BEPS in the Boardroom: Cracking Down on Multinational Tax Avoidance

So in February 2013, the OECD set up a project to do something about it, launching an action plan in July that year, and it is now in the stage of its final deliverables. The next step, says Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD and unquestionably the driving force of the whole BEPS initiative, is “all about proper implementation. We need to make sure all the countries implement minimum standards consistently.” This, he says, will involve a multilateral effort to limit the risk of people acting unilaterally.

And this brings us to a problem. Countries will inevitably ratify and enact policy at different speeds, according to their progress through legislatures; worse, some countries, including the US, UK and Australia, have chosen to do their own thing in parallel with or ahead of the OECD measures.

This leads us to a likely interim period where there is a lack of clarity in global taxation and an increased likelihood of financial penalty as a consequence. “We expect there will be situations where, as a consequence of countries moving at different speeds, there may be double, triple and quadruple taxation before we see the end of this,” says Drum.

He cites the example of an Australian company that has used Singapore as a marketing hub, and paid tax on cross-border transactions in Singapore rather than Australia, at Singapore’s lower tax rate. “If Australia then applies the diverted profits rule because it looks like a sham to them, and calls for tax to be paid in Australia, Singapore might not want to give up the tax they’ve already collected on that.” In that instance, a company would be taxed twice in two countries for the same income.

Concerns about this have been widespread throughout the BEPS discussion process and will come to a head with implementation. “The concern a global approach addresses is that if it is left for individual countries to implement ad-hoc domestic legislation it could actually make the problem worse or potentially cripple businesses who would face double or triple taxation as governments scramble to protect their own tax bases,” said New Zealand’s Office of the Minister of Revenue in a May 2016 public update.

The idea has also caused alarm for some corporates. “If the rules become more ambiguous and complex, and less-aligned – all of which appears to apply to the BEPS project – this will undoubtedly lead to more conflict and double taxation,” says Jesper Barenfield, head of corporate tax at AB Volvo, speaking to EY’s ‘Tax Insights for Business Leaders’ publication.

Sometimes concerns relate to specific points that might yet be addressed. Ernst & Young highlights the Limitation on benefits rule, for example, still in draft form. In its existing form, EY concludes, “it will result in double taxation on income that has already been taxed at operating company level (and triple taxation if ultimate shareholder taxation is included).” EY also raises concerns about transfer pricing treatment of capital-rich companies which fund risk-taking opportunities but have little other relevant economic activity. The policy, if implemented as is, “is likely to create a great deal of confusion as different practitioners and tax authorities interpret it differently. It could also lead to double taxation and almost certainly increased controversy.” And it says that an uncertain environment for cross-border financial payments “may well lead in some cases to double taxation.”

Concerns like this have been voiced by the real estate and investment trust industry, which involve cross-border flows into investment vehicles, for some time. In May 2014 representatives of the sector wrote to OECD spelling out an example of a Luxembourg SICAV investment vehicle investing into French, German and Spanish shopping centres via local companies. “For taxable investors, there is even triple taxation,” the submission said. “The property income is taxed in the hands of the local [property companies], non-creditable withholding tax is levied from the Luxembourg investment holding company, and corporate income tax will be due on the distribution of the proceeds at the level of taxable investors.”

That said, concerns about double taxation do tend to arise in quite specific technical circumstances, and are likely to be a temporary fixture of a new regime coming into place around the world. “It may result in double taxation in the short term while the lines are redrawn and thought through,” says Grant Wardell-Johnson, the global spokesman on BEPS at KPMG.

Wardell-Johnson is more inclined to focus on the positives. “BEPS was an amazingly ambitious programme to start with,” he says. It embraces the 34 OECD countries, plus two further accession countries; the eight members of the G20 who weren’t part of OECD; and then a further 14 developing countries. Including those who have had a say but without committing to implement in full, around 100 countries have been involved. “They have had to work on the basis of consensus, not a majority vote,” says Wardell-Johnson. “To get all of those together and reach a consensus conclusion is quite remarkable.”

