Finalising and Implementing the BEPS Agenda

452 Pages·2017·10.06 MB·English

Finalising and Implementing the BEPS Agenda
Program
Monday 17 November
8:30 Registration. Coffee and pastries
9:00 The BEPS project
Pascal Saint Amans, OECD
Richard Vann, Sydney University. A stocktake of work to date and an assessment of
the future
10:30 Morning tea
11:15 Miranda Stewart, ANU. Themes of abuse and the digital economy in BEPS
Jacques Sasseville, OECD. Commentator
12:15 Lunch
1:15 Actions 8, 9, 10, 13. Transfer pricing
Mitchell Kane, NYU. Labor rents and 'developing' countries: Where’s the BEPS?
Michelle Markham, Bond. Commentator
2:15 Action 4. Interest and base-eroding payments
Chloe Burnett, Sydney University. Arm's length interest - close to hand
David Duff, University of British Columbia. Toward a comprehensive approach
to base erosion through the deduction of interest expenses
3:15 Afternoon tea
3:45 Action 2. Hybrid instruments and entities
Graeme Cooper, Sydney University. Co-ordinating inconsistent choices: hybrids
John Prebble, Victoria University of Wellington. Commentator
4:45 Action 11. Evidence
DP Sengupta, Principal Consultant, National Institute of Public Finance and Policy, India.
Base erosion and profit shifting - an Indian perspective
Wei Cui, University of British Columbia. A critical review of proposals for destination-
based income taxation
7:00 Dinner
Tuesday 18 November
8:30 Coffee and pastries
9:00 Actions 1, 7. PE issues
Antony Ting, Sydney University. The politics of BEPS - What does Apple's international tax
structure reveal?
Dale Pinto, Curtin University. A preliminary analysis of the potential options to address
the tax challenges raised by the digital economy
10:30 Actions 6, 15. Treaties
Jacques Sasseville, OECD. Abuse of tax treaties
Lyn Redman, Greg Woods, Australian Treasury. Commentators
11:00 Morning tea
11:30 Actions 12, 13. Information
Diane Ring, Boston College. Transparency, disclosure and developing countries
Craig Elliffe, University of Auckland. Commentator
12:30 Lunch
1:30 Action 14. Dispute resolution
Jonathon Spencer, ATO. Improving tax treaty dispute resolution – Lessons from Australia
Micah Burch, University of Sydney. Commentator
2:30 BEPS implementation and national interest issues
Andrew Mills, ATO. Some Thoughts on Implementing the BEPS Agenda in Australian Law
David Pearl, Treasury. BEPS - A policy adviser's perspective
3:30 BEPS and developing countries
Caroline Malcolm, Counsellor to the Director and Deputy Director, CTPA
Carmel Peters, IRD NZ. Commentator
4:30 Close
BEPS: A stocktake of work to date and an assessment of the future
Richard Vann, University of Sydney
Thedetails of theindividual actions of the OECD/G20 BEPS Action Plan will be
discussed at the various sessions of this conference so this paper will consider the
broader issues of the project, using some examples from the various actions. At the
outset it should be noted that a great amount has already been achieved in building
consensus within and beyond the OECDeven when the opposition appeared very
strong. The following comments are not meant to detract from that achievement, but
rather encourage the OECD to continueto think further about some of the longer term
issues thrown up by BEPS –already the OECD may be taken to be suggesting in the
case of the digital economy that BEPS is but one stage on the road to change in the
international tax system.
It may well be that many of the ideas raised are simply not feasible given the
negotiation dynamics within the relevant BEPS working group and the many and
diverse country interests that need to be accommodated but at the veryleast outsiders
will want to understand what those dynamics are and why they make various
possibilities not feasible within the BEPS project.
Provisional nature of outputs to date
The 2014 deliverables have a standard Foreword which makes clear that all of them,
though agreed, are only provisional pending further work in 2015 (which was
expected because of their interactions with the variousActions to be dealt with in
2015). It is also stated that all of these Actions require more work, in other words they
are all in some sense incomplete. Further the reference to tax sovereignty which has
featured in the G20 communiqués is repeated, that is, no country is legally bound by
what is decided in the BEPS process to date and maintain their freedom of action to a
large extent both legally and practically.
