Enhanced international tax coordination works
Since the adoption of the base erosion and profit sharing (BEPS) package in 2015, countries are taking action on many fronts, including on actions that go beyond the four minimum standards. The first results of the ongoing peer reviews are becoming available: more than 11,000 tax rulings identified and being exchanged, and over 160 preferential tax regimes reviewed and being amended or abolished.
An important step was reached in June 2017 with the first signing ceremony of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, also known as the ‘BEPS multilateral instrument’. With 78 jurisdictions having signed to date, it covers more than 1,200 bilateral tax treaties that will be updated to implement several BEPS measures. The instrument will come into force in July 2018.
The OECD has delivered on the G7 Bari Declaration of May 2017: its Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures set out model mandatory disclosure rules that target promoters and service providers involved in arrangements designed to circumvent reporting under the Common Reporting Standard or aimed at providing beneficial owners with the shelter of non-transparent structures.
Addressing the challenges ahead
Although tax sovereignty is a core feature of national identity, the scale of interconnectedness and cross-border activity means that when governments act alone, this sovereignty may be only nominal. Unilateral action can never provide a complete solution. The work on tax and digitalisation is now a priority, and an area where greater coordination is needed to avoid rules emerging that may lead to increased compliance burdens and double or multiple taxation. To protect sovereignty, a consensus-based solution is needed.
In March 2017, the G20 finance ministers mandated the OECD to deliver an interim report on the tax implications of digitalisation. This report, Tax Challenges Arising from Digitalisation – Interim Report 2018, was agreed in March 2018 by the Inclusive Framework on BEPS.
Digital analysis
The report analyses the main features frequently observed in certain highly digitalised business models and value creation in the digitalised age, as well as implications for the existing international tax framework. It describes the complexities of the issues involved, countries’ different positions regarding these features and their repercussions, and how these stances drive their approach to possible solutions.
Countries’ perspectives fall into three groups. The first considers that reliance on data and user participation may lead to misalignments between where profits are taxed and where value is created. However, these countries think that such challenges are confined to certain business models and do not undermine the principles underpinning the existing international tax framework. Consequently, they do not see the case for wide-ranging change.
A second group takes the view that the ongoing digital transformation of the economy and trends associated with globalisation challenge the continued effectiveness of the existing international tax framework for business profits. For these countries, these challenges are not exclusive or specific to highly digitalised business models.
Finally, a third group considers the BEPS package to have addressed double non-taxation, although it is still too early to assess the impact. These countries are generally satisfied with the existing tax system and currently see no need for significant reform of the international tax rules.
In addition, the report discusses interim measures that some countries have indicated they would implement, believing that there is a strong imperative to act quickly. There is no consensus on the need for, or merits of, interim measures, with several countries opposed on the basis that such action would give rise to adverse consequences. The report describes, however, the framework to avoid potential undesirable effects of such short-term measures. The Inclusive Framework, to be updated in 2019, is seeking a consensus-based solution by 2020.
Beyond the international tax rules, digitalisation can improve tax administration across the world. Given the availability of big data, international cooperation could be enhanced regarding the information on users of online platforms, as part of the gig and sharing economies. New tools can be developed, and the tax consequences of technology can be better understood, particularly regarding cryptocurrencies and blockchain.
The dialogue now goes to the heart of international tax rules – countries have agreed to review fundamental questions about who can tax what, why and how much. Without consensus on these tax rights, the international landscape risks deep fractures that would be painful, difficult and costly.
It is therefore important to keep the global community together to face the important challenges ahead. On these issues, as for others such as tax crime and illicit financial flows, support from G7 members is needed to reach solutions that work for all. The G7, a small but diverse group of countries, represents a wide range of viewpoints and can serve as a building block for a consensus-based solution.
