Tightening tax laws will change how cross-border business is structured and conducted in the global economy.
Updated: 31 August 2016
Global corporations will attract greater public scrutiny of how and where they pay tax and how their businesses are structured, as a significant transformation in the global tax system comes into force.
The Organisation for Economic Co-operation and Development (OECD), acting on a request from the G20, is leading the charge to stop corporations avoiding tax as they shift profits between jurisdictions.
The push for the move has come from governments re-examining their tax bases after the economic fallout of the global financial crisis, as well as community concerns around perceptions of multinational tax avoidance.
The digital age has made global trade easier but has also enabled business to better leverage cross-border loopholes. Technology and law changes will enable jurisdictions to close the net on some of these practices.
The pressure on governments is shown by the speed of the OECD’s Base Erosion and Profit Shifting (BEPS) project, which went from its launch in July 2013 to agreement in October 2015 on coordinated reform of tax rules designed to align tax paid to where business is conducted.
BEPS will lead to greater exchange of information so that tax authorities can look through arrangements to see where profits are being moved.
The key points of 15 actions agreed by the OECD, G20 and developing nations include:
- preventing “treaty shopping” used by companies to move profits around
- standardised country-by-country reporting by companies
- limiting interest deductibility and denying exemptions for payments in other jurisdictions
- transfer pricing guidelines.
Former CPA Australia chief executive Alex Malley says the BEPS actions provide much-needed guidance on how nations should modernise their tax systems to best tackle profit shifting.
“With BEPS being very much a cross-border issue, multilateral action such as through the OECD/G20 action plans is a far better way to begin to address the challenges of BEPS than unilateral action,” Malley says.
There is enough profit being sucked out of tax revenues to make the huge project worthwhile. Australia has signed up for exchanges of information with more than 100 countries, so BEPS is already underway here. The OECD estimates that tax authorities could be losing 4 per cent to 10 per cent of global corporate revenues, or US$100 billion to US$240 billion annually.
Toronto-based global head of tax at KPMG Greg Wiebe says that in 31 years of accounting, this is the first time he’s seen tax become a social issue. He says BEPS is about perceptions of fairness and governments wanting to rebuild trust with citizens.
However, there are concerns that legislators will move at different paces and this will lead to double taxation when profits are counted in two jurisdictions. There are also fears about unintended consequences and that legitimate business activities will be caught up in anti-avoidance measures.
The OECD’s director for tax policy and administration, Pascal Saint-Amans, told INTHEBLACK that profit shifting can lead to double non-taxation but addressing it should not lead to double taxation. He expects companies to become more conservative in their planning, in particular on transfer pricing or the use of tax treaties.
“Implementation of the measures by countries will be key, but it is clear that the actions are already having an impact. Companies are revising their planning to reduce the gap between the location of real activities and the location of profits,” Saint-Amans says.
The rise of social media and fears of reputational damage have pushed tax up to the board level, but CPA Australia has long argued that’s where it belongs anyway.
“Tax is not just a matter for the head of Treasury,” Malley says.
“It should be discussed in the boardroom and companies need to be reviewing their arrangements to understand what this seismic shift means for them, and engaging with the tax commissioner now.”
Brahma Sharma, KPMG’s Singapore-based global head of markets tax and regional partner, notes that profit shifting is essentially a developed world issue.
“There is not a big pot of tax to be collected by developing countries,” he says.
Malley says it’s important for Australia to consider the BEPS action plans and, if necessary, change tax laws such as the Multinational Anti-avoidance Law to align with the plans.