Looking across the entire BEPS agenda, it was likely that some parts were going to be
easierthan others, with the consequence that the deliverables have had to some extent
to fudge responses. It is likely to be easier to get countries to agree to things that are
basically about collecting and disseminating information (transfer pricing
documentation and country-by-country reporting) or to agree on overcoming tax
planning which leads to tax being paid nowhere (hybrids) –though even in both these
cases consensus was not easy as it turned out. It might even be easy to get countries to
agree to fix up some of the problems that treaties are alleged to have created such as
switching off CFC rules (treaty abuse). On the other hand it is likely to be hard to get
countries to agree to things which constrain their ability to use their tax systems to
attract investment (harmful tax practices) or to agree to give up their tax base to some
other country (the country of location of customers in relation to the digital economy).
Hence it is not surprising that the OECD has had mixed success in achieving the
outcomes indicated in draft documents released earlier this year or in completing the
2014 Actions. To think of this as a failure, however, is probablywide of the mark.
The amount of detail that has been agreed is surprising in its breadth and depth and
1
the political momentum and commitment to finish the BEPS agenda on time has been
reaffirmedon more than one occasion.
Nor should it be forgotten that BEPS is only one part of a three-pronged G8/G20-
OECD tax and tax-related agenda, including also establishing automatic exchange of
financial account information as the international standard (now agreed by the G20 to
start by 2018 at the latest) and disclosing the ultimate beneficial ownership of legal
entities (to which the G8/G20 commitment on progress continues with more promised
at the Brisbane G20 November meeting).
Which is a dilemma for the OECD. Not only does it have to contend with this other
large workload, in 2015 it has to finish the unfinished part of its 2014 work as well as
complete the 2015 work. Our politicians tended to give the impression in September
2014 that, with deliverables on 7 out of 15 actions, the work was more or less half
complete. A more accurate estimate would be one third of the work is (provisionally)
complete. The fate of the BEPS project really depends on the work to be finalised in
2015.The project was always a big ask of the OECD and as time passes, the amount
of work seems to grow rather than decrease.No doubt the necessary deliverables will
be delivered in 2015 but to what extent they represent a real consensus will be the
critical question.
Policy
The policy underlying BEPS is to keep the corporate income tax as the main tax on
business profits andto align the location of taxable profits of a firm with its activities.
This directly or indirectly explains the various actions which are largely substantive in
content, though in some cases they are reactive to failure by countries to align profits
withactivities (potentially parts of Actions2-4 and perhaps 5 and 14 –see below)or
procedural to provide evidence to tax administrations that BEPS is occurring in
specific cases (the transparency part of Action 5, and Actions 12-13). Action 11
stands to one side and, perhaps along with Action 1, provides the only direct
consideration of data and policy. As written the action reads mainly like a concern
with system wide “proof” (data) that BEPS is occurring and the responses to the
consultation on Action 11to date confirm that view.
There is, however, a deeper policy question of whether the corporate income tax is the
right approach to taxing corporations or whether it is economically doomed to failure.
It is not evident to what extent this question will be raised in the policy discussion
under Action 11. It can be argued that, as the 2014 digital economy paper recognises,
the returns earned by most companies are a mixture of returnto economic rents and
returnto risk-takingwhich cannot be observed separatelyin the real world. The
corporate income tax has the virtue of capturing both kinds of return without the need
to distinguish them, unlike other alternatives emerging from the economic literature
such as explicit rent taxes, and destination based cashflow taxes on returns (which are
assumed to all relate) to risk-taking.
There are also more detailedpolicy issues inherent in all of the substantive action
items which are likely to fall between the cracks, because they will not be captured in
Action 11nor other actions items,either because they are put to one side such as the
broader nexus questions in the digital economy, or because the content of the
2
particular action is quite prescriptive and invites a response in very specific and
concrete terms such as Actions 6-10,which in my view are the crux in terms of
positive norms involved in the BEPS project.
For tax treaties, what the basic policy drivers are in terms of treaty abuse or the
permanent establishment threshold are rarely analysed in any detail . The OECD work
on treaty abuse has suffered historically from the fundamental difficulty in defining
the policy problem(s). The current treaty abuse work is largely devoidof explicit
policy analysis. The PE threshold likewise has always been very light onexplanation
(althoughsome attempt was made by the OECD in 2008 in relation to the services
PE). Here I will focus on the PE test and transfer pricing as an example of how the
detailed proposals may miscarry if policy is ignored.
