The Plan states that this has resulted in reduced revenue for governments and higher costs of enforcement, a shifting of the tax burden to other taxpayers, and competitive disadvantages for businesses that do not engage in BEPS. It also has caused some interest groups to question the fairness of tax systems.
The plan sets out 15 areas for further action, each of which is linked to specific outputs that are to be completed in 2014 or 2015. We will discuss some of the proposed actions hereunder;
- Neutralize the effects of hybrid mismatch arrangements. It often occurs within MNCs that company A in country I provides group company B in country II with a loan. By giving this loan a so-called hybrid character, amongst others by letting the payment of interest being dependant of the presence of profit at the level of the debtor, a tax advantage can be realised when the interest payment is deductible at the level of the debtor and the interest income qualifies as (tax exempted) dividend at the level of the creditor. Via recommendations for the design of domestic tax laws to eliminate the tax advantages arising from hybrid instruments and entities and by enforcing changes to the OECD’s model tax convention the OESO intends to realise its proposed actions. These actions have a considerable chance to be successful. The target date is September 2014.
- Assure that transfer pricing outcomes are in line with value creation. Based on the arm’s length principle transfer pricing rules serve to allocate income earned by a MNCs among those countries in which the company does business. Very often the existing transfer pricing rules effectively allocate the income of MNCs among taxing jurisdictions. However in other case MNCs are able to separate income from the economic activities that generate that income and to shift it into low-tax environments. Most often this results from the transfer of intangibles and other mobile assets for less than full value, the over-capitalization of lowly taxed group companies and from contractual allocations of risk to low-tax environments in transactions that would be unlikely to occur between unrelated parties. With the proposed actions the OESO wants to develop rules which ensure that profits associated with the transfer and use of intangibles are appropriately allocated in line with value creation. In this respect it is worth mentioning that on July 30, 2013 OESO issued a revised discussion draft on the transfer pricing aspects of intangibles. Further OESO wants to develop rules preventing high returns accruing to a company solely because risks have been contractually transferred to it or because it has been allocated excessive capital within the MNCs. The target dates are September 2014 and 2015;
Another OESO action plan titled ‘a step change in tax transparency’ deals with addressing the international tax avoidance and evasion by delivering an effective model of bilateral automatic exchange of information. Changes are taking place. A major breakthrough towards more transparency was accomplished in 2009 with information exchange upon request becoming the international standard and the restructured Global Forum on Exchange of Information and Transparency for Tax Purposes starting to monitor the implementation of the standard through peer reviews. Now, there is another step change in international tax transparency driven by developments around the globe, including in the United States and Europe, with unprecedented political support for automatic exchange of information. In April 2013 the G20 Finance Ministers and Central Bank Governors endorsed automatic exchange as the expected new standard.
This OESO report sets out the key success factors for an effective model for automatic exchange, provides relevant background and outlines four concrete steps needed to put such a model into practice: (i) enacting broad framework legislation to facilitate the expansion of a country’s network of partner jurisdictions, (ii) selecting (or where necessary entering into) a legal basis for the exchange of information, (iii) adapting the scope of reporting and due diligence requirements and coordinating guidance, and (iv) developing common or compatible IT standards.
The report recognises that offshore tax evasion is a global issue requiring global solutions – otherwise the issue is simply relocated, rather than resolved. With more and more jurisdictions joining the Convention on Mutual Administrative Assistance in Tax Matters there exists a clear legal basis for comprehensive automatic exchange with strict safeguards protecting confidentiality. Bilateral tax treaties also provide such a legal basis and within the European Union, Directives provide a specific legal framework for automatic exchange of information regarding interest income and certain other types of income between its 27 (soon 28) members. This report notes that a global solution also means a global standard to minimise costs for businesses and governments, while at the same time enhancing effectiveness, maintaining confidence in open markets and best serving society at large. A proliferation of inconsistent models is in nobody’s interest. Target date is September 2014. All the G20 countries plus 30 other countries including The Netherlands have recently agreed to adopt this new standard for automatic exchange of information.
Nijmegen, August 23, 2013