in unilateral actions that would risk undermining the consensus-based framework for jurisdiction to tax and addressing double taxation which exist today.

 * THE OCDE IS A UNIQUE FORUM WHERE GOVERNMENTS WORK TOGETHER TO ADDRESS THE ECONOMIC, SOCIAL AND ENVIRONMENTAL CHALLENEGES OF GLOBALISATION. THE OCDE IS ALSO AT THE FOREFRONT OF EFFORTS TO UNDERSTAND AND TO HELP GOVERNMENTS RESPOND TO NEW DEVELOPMENTS AND CONCERNS, SUCH AS CORPORATE GOVERNANCE, THE INFORMATION ECONOMY  AND THE CHALLENEGES OF AN AGEING POPULATION. THE ORGANISATION PROVIDES A SETTING WHERE GOVERNMENTS CAN COMPARE POLICY EXPERIENCES, SEEK ANSWERS TO COMMON PROBLEMS, IDENTIFY GOOD PRACTICE AND WORK TO CO-ORDINATE DOMESTIC AND INTERNATIONAL POLICIES.

THE OECD MEMBER COUNTRIES ARE :

AUSTRALIA, AUTRIA, BELGIUM, CANADA, CHILE, THE CZECK REPUBLIC, DENMARK, FINLAND, FRANCE, GERMANY, GREECE, HUNGARY, ICELAND, IRELAND, ITALY, JAPAN, KOREA, LUXEMBOURG, MEXICO, THE NETHERLANDS, NEW ZEALAND, NORWAY, POLAND, PORTUGAL, THE SLOVAK REPUBLIC, SLOVENIA, SPAIN, SWEDEN, SWITZERLAND, TURKEY, THE UK, AND THE USA.

THE COMMISSION OF THE EUROPEAN COMMUNITIES TAKE PART IN THE WORK OF THE OECD.

SOURCE :

  1. Corporate Loss Utilization through
    Aggressive Tax Planning – ISBN 978-92-64-11921-5.
  2.  Addressing Tax Risks involving Bank
    Losses – ISBN 978-92-63-08867-2.
  3. Building Transparent Tax Compliance
    by Banks – ISBN 978-92-64-06782-0.
  4. OECD Transfer Pricing Guidelines for
    Multinational Enterprises and Tax Administrations – ISBN 978-92-64-09033-0.
  5. http://www.oecd.org/ctp/WCRVol6Issue2_BEPS.pdf
  6. www.oecd.org/tax
  7. http://www.g20civil.com/calendar/

 

PHILIPPE-HENRI LATIMIER DU CLESIEUX, Ph.D. – Publisher & Executive Editor – www.conversationprivee.com / www.off-the-recordmessaging.com

- Member of the Publishing Committee – LA LETTRE DIPLOMATIQUE – www.lalettrediplomatique.fr

 

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