International efforts to rein in corporate tax avoidance are gaining momentum.
Government tax policy is rarely seen as a chance to win the hearts and minds of voters. Allegations of tax avoidance by giant global corporations, however, have captured the public’s imagination and emboldened political leaders in many countries to take action against the practice known as base erosion and profit shifting, or BEPS.
Rulings such as the European Commission’s demand for Apple to pay a record-breaking €13 billion in back taxes to Ireland in 2016 started the blitz on alleged cases of companies shifting profits from a high-tax jurisdiction such as Australia, the US or several European countries to one with low or no tax. Google, Ikea, McDonald’s and Amazon are other prominent companies that have been in the sights of tax authorities in recent years.
Such controversy has prompted Kerrie Sadiq, a professor of taxation in the school of accountancy at the QUT Business School, and fellow editors Adrian Sawyer and Bronwyn McCredie to release a new book, supported by CPA Australia, called Tax Design and Administration in a Post-BEPS Era: A study of key reform measures in 18 jurisdictions.
The publication outlines how countries are tackling the BEPS issue. The case studies suggest most are taking two paths – multilateral cooperation through the OECD's BEPS Project, and unilateral moves via the adoption of new taxes imposed on multinationals.
Sadiq says the global financial crisis a decade ago put international tax issues back on the agenda as cash-strapped governments weighed up raising personal taxes, increasing consumption taxes and tightening rules for multinationals.
“Citizens don’t like taxes being raised, so it was a really good opportunity to collect more tax where tax was being avoided,” she says.
The BEPS Project
Unveiled by the OECD in 2015, the BEPS Project is a package of corporate tax reforms that identifies 15 actions to protect tax bases and reduce the risk of abuses occurring. It has three fundamental pillars: introducing coherence in domestic rules affecting cross-border activities; reinforcing substance requirements in the existing international standards; and improving transparency and certainty for businesses.
At last count, 127 countries had agreed to implement minimum standards as part of an Inclusive Framework. These standards revolve around peer review, the prevention of treaty abuses, and country-by-country reporting. The latter has received the most publicity and requires companies to declare the amount of revenue, profit and tax paid in each country in which they do business.
“When you have that many countries agreeing to quite substantive measures, it’s a really good sign,” Sadiq says.
The other gamechanger, she believes, is that 87 signatories [as of February 2019] had backed a tax-reform treaty calling on them to follow rules contained in a Multilateral Instrument. It, in effect, means that the BEPS measures will extend beyond just the big tech giants to include a wider range of targets. Concerns about tax havens and secrecy have grown, according to Sadiq, because of the rise of the digital economy, which can make profit shifting simpler for companies of all sizes.
Sadiq’s book outlines the responses to the BEPS Project within 18 jurisdictions, and the overarching message is around the willingness of countries to embrace the 15 action points, even though developing nations have typically lagged developed countries.
“Every jurisdiction we looked at was introducing some measures of the BEPS actions and every jurisdiction was a signatory to the Inclusive Framework,” says Sadiq.
David Bradbury, head of the Tax Policy and Statistics Division within the OECD’s Centre For Tax Policy and Administration, says the BEPS Project represents one of the most significant multilateral efforts to reform international tax rules.
“As governments continue to implement these rules, we have seen many of the loopholes that have long been exploited by large multinationals and their advisers being shut down,” he says. “This has resulted in more coordinated tax rules across jurisdictions, which has generated additional revenues for governments, levelled the playing field between businesses and improved the overall operation of the international tax rules.”
Bradbury agrees that the introduction of country-by-country reporting is crucial.
“Country-by-country reporting, in particular, has ensured that tax administrations are now receiving improved data from large businesses on their worldwide operations,” he says. “This has been crucial for empowering tax authorities with the information needed to properly understand how a firm’s global operations impact its tax liability in a particular jurisdiction.”
He is also encouraged that the changes have led to “considerable behavioural changes” from many multinationals.
Focusing on a multilateral approach
CPA Australia’s general manager external affairs, policy and advocacy Paul Drum FCPA says the release of Sadiq’s book is clearly timely given that the digital economy has exacerbated concerns about multinational capital flows.
“It’s become much easier to manufacture outcomes whereby you have no tax [paid] anywhere,” he says, adding that the publication helps inform readers about illegal tax evasion and legal tax minimisation.
With regard to the effectiveness of the BEPS Project, Drum notes that the US’s decision not to sign up is a potential “blocker” to reform. “The long-term effectiveness of it is significantly undermined by that.”
