The OECD’s Base Erosion and Profit Shifting (BEPS) project has moved at a rapid pace over the past 18 months or so. That is possible in the early stages of such a process where the emphasis is on designing proposals which are due to be presented in full during the autumn. It is now clear that the chances of full implementation of the proposals is low.
The key opposition comes from the United States and was in full view last week. It started with a letter from Sen. Orrin Hatch and Rep. Paul Ryan to Treasury Secretary Jack Lew who made clear that Congress ultimately determines U.S. tax law:
Congress is tasked with writing the tax laws of the United States, including those associated with cross-border activities of U.S. companies. Regardless of what the Treasury Department agrees to as part of the BEPS project, Congress will craft tax rules that it believes work best for U.S. companies and the U.S. economy.
Hatch and Ryan expressed concerns about a number of BEPS proposals including country-by-country reporting and changes to the definition of permanent establishment. However it was over the next two days at the 2015 OECD International Tax Conference in Washington that BEPS faced a barrage of U.S. opposition. Unilateral actions taken by some countries, such as the U.K.’s Diverted Profits Tax (DPT), were also subject to criticism as reports of the conference indicate.
The US Treasury position was outlined by assistant deputy secretary Robert Stack who is their lead person for international tax. On BEPS he was pretty frank:
“The US is extremely disappointed in the output and our collective failure in the BEPS project to do more and do better work than we've done.”
He said that the unilateral moves of the UK and Australia “point in a disturbing direction” and added that:
“One of the premises [of BEPS] was, if the OECD didn’t write the rules, countries would go their own way. Well, here are two of our closest friends going their own way. How long until others follow? And what recourse will governments have once they do go their own way?”
“Regular folks in those countries, squeezed during a time of austerity, deeply resented reports that multinationals—largely reported as U.S. multinationals—could achieve very low rates of tax.”
“These moves put a spotlight on the degree to which political pressure can trump policy. I find it hard to believe the tax experts in both governments don't recognize the technical weaknesses of their legislation.”
[The UK and Australia] “are shouting out loud that they believe they will not get their estimation of the income they deserve, either under the current agreed rules, or under any rules, to come out of the BEPS process.”
“Goods or services are provided in their jurisdiction and there is some activity in the jurisdiction related to the sale of those goods or services. However, introductory international tax law classes teach that this very issue is addressed directly and explicitly by the PE rules in a bilateral tax treaty. If countries want to change the PE rules they should negotiate a new treaty with the treaty partner.”
“The use of commissionaires, fragmentation and splitting of contacts can in certain circumstances run afoul of the purposes of the convention but [the UK and Australian approaches] focus not what happens in the country, but what happens outside the jurisdictions and are based on a theory that a taxpayer who follows the very specific PE provisions in a treaty can somehow also be acting in contravention of the objective and purposes of the treaty.”
[The UK and Australia] “appear to think they are entitled to more than the income from the assets, functions and risks actually in their jurisdiction. They will know that BEPS has been eradicated only when they have been able to reach beyond their shores and pull in revenue from things happening elsewhere. This only takes us further down the road in which a taxpayer is at the mercy of whatever a tax auditor decides is the right amount for a taxpayer to pay.”
Unlike Hatch and Ryan, Stack said that the country-by-country reporting proposals are an “extraordinarily successful effort” but did side with them when raising concerns about the proposed changes to the definition of permanent establishment. On this it is notable that the U.S. is not participating in the work to design a multi-lateral instrument which is intended to allow the implementation of some of the BEPS proposals without the need to re-negotiate thousands of bilateral tax treaties.
Stack set out a U.S. wish list for BEPS with the first item being pretty clear: slow down BEPS. This was taken further by other US speakers at the conference who said that the US should only have one position: stop BEPS. Some of the exchanges were sparky with the consensus that Pascal Saint-Amans has frequently referred to being notably absent.
Robert Stack’s counterpart at the U.K. Treasury, Mike Williams, responded to Stack’s comments are countered that the problem was not unilateral action by some countries but a divergence in approach between the rest of the world and the U.S.
“Looking beyond BEPS, a key challenge will be being able to cope with divergence. Divergence, candidly, in a number of instances between the U.S. and the rest of the world. You can see where the divergence comes. The U.S. has a bigger economy and, in a sense, inevitably a less open economy, and that in a sense drives policy.”
The exchanges were summarised by a contributor from the South African Revenue Service with the comment:
“I was reminded of a movie I once watched and the man said he thought the marriage was fine until his wife asked for a divorce. The last two days, for me, have brought to the fold that maybe the marriage doesn't seem to be working that well, and maybe some counseling is needed."
One source of disagreement was a U.S. insistence that their be prescriptive rules rather than indicative guidelines. Going back to Robert Stack he said:
“How much revenue do [other countries] need to get, determined according to what rules? Or do the rules even matter anymore? And if the rules don’t matter, what is the role of a standard-setting body such as the OECD? Do we really need a standard-setter to say tax administrators can use the pornography test for tax avoidance — ‘We know it when we see it, and we’ll get you if we want to’?”
Again the U.K.’s Williams offered an alternative perspective
"If you do go for detailed rules, how do you make them work in the very different circumstances of many different countries? If the rules are very detailed, and they do have to take into account circumstances in different countries, how do you keep them up-to-date?
We do have to coexist, and there are choices about how that coexistence happens. We could cooperate, in which case we'll have to be respectful of other countries' viewpoints and practices. In that context, we have to be clear that the rest of the world has a viewpoint, and isn't going to buy into the U.S. rules.
Or, alternatively, we don't accommodate, we don't cooperate, in which case there will be more chaos, there will be more controversy, which will almost certainly lead to more double taxation. I would urge U.S. businesses to reflect on that."
When referring to countries’ attempts to garner more tax revenues, Stack drew the link between value added and tax receipts:
“Countries need to acknowledge the sometimes unpleasant reality that very often, there’s not much value added in their jurisdictions, so their desire for outsized tax receipts based on relatively minimal operations is in the end a pipe dream.”
Williams said that “the U.K. supports the BEPS project's goal of taxing profits where the economic activities generating them take place, with that jurisdiction having the sovereign choice of taxing, or not taxing, the profits.” But is he referring to production or consumption?
The theme of taxing rights was taken up by Pam Olson, a former U.S. Treasury official now at pwc who, when referring to issues that clearly have resonance for Ireland (and are being investigated by the EU), said that:
“The ‘stateless income’ that is so often referred to is in fact the un-repatriated profits of U.S. companies. ... The reality is stateless income isn’t stateless at all — it’s ours, and we have merely delayed taxing it until it’s repatriated. It is nothing for the rest of the world to be obsessed over.
We need to explicitly have the conversation that we are having only sub-rosa. Where should the line between source and residence taxation should be drawn? We took that off the table, but you can't take it off the table.
The last two days, if it wasn't clear to people before, there has been a dissolving global consensus.”
Indeed. Though mainly in the US.
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