The PE test (along with its functional equivalent of creation of a subsidiary in a
country) is intended to draw a line between foreign direct investment in a country as
opposed to mere exports to a country. The fixed place threshold which bases thetest
ona fixed presence of some duration in a countrywas devised in an era when the
nature of business meant that some premises were necessary to have a relevant
presence and it was sensible to look at single companies as the current complex
corporate structures did not exist. The growth of international trade in services has
largely undermined the use of fixed premises to express the basic idea (as is
recognised in the services PE definition in the UN Model and the OECD
Commentary) and the growth of complex corporate structures has rendered the use of
single companiesan inappropriate way to test presence. The latter is recognised in the
useof provisions grouping associated enterprises (which is one of the main proposals
of the PE Action 7 discussion paper) but these do not recognise that it is the combined
presence in the country of all associated companies whether resident or non-resident
that matters, that is, within the country grouping of associated companies whether
resident or non-resident should be applied to test presencefor the threshold.
With respect to agency PEs the need for this specifictest arose from what has come to
be called the “at the disposal” testwith respect to the fixed place, that is, the premises
(presence) had to be those of the enterprise in question, not another enterprise. The
agency PE which historically also required a fixed place was designed to ensure that
premises of another person were effectively treated as the premises of the enterprise if
that other person was dependent on the enterprise(note that the same applies to the
services PE and is now discussed at some length in the OECD Commentary).The
rewriting of the test in the 1950s by the OEEC to separate the agency test from the
fixed place test and to omit the explicit reference to a place finally led to the 2003
OECD view that no enduring presence of the agent in the country was necessaryso
that exports to a country are much more likely now to be captured by the agency test
in contradiction of the basic policy(signing contracts in a country without any other
fixed place or other activity there is enough for an agency PE).
The contracting test in the agency PE was an artefact of the usual activity carried on
by foreign enterprises in the past of selling things in the country. Now that sales of
things in a country (where contracting makes some sense as a test) has been matched
or overtaken by provision of services (where it is the provision, rather than the
contracting that matters) the agency test misfires in many cases even where the
“dependent actor”has some enduring presence but does not contract.The proposed
3
rewrite of the agency test mainly focuses on fixing the contracting side of matters but
without getting at the underlying policy. Not surprisingly it has raised concerns for
Australian exporters of natural resources.
The suggestion above of looking at the presence of all associated companies in a
corporate group in testing whether the threshold is passed would largely solve the
“dependent actor”PE issue –the further test would only be necessary for an
enterprise which satisfies the presence threshold and is dependent on but not
associated with the other enterprise. It would also greatly reduce the significance of
the threshold as the presence of a subsidiary would be enough to enliven taxing
jurisdiction with respect to all activities of the associated companies in the corporate
group undertaken in the country. This kind ofdiscussion about PEs is necessary to
establish what the policy of the threshold is. It does not necessarily mean that the
recommended fixes have to be applied directly as path dependence has a role to play
in how the rules are developed in future. But it is necessarythat the policy issues be
understood to prevent any rewrite affecting innocent bystanders (which includes
collective investment vehicles as well as exporters).
Once the necessary activity threshold has been passed then it is a matter of using
transfer pricing to establish the value of all the activities of the associated companies
which constitute a corporate group in the country (including those of “dependent
actors” of such companies) even if the tax liability isthen levied company by
company, rather than on a separate entity basis – which brings the discussion to the
policy issues ofthe transfer pricing rules.
The elaborations in the last 20 years ofthe Transfer Pricing Guidelines and the
Attribution Report implicitly assume that the return to companies taxed under the
income tax is for risk-taking and so risk has become central in the analysis. The
debate about intangibles in particular is, however, mainly about returns to economic
rents, which means that much of the transfer pricing analysis miscarries because it is
still framed within the return to risk-taking paradigm. Moreover, even if returns are
only to risk-taking, it is impossible to really observe where the risk-taking occurs
(other than where activities occur) and the adage of the optimal tax literature again
applies: it is not possible to tax directly what cannot be observed. The insistence on
taking account of facts and circumstances in the transfer pricing guidelines is a case of
observing the unobservable and means that the transfer pricing work (putting aside the
“special measures”) is likely to miscarry at least in part when viewed from the policy
level.
Accepting as BEPS does that the focus should be on activities the questions then are
what is meant byactivities in a countryin relation to taxing returns to rent and risk-
taking, and how can an arm’s length test be applied in that setting. These are large
issues that I have discussed elsewhere and will leave for now, except to emphasise
again that putting aside special measure, the current BEPS work is only partly heading
in the right direction(so far is it pushes towards profit splits).
