United Kingdom: The OECD Base Erosion And Profit Shifting Action Plan
There has been considerable publicity in recent months on the alleged tax avoidance perpetrated by multinationals that has resulted in the Organisation of Economic Cooperation and Development (OECD) publishing its action plan on base erosion and profit shifting (BEPS).
The action plan, consisting of 15 proposals to counter the perceived tax avoidance, has been endorsed by the G20 countries as well as China and India (who are not members of the OECD) and seeks to provide countries with domestic and international instruments that better align rights to tax with economic activity within the next two years. The principal objective is to counter tax rules that lead to the avoidance of tax by aggressive planning of the supply chain or the concept of double non taxