A turning point in international taxation
In the aftermath of the 2008 financial crisis, governments were forced to reduce public spending, increase taxes and implement austerity measures, while several companies received taxpayer-funded bail-outs. At the same time, tax suddenly became a controversial political topic with headlines emphasising the low global tax rates paid by some multinational enterprises (MNEs). Also, countries confronted the growing perception that the tax burden is not equally shared among taxpayers and that the international tax rules on corporate profits are broken. This perception became a serious political and social issue, casting doubts upon the fairness and integrity of countries’ tax systems.
This political debate on taxation went global and multilateral first in 2009, when the G20 declared that bank secrecy was over and committed to take action against non-cooperative jurisdictions, including tax havens. Countries around the world agreed to meet the international standard for exchange of tax information on request, developed by the Organisation for Economic Co-operation and Development (OECD), and joined the restructured Global Forum on Transparency and Exchange of Information for Tax Purposes. The latter is today composed of 127 members participating on an equal footing, and has enabled a rapid implementation of the standard through a comprehensive peer review process.
With G20 support, global tax transparency was further enhanced in 2014 with the development of the global Common Reporting Standard for Automatic Exchange of Information Standard (AEOI), which 94 jurisdictions have committed to implement. The first exchanges will begin by 2017 and 2018. Such exchanges minimise the compliance burdens for both governments and financial institutions, and, overall, result in increased voluntary compliance initiatives and other similar programmes to encourage taxpayers to regularise income and wealth previously hidden from their tax authorities. To duly implement AEOI, the OECD is now working with G20 members and the Global Forum to support jurisdictions for globally consistent implementation. The Global Forum will review implementation of this standard, and is developing the necessary terms of reference.
Another fundamental change has taken place over the past two years in the area of corporate taxes. For decades, the OECD has been promoting the elimination of double taxation on cross-border trade and investment. Eliminating double taxation facilitates cross-border trade and investment, which spur growth and create jobs. However, current international tax rules (such as tax treaty provisions and transfer pricing guidelines) have not kept pace with the way business operates in the 21st century. As a result, the rules aimed at eliminating double taxation have also enabled tax-planning arrangements that secure double non-taxation, as in situations where income is not taxed in either the taxpayer’s country of residence or the source country. Following a request in 2012 by G20 leaders in Los Cabos, the OECD-G20 project to address Base Erosion and Profit Shifting (BEPS) was launched to close unintended loopholes in the international tax system that allow corporate profits to be shifted away from the location of economic activity and value creation.
The consequences of BEPS currently achieved by some multinationals range from unintended competitive advantages for MNEs over smaller or domestic companies, to distortion of investment decisions, to the loss of substantial corporate tax revenue for governments. More fundamentally, the perceived unfairness jeopardises citizens’ trust in the integrity of the tax system as a whole, thereby undermining voluntary tax compliance.
Coordinating policies
On 5 October 2015, the OECD delivered a comprehensive package of measures to counter BEPS that has been endorsed by the G20 finance ministers at their meeting on 8 October 2015 in Lima and transmitted to the G20 leaders for their summit at Antalya on 15-16 November 2015. This package covers three unifying themes: to ensure that the substance of international tax rules aligns taxation with the location of economic activity and value creation, establish coherence between domestic tax systems and across the international rules, and promote transparency including regarding increasing certainty and predictability. The measures are practically focused, offering policy detail as well as tools for implementation, including model provisions for tax treaties and domestic legislation, templates and practical guidance. Four minimum standards target some of the headline BEPS issues – preventing tax treaty abuse through treaty shopping, tackling harmful tax practices with common principles and more transparency, providing a single global picture of MNE operations to tax administrations with country-by-country reporting, and resolving cross-border tax disputes more effectively to increase certainty for business and governments. Existing rules on issues such as transfer pricing and the ‘permanent establishment’ concept have also been updated to meet the tax challenges of modern business arrangements. The impact of the digital economy on tax systems has also been assessed, and, coupled with other BEPS measures, the new International VAT/GST Guidelines will address the hurdles it poses.
This package clearly marks a turning point in the history of international taxation, the most prominent step towards modernising and coordinating countries’ tax policies in a hundred years. Without these tools, the effectiveness of countries’ domestic tax policies would remain inhibited: in a globalised world, tax cooperation is the only way to protect tax sovereignty.
The BEPS project demonstrates how governments can work together under the political leadership of the G20 to promote a stable and effective international tax environment. The OECD and G20 partnership – 44 countries equal to about 90% of the world’s economy working together on an equal footing – is the foundation of the project’s success. It has grown to include 62 countries participating in the decision-making body and technical working groups, and more than 120 jurisdictions providing input through dedicated regional networks and the close engagement of regional tax organisations such as the African Tax Administration Forum and the Inter American Center of Tax Administrations. Furthermore, one key practical outcome – the development of a multilateral instrument to expedite and streamline the implementation of the treaty-related BEPS measures – is open to negotiation by all countries, and 89 countries are already participating.
As the G20-OECD efforts to address BEPS and AEOI move to implementation, it will be essential for developing countries to have the tools and skills to address the practical challenges that implementation (including tax administration) will present. Support on implementation is also critical to ensure efficiency, coherence as well as a level playing field between relevant jurisdictions. In conjunction with the BEPS project, a dedicated work stream developed under the G20 Development Working Group will deliver practical guidance on BEPS-related priorities for developing countries over the coming years, as well as guidance on implementing BEPS outcomes that takes into account their capacity constraints. OECD and G20 members have agreed to continue to work together, on an equal footing, in the BEPS project, and to establish an even more inclusive framework for interested jurisdictions to support and monitor implementation. In parallel, to ensure that developing countries can fully participate in and benefit from an enhanced transparent tax environment, an ambitious technical assistance plan on AEOI is also in place with one-on-one assistance, pilot projects and training seminars around the world.
To conclude, the work on global tax transparency and BEPS demonstrates the ability of the G20-OECD partnership to address global tax challenges by delivering high-profile and universally applicable tax policy solutions. The G20 leaders endorsed the BEPS package in November 2015, and the OECD stands ready to move the G20 tax agenda forward, both in the context of the previous Turkish G20 presidency and the current Chinese G20 presidency. It is now critical to develop an inclusive architecture that can draw in on an equal footing for all interested countries to keep the G20 tax work relevant for the global economy of the 21st century.
