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OECD tax avoidance recommendations: talking the big talk or game changer?

Accounting firms and professional bodies have reacted cautiously to the Organisation for Economic Co-operation and Development (OECD) release of its first set of recommendations to combat tax avoidance by multinational enterprises.

The OECD released earlier this week its 2014 Base Erosion and Profit Shifting (BEPS) package, which covers half of the OECD's BEPS Action Plan endorsed by the Group of 20 (G20) in July 2013.

The BEPS package is aimed at creating a single set of international tax rules to help governments end tax base erosion and the artificial shifting of profits to tax havens.

"First, it will provide concrete measures to reduce tax treaty abuse. We all know it makes no sense that an investor based in one country, sets up a shell company in another country, to channel an investment in a third country," OECD secretary general Angel Gurría said at the launch of the package.

Gurría said the OECD is committed to closing such a loophole and recalled all G20 countries had agreed that companies shouldn't engage in this "treaty shopping".

Gurría added: "With this, as well as the measures relating to transfer pricing and other items in the BEPS package, we will finally neutralise cash boxes - which at the moment hold more than two trillion US dollars offshore. This will be a crucial step forward!"

The BEPS Action Plan identified 15 key areas to be addressed by 2015; with seven to be delivered in September 2014. The 2014 BEPS package released this week consists of an explanatory statement and the seven deliverables:

  • Two final reports, one addressing the tax challenges of the digital economy and one on the feasibility of developing a multilateral instrument to amend bilateral tax treaties.
  • One interim report on countering harmful tax practices.
  • Four reports containing draft recommendations to neutralise the effects of hybrid mismatch arrangements; prevent treaty abuse; assure that transfer pricing outcomes are in line with value creation; re-examine transfer pricing documentation.

Gurría warned that tax avoidance deprives governments of precious resources and highlighted two key challenges that needed to be address in order for the package to be effective: implementation of the measures and inclusion of developing countries.

"How is BEPS going to be implemented with more than 3000 tax agreements already in existence?" he asked. "As part of this package countries have agreed on the feasibility of a multilateral instrument to streamline implementation of anti-BEPS measures. In January next year, they will consider a draft mandate for an international conference so that a multilateral instrument could be negotiated."

Implementation challenges
Reacting to the release, accounting firms and professional bodies welcomed the progress made by the OECD to tackle tax evasion and avoidance, but were conscious of the challenges lying ahead.

BDO global head of tax John Wonfor said: "We see some turbulent times going forward because it is up to the countries to implement partly or fully the OECD's recommendations."

Countries will implement at different speed and choose the recommendations they like and ignore the ones they don't like, Wonfor continued.

"For international businesses it will create a bit of uncertainty as countries make their decisions, international businesses will have to look at the possible impact for their global tax position so we see a lot of work as an accounting network in helping our clients figuring that out."

Similarly Grant Thornton UK partner Wendy Nicholls said the 2014 package is a positive step in the right direction. "But many businesses will be somewhat disappointed that there are still so many gaps in the action plan and questions left unanswered," she said.

"As businesses rely on certainty, my worry is that the material detail of the action plan will only be agreed late in 2015, leaving businesses with very little time to plan and adapt."

Businesses need certainty and want to know what they are expected to comply with in order to get their business ready, Nicholls continued. "The really difficult bit here is still to come, because the OECD has to finalise the rules and has to give people guidance on implementation."

Work in progress
Unveiling the package, OECD director of the centre for tax policy and administration Pascal Saint-Amans said the OECD is "half way" and delivered seven actions, with eight more to come next year, despite some had doubted it would meet the deadlines.

However ICAEW international tax manager Ian Young pointed out that only four of the actions delivered this week had been closed off while the other three are work in progress. "So we have 11 actions to go," he said.

"Your assumption would be that we are half way through," Nicholls agreed. "But out of the seven actions only two are final reports the rest are interim or drafts and the two that were final were not totally final as they leave things open on certain point saying 'we haven't decided if we are going to change the rules or not'."

ACCA head of taxation Chas Roy-Chowdhury said: "The clock won't stop at the end of 2015 when all the actions are delivered. The work will just go on because I can't see the multinational instrument being delivered by the end of 2015 for one example."

Tax will continue to be on the agenda for a number of years, he continued.

Country by country reporting
One of the main recommendations introduced in the 2014 package is to have companies report their activity on a country by country basis so that tax administrations would have a global picture of a company's activity.

"This will provide all the tax administrations where a company operates a broad picture of where the sales are made, where the profits are located, where the taxes are paid, where the employees are employed, where the assets are deployed, on a country by country basis meaning that every country will have the global picture," Saint-Amans said.

This is confidential information and will only be for tax administrations, he continued. "But this will be a game changer in terms of tax assessments."

BEPS Monitoring Group coordinator and member of the Tax Justice Network Sol Picciotto said: "Country by country reporting is a big breakthrough at least now the tax authorities will have or should get the overall view."

Picciotto said it is the first time the OECD is seriously looking at ensuring that companies are taxed rather than looking at avoiding double taxation. "It is a game changer but we have to see how much of it is symbolic and how much will be effective," he continued.

At the launch of the 2014 package Saint-Amans said the OECD wasn't producing reports to generate talks but was producing actions to change the tax environment.

However accounting firms and professional bodies said it all boils down to the implementation challenges.

"I think the OECD intends it to be action but now it is up to individual countries to determine what they are going to do with it," Wonfor said. "At the end of the day the OECD can only make recommendation."

The issue will be to get an international consensus as implementation will be a source of tension between countries, according to Nicholls. "What we have yet to see is if it is going to be implemented by all the countries, because all we have now is 'yes it is feasible'," she said.

"At the moment I don't see anything definitive saying 'yes everybody is going to sign up and they will do so pretty soon'; that would be my note of caution."

Related articles:

Fair corporate tax regime faces uphill task

Africa's taxing problem


Related link:

BEPS 2014 Deliverables

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