The other major challenge results from moves by some countries to take unilateral action on tax changes amid delays in getting multilateral agreement from participating countries. Perhaps the most notable cases involve the UK introducing a diverted profits tax, colloquially known as the “Google tax”, to counteract contrived moves by companies to limit taxation, as well as an Australian proposal to roll out a digital tax that would see companies with significant digital revenues pay a set tax on their Australian turnover.
“If everyone doesn’t do it the same way, you could end up with a situation where there will be entities that not only suffer double tax; they could be triple- or quadruple-taxed on the same transaction because each country has gone its own way,” Drum observes.
He understands the dilemma for governments, noting that they have to weigh up waiting for possible multilateral agreements while at the same time meeting community expectations that governments will protect their tax bases and provide expected services. “This means they don’t always have the luxury of sitting back and waiting for this tax nirvana.”
"When you have that many countries agreeing to quite substantive measures, it's a really good sign." Kerrie Sadiq, QUT Business School
Sadiq hopes that Action 14 of the BEPS Project, which addresses dispute resolution, will ease concerns about multiple taxation.
“If there is double tax or triple tax, there are 127 countries that have agreed to the Inclusive Framework that are also looking at a dispute resolution mechanism that multinationals can use to potentially prevent this tax problem.”
While she agrees that the US’s status as an “outlier” on global tax issues represents a threat to BEPS, Sadiq says that there should now be sufficient momentum to ensure that countries going it alone “will not be a large issue”.
“It’s going to take ongoing work at the OECD to ensure there is a focus on a multilateral approach, or we’ll potentially revert to an ad hoc system that caused problems in the first place, where countries have gone it alone,” she adds.
Bradbury counters fears about multiple taxation, commenting that members of the Inclusive Framework have agreed that any new rules should not result in taxation when there is no economic profit. Nor should they result in double taxation.
“They have stressed the importance of tax certainty and the need for effective dispute prevention,” he says.
The BEPS legal minefield
The great unknown with the BEPS Project is how affected multinationals will respond to moves to restrict profit shifting.
Sadiq admits that some corporations are seeking advice from lawyers and accountants to check their options and see that they are complying with relevant laws. “Globally what we are seeing is multinationals being much more transparent about their tax positions.”
In line with one of the BEPS Project pillars around the transparency and accountability of companies, Sadiq says more information about the tax activities of many companies – not just Google, Amazon and Apple – is being released.
A good example is Australia’s Voluntary Tax Transparency Code. Although it is not directly related to the BEPS Project, Sadiq says, “We’re seeing Australia’s multinational entities actually telling us what they’re doing in terms of paying tax.”
She concludes that in an era of heightened corporate social responsibility, stakeholders are demanding that companies act as good corporate citizens. “It’s starting to make a difference as to how we think about multinationals.”
The focus now, according to Sadiq, should be on maintaining the momentum of the BEPS Project through the efforts of the OECD and individual countries.
“We need to think of this reform project as being in the beginning stages, not the end stages,” she says. “Countries have to run with this and we have to keep the conversation and momentum going.”
CPA Australia gets behind a piece of rigorous research
Kerrie Sadiq worked with 32 academics, practitioners and revenue authority personnel who contributed to the new book, Tax Design and Administration in a Post-BEPS Era.
The writers include a representation from Asia and Africa, in addition to nations such as the United States, the United Kingdom, and the Netherlands. Sadiq also praised CPA Australia for helping to fund the publication through a Global Perspectives Research Grant, remarking that it will contribute to future tax reform and research.
“This project became possible because CPA Australia believed in it and supported it,” Sadiq says. “There’s a lot of research required.”
The book notes that a number of jurisdictions are continuing their domestic tax-reform initiatives at the same time as members seek to implement BEPS Project actions.
The OECD’s David Bradbury admits that a digital economy is increasingly raising questions as to whether existing tax rules are appropriate in this modern economy.
As a result, some countries have acted unilaterally.
The OECD has released a policy note through which the 127 members of the Inclusive Framework on BEPS have agreed to examine proposals involving two pillars. These pillars could form the basis of a consensus for a solution to the tax challenges of the digital economy.
Bradbury says the first pillar focuses on the allocation of taxing rights among countries. He explains that the second pillar will consider granting new taxing rights that aim to strengthen the ability of jurisdictions to tax profits where other jurisdictions with taxing rights apply a low effective tax rate to those profits.
“This work will clearly have implications right across the economy and it is not limited to the activities of a small number of highly digitalising businesses,” Bradbury says.
Tax Design and Administration in a Post-BEPS Era is available from the CPA library. Non-members may purchase the book from the publisher.
Further resources on BEPS are available in the CPA Library.