The separate entity part of the separate entity arm’s length principle also needs to be
thought through given the view above, which is implicit in the BEPS policy stance,
that it is the value adding from all activities of associated companies in a country that
need to be priced and allocated to that country for taxing purposes, once the threshold
4
is passed. At the moment there are separate principles for PEs and associated
enterprises. Clearly a unified set ofprinciples is required. One of the main purposes of
the Attribution Report was to unify the principles and that sense headed in the right
direction but it sought to move the treatment of PEs in the direction of associated
enterprises and elevated dealings to the status of transactions for that purpose. BEPS
is focused on activities which implies a move away from transactions and dealings.
There is an awareness of the implications of this shift in some of the BEPS intangibles
work to date but the current result is an awkward combination of transactions and
activities. Path dependence is the reason why the shift is occurring in this way, but the
policy goal needs to be kept in view in navigating the transfer pricing rules along that
path.
Instruments (and working methods)
The OECD/G20work to date also indicates the complexity of BEPS and its
interactions. The interactions were always recognised, but the complexity arising from
the various instrumentsbeing used to deliver them has not so far been much
highlighted. The instruments are domestic law changes, changes to OECD
Commentaries and Guidelines, changes to the OECD Model treaty, the multilateral
instrument and in the case of Action 5 the revived Forum on Harmful Tax Practices
(FHTP). As an example of this complexity, consider the BEPS work on intangibles.
Two Actions, 5 and 8 explicitly feature intangibles, but involve the whole range of
delivery mechanisms, being domestic law and the FHTP under Action 5 and
potentially the Guidelines, Model treaty and multilateral treaty for Action 8. The
related question is what happens as the end of 2015 when the BEPS project is
concluded. Will the world return to its previous patchwork of implementing
international tax solutions, or will a more coordinated approach be adopted?
One unexpected item in the 2014 deliverable on Action 15 is that the negotiations on
the multilateral instrument (treaty) to give effect to some of the BEPS conclusions
will now commence in early 2015. Originally the indications were that this
negotiation would occur in 2016. The result is that delegates will be negotiating text
on 2015 actions which will still be in progress when the negotiations occur (such as
changes to the permanent establishment definition, special measures on transfer
pricing and international tax dispute resolution), which, along with treaty abuse and a
rule on the treaty treatment of transparent entities, are likely to form the contents of
the instrument. The message from moving the multilateral instrument into 2015 seems
to be that it is expected by the G20 that BEPS will really be finished in 2015 at least
so far as establishing the consensus on the new system is concerned, although
implementation and follow-upobviously will extend beyond that time.
Once the BEPS work is finished, only two instruments apart from the normal OECD
work processes are evident for ensuring that countries honour their agreements to
implement BEPS related measures to which they have agreed at the political level, the
Forum on Harmful Tax Practices in relation to Action 5 and whichever body is
responsible for the multilateral treaty (almost certainly the OECD). Nothing to date
like the Global Forum on Exchange of Information for Tax Purposes which has driven
the technical work and peer reviews on exchange of information is yet being proposed
for BEPS. It is doubtful that the progress on exchange of information would have
been made without the Global Forum – the multilateral treaty in that area has only
5
been a convenient mechanism rather than the driver of change. It is thus still possible
that BEPS could fail in implementation if no oversight mechanism is put in place at
the end of the 2014-2015 work. How long the political attention of the G20 can
remain engaged is a related and still open question.
That in turn leads to consideration of why one or other mechanism is chosen for
implementing particular actions. In terms of ease of delivery the OECD
Commentaries and Guidelines seem the best method since they do not require treaty
implementation and are regularly changed by the OECD and largely accepted by
countries even though only a form of soft law. At the other extreme renegotiation of
existing bilateral treaties based on the OECD Model or negotiation of a multilateral
instrument to modify existing bilateral tax treaties is likely to be either a very slow
and/or a very contestedprocess. A middle way more generally is to create soft law
norms with some peer review process like the FHTP to carry the BEPS work into
action.
