Eradicating base erosion and profit shifting-Part two
Part two in our series on whether or not action on base erosion and profit shifting can actually work
- While the OECD is developing recommendations, will be up to individual national governments to implement the reforms
- Without international cooperation, the wheels could fall off the BEPS agenda
- Countries are already moving on unilateral action, particularly developing countries
This is part two of a three-part feature on combating base erosion and profit shifting. If you missed it, read part one now.
Summarising the progress of the reform push, Michael Croker, Tax Australia Leader at Chartered Accountants Australia and New Zealand, predicted Australian Treasurer Joe Hockey will have “a few wins” to announce after the G20 leaders’ meeting in Brisbane, mostly around the issues of data sharing and transparency.
“Things like sharing of tax data between financial institutions on a global scale, like helping tax agencies around the world understand the transfer pricing policies of the companies doing business in the various jurisdictions so that tax agencies are better informed and can form a view about whether the royalties or interest being charged is at ‘arms length’, to use the jargon,” said Croker
Such information would allow Australian and New Zealand revenue collectors to flag circumstances where the transfer pricing arrangements might be, in the words of the ATO’s Mark Konza, “a bit hot”.
“They’re talking about compulsory global data which has to give country-by-country reports of the activities being undertaken by all members of the multinational group; a master file which describes the entire global operations of the multinational. And then for each country that you’re in, a local file which has comprehensive data on all the related party transactions that are being undertaken,” Konza explained.
“Now the ATO would commonly attempt to gather all that data in what we call a risk review. So I’m hoping that we will be able to reduce the large number of risk reviews that we do,” he said.
“I anticipate when we have these country by country reports… I’ll have a steady flow of emails from other countries saying, ‘Have you seen that report?’ ‘What do you think?’ ‘How do we read that report?’ ‘Should we be doing something?’ You’re going to have what Commissioner Jordan calls the ‘global compliance analysis of global tax planning arrangements’. You’re going to have that occurring on a much more regular basis and [on] much more difficult questions.”
How much legislative change?
Treasury’s Rob Heferan doesn’t think Australia, at least, will necessarily have to undertake much legislative change to give effect to such reforms.
“The G20 things will have to still work through next year. But then it will come down to domestic implementation. So the question for Australia will be: what – if anything – do we need to change?
“When you look at a lot of the key [OECD] action items, we look at our [Australian] system and say, ‘Well actually, we’ve either already dealt with that.’ Or, ‘[We’re] in the process of dealing with it.’ Or, ‘The changes that are proposed might not be dramatic things needed [to be given effect] through changes of legislation’.”
It seems a very daunting task. No country wants to be the first mover.
In terms of the exchange of information across national borders, Heferan said there would need to be “some tweaks to facilitate that” but this might not be a large burden on the government’s overall legislative programme.
But what of the more ambitious elements in the OECD’s 15-item action plan? While the OECD is busily developing detailed recommendations within its own timeframe, in the end it will be up to individual national governments to implement the reforms.
“It seems a very daunting task,” says Croker. “No country wants to be the first mover. Each nation is quite rightly going to look at its particular circumstances.
“In Australia, for instance, we need to be an ‘open for business economy’ as our Prime Minister often says, and also [a government which encourages] Australian companies to go forth and strut the world stage. So we have to be very mindful of our economy’s characteristics and make sure these measures that are being pushed globally aren’t necessarily too detrimental for us,” Croker says.
Sustaining the BEPS agenda
And there’s a fear that without international cooperation, the wheels could fall off the BEPS agenda. “Those G20 nations are key,” Croker adds.
“If they’re not all on board [in Brisbane in November], its quite easy for other nations to say ‘if it’s not unanimous at the G20, why should we get involved in this?’”
Those other – sceptical – nations include the BRICS (Brazil, Russia, India, China and South Africa) as well as developing nations, many of which see the BEPS agenda as an attempt by rich nations to shore up existing tax revenues.
“There is a concern that there’ll be unilateral action because of the time it will take to get uniform action, countries sort of going it alone with their own rules,” says PwC’s Pete Calleja.
When it gets to rubber on the road we’ve got a real risk of breakaway actions.
“I think that the OECD is doing a great job at holding it together at the veneer but I think when it gets to rubber on the road we’ve got a real risk of breakaway actions.”
“Countries are already moving on unilateral action, particularly developing countries that are arguing that the OECD rules are simply not working for them,” he said.
Another forum participant, The Uniting Church’s Dr Mark Zirnzak, says this is already happening.
“So you’ve got examples like Brazil, which already whacks a 30% withholding tax on everything exiting the country – much to the disdain of some treasury officials I’ve spoken to here in Australia,” Zirnak says.
This is part two of a three-part feature on combating base erosion and profit shifting. Read part three 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.