Date posted: 01/12/2016 3 min read

Eradicating base erosion and profit shifting-Part one

Can action on base erosion and profit shifting work, or is corporate tax the beta max video of the tax system?

In brief

  • Base erosion and profit shifting had long been a threat to national governments
  • Despite Australia’s relative immunity from the direct effects of the GFC, the BEPS agenda is considered critical for Canberra
  • Part one in our feature on whether or not action on base erosion and profit shifting (BEPS) can actually work

In the wake of the global financial crisis (GFC), as governments across Europe, in particular, responded with unpopular austerity measures, taxpayers in those countries started to feel the effects of the crisis personally. And they didn’t like it.

If the failure of the system exposed by the GFC hadn’t challenged their faith in their democratic institutions enough, they only had to turn to the business pages of any newspaper or website to discover that, while they were bearing the pain of austerity, many big multinational entities had dodged the bullet.

Clever tax planning strategists continued to exploit the gaps and mismatches between different nations’ tax rules. So, as ever, some monster international conglomerates often paid little or no tax from income earned on cross-border activities even when they’d boasted dizzyingly good profit results. It just didn’t add up.

While this so-called base erosion and profit shifting (BEPS) had long been a threat to national governments, struggling to manage their budgets in a sustainable way, the popular unrest unleashed by the impact of the GFC meant that suddenly BEPS was a hot political issue – a crisis in the very social contract. Why would any individual citizen pay tax if some of the richest corporations weren’t paying their share?

At the top levels of many governments there was a desire to find ways to bring more coherence to the international tax system. National tax collectors needed to match the dexterity of the multinationals, who for years had operated across national borders, leaving bamboozled revenue collectors fuming in their wake.

The OECD released its Action Plan on Base Erosion and Profit Shifting in July 2013. It was endorsed by G20 Leaders at the Saint Petersburg meeting in September 2013. As current chair of the G20, Australia has made achieving reform of the global taxation system a key focus in the run up to November’s G20 leaders’ summit in Brisbane.

A welcome development

The push for reform is not necessarily an unwelcome development for tax professionals advising multinational companies.

Pete Calleja leads PwC’s Asia Pacific Transfer Pricing Practice and is a member of the PwC Global Leadership Team for Transfer Pricing Services. He’s conducted a wide array of complex cross-border business transformation projects for some of the world’s largest multinational corporations in more than 30 countries.

“Those international tax rules were written last century so they are clearly out of date,” Calleja said at the Chartered Accountants Australia and New Zealand Public Sector Symposium, held at the National Press Club in Canberra recently.

“I spend most of my time at the front line working through the incredible complexity of all of this asymmetry, which is fraught with difficulty and fraught with uncertainty. So there is a real urgency around simplification and ensuring that these developments at OECD level give us a better, more globally uniform system. Undoubtedly that’s the opportunity,” he said.

Critical for Canberra

Despite Australia’s relative immunity from the direct effects of the GFC, Rob Heferan, Executive Director of the Australian Treasury’s revenue group, told the symposium the BEPS agenda is considered a “critical area of leadership” for Canberra.

“The PM and the Treasurer have made clear that the fairness of the system is being called into question and where that happens I think politicians need to step in and say ‘we need to do what we can to make sure that people have confidence that the system is working as well as can be expected’. [It’s] never… perfect but as well as can be expected,” Heferan said.

The push for reform is not necessarily an unwelcome development for tax professionals.

Another speaker, Deputy ATO Commissioner Mark Konza summarised the standard his own boss, ATO Chief Chris Jordan FCA, has done much to promote: “The rule for transfer pricing for tax planners is have a good feed but don’t make a pig of yourself.”

But how much action will actually come out of the plan, even if the G20 leaders all sign up in November? Will it make any substantial difference to how multinationals organise their tax affairs? And is there a risk that the cure will be worse than the disease in countries like Australia and New Zealand, where a greater compliance burden may bring very few extra dollars into the tax coffers?

This is part one of a three-part feature on combating base erosion and profit shifting. Read part two now.

Ellen Fanning is a leading Australian journalist. She moderated a panel discussion exploring the complexities of taxing multinational enterprises at the recent Public Sector Symposium held by Chartered Accountants Australia and New Zealand in Canberra.

This article was first published in the Oct 2014 issue of Acuity magazine.