And, if there are short-term concerns during implementation, the whole process is easier and clearer than one might have expected. By and large, progress on the sovereign side has been civil and inclusive. “It could have disintegrated into a fight between certain developing and developed countries trying to re-litigate the basic divide between source and residence taxation,” says Wardell-Johnson. “It is very beneficial to the whole project that the framework of international tax rules remains largely the same, and what changes there are, are mainly within that framework.

“No-one threw their toys out of the cot – though India and the UK came close.” India was dissatisfied with conclusions on the digital economy, which it has got around by setting an equalization levy, and the US because of objections by the Republican Congress (something that will become still more relevant in a Republication administration). “But they stayed in the fold.”

Wardell-Johnson sees both successes and challenges. While the positives include country-by-country reporting and treaties, patent box rules, and clauses around hybrid mismatch arrangements, he has been disappointed by the lack of mandatory binding arbitrations. And he sees “two main areas of potential divergence.”

The first is the expansion of permanent establishment. BEPS expands the notion of a taxable presence in a country with very specific words, “but different countries will have different interpretations of those words.”

The second area of divergence is around intangibles in transfer pricing. “There is increasingly a divide between developing and developed countries on where value is located in relation to intangibles,” Wardell-Johnson says. Take a handbag with a registered trademark in Switzerland. “The West would think that’s where its value is; developing countries like China would say the value is the capacity to sell the product into the Chinese market. There is an inherent tension here that has not yet been worked out.”

Certainly, companies are taking a close look at what BEPS is all going to mean for them as it moves toward implementation. In 2016 Deloitte conducted its third survey in three years on BEPS. By then, 79% of participants said their organization had assessed the potential impact of changes, and 63% said they were expecting significant legislative and treaty changes in their country as a consequence. Just over half had developed new corporate policies and procedures, and 55% had changed the way they conduct tax planning for cross-border transactions. Interestingly, despite this apparent need for resources, only 26% said they had planned to secure additional headcount to deal with the expected changes (though at least that’s up from 18% the previous year).

In the same study, 92% of respondents said they felt tax structures were under greater scrutiny by tax administrations than a year earlier.

Companies at once need to be across the nuts and bolts of legislation, and the abiding spirit of the times. “You can see BEPS as a set of rules, or you can see it as a milieu, a general change in the way tax is viewed,” says Wardell-Johnson.  As a set of rules “it will impact multinationals unevenly.” All will need to put the numbers together for country-by-country reporting, but many will also have to rethink their structures and how they do business. “What’s more difficult is the narrative around the numbers and changing attitudes to business structures: there is a tension between countries saying they are opening for business and yet showing heightened aggression around tax.”

Still, BEPS is an immovable force prompted by a global sense of injustice. Saint-Amans says that, just as ordinary people object to the wealthy getting away with paying no tax because of bank secrecy, they also object to multinationals shirking tax. “It’s not that sovereign parliaments would have decided to exempt multinationals from paying tax, it’s because of the international framework of obscure tax rules,” he says. “It took a major crisis for people to react, but now it has strong political support, that has helped to move things that people otherwise thought would never move.”

The case of Apple being ordered to pay Eu13 billion in back taxes to Ireland by the European Commission is something of a red herring – it was a consequence of an investigation by European Competition Commissioner Margrethe Vestager and was driven by the application of trade laws rather than tax – but it has brought the issues BEPS seeks to address into the public eye. People want to know multinationals are doing their bit for the tax base in the countries in which they operate. “It was a competition decision dealing with the past, while BEPS’ work is purely about the future,” says Saint-Amans. “What I would say is that the work OECD has done addresses the planning that Apple was engaged in, and the scheme would no longer be possible.” Backward-looking though it may be, it’s still relevant, as rumours swirl that the EC is going after McDonalds and Amazon next.

While the overall outcome is likely to be positive, near-term progress may be disjointed and confusing. “Companies need to have a much better grasp of what BEPS means,” adds Drum. “There’s going to be risks, there are going to be double and triple taxation scenarios and there are going to be tears. It could be a tax lawyer’s picnic.”