The 2014 deliverable on the multilateral instrument quotes the multilateral treaty on
Mutual Administrative Assistance in Tax Matters as a ‘recent success story.’ That
treaty was opened for signature in 1988, commenced operation in 1995 with five
signatures and only had 14 signatures by 2009, after which it took off to become the
new international standard for administrative assistance, especially exchange of
information, now having 84 signatures and 15extensions to ‘colonies’ (includingtax
haven dependenciesof the UK). The success only materialised once the G20 become
involved with it in 2009. Even so that is five years ago and the real take-off was only
in the last two or three years with the push for automatic exchange of information
arising from the current implementation of FATCA by the US. Is it the G20 or
FATCA that explains the recent success? While the FHTP is to be revived from its
moribund slumber of recent years as a result of BEPS, its history to date shows the
difficulty of maintaining momentum purely in soft law terms, without the availability
of some hard law frameworkand ongoing political commitment.
Which raises the questions of why there is little discussion of implementation
instruments of specific actions beyond fairlybland reference to domestic law etc and
the apparent under-utilisation of the course of soft law guidelines. It is possiblethat a
lot more could beachieved by this approach particularly in relation to Actions 2 and
6-10. Recent history in the form of the 10+ years projects on e-commerce and
attribution of profits to PEs may provide the answer. Arguably it was the OECD’s
refusal pre-BEPS to consider the transfer pricing rules along with the PE threshold for
taxing businesses that has largely been to blamefor the development of BEPS. The
transfer pricing rules have changed beyond all recognition in the last 25 years while
the PE threshold has gone largely untouched producing a significant mismatch
between them.
The reason for this outcome is probably theway in which the OECD traditionally
workedin silos, with treaties in WP1, policyin WP2 and transfer pricing in WP6.
Although attempts were made in the previous e-commerce work of the OECDto work
across the silos this was largely unsuccessful,as it was entirely unsuccessful in the
attribution project. By contrast the BEPS project recognises the need for a whole-of-
OECD approach –that a coordinated set of measures are necessary. But old habits
seem to die hard. WP6 is unable to see sufficient flexibility in rewriting the guidelines
6
to overcome the many problems that the previous rewrites of the guidelines have
createdwithout special measures, other than more of the same. Hence the hard option
of the multilateral instrument in several important respects can be seen as a way of
overcoming the caution or perhaps the inability to see a way forward in the soft law
routein the traditional work silos of the OECD, even though they have largely
operated with soft law for many years.This silo issue may have resurfaced in the
BEPS PE discussion draft for Action 7. That action includes attribution of profits to
PEs (as the policy discussion above suggests it should). The discussion draft indicates
the degree of coordination necessary across Actions 4, 7, 8 and 9 but concludes,
subject to that coordination, that current work “has not identified substantial changes
that would need to be made to the existing rules and guidance concerning the
attribution of profits to a permanent establishment if the proposals included in this
[discussion draft] were adopted.”The overall impression is that WP1 does not want to
tread on the toes of WP6 or WP11 (on aggressive tax planning) despite the necessity
of interaction.
Apart from coordination issues there is a further complication arising from silos –the
problem of “too many cooks spoiling the broth.” The following slide borrowed from a
recent ATO presentation by Andrew Mills and Mark Konza to an IFA branch meeting
indicates that no less than seven OECD related bodies are involved in the BEPS work.
This in fact understates the number and the issue, for example, the Forum on Tax
Administration is also involved in the work on dispute resolution and the UN Tax
Cooperation Committee has work underway on services (including a possible article
on technical services and/or cyber-based services and revision of UN transfer pricing
guidance). The existing OECD bureaucracy in the Centre for Tax Policy and
7
Administration is clearly the main coordination mechanism and will be put to the test
in the next year as the various strands of work are brought together.
Conversely it can be argued that “the more the better”in terms of establishing as
broad a consensus as possible and ensuring buy-in to the outcomes of BEPS by the
diverse groups involved. The BEPS Action Plan articulated a broad consultation
strategy which is still a work-in-progress as indicated under the next heading. No
doubt consideration is being given by the OECD and others to the follow-up strategy
for BEPS. It will be critical to the ultimate success or otherwise of the BEPS project.
Non-OECDcountries
BEPS is not only about the tax machinations of multinationals. It also is an implicit
recognition of the shift in geo-political power away from the old economies as
illustrated by the following graph in one of the documents produced by Australia’s
Treasury in relation to BEPS.
The involvement of the G20 in the exchange of information area from 2009 was
probably explained mostly by politics –getting the necessary political support and
power to bring tax havens to heel. In the case of BEPS in addition to getting the
political support and power to bring another recalcitrant group, the multinationals, to
heel, it was also a convenient way to get the major emerging economic powers into
the tent. Shortly before BEPS got underway there were signs that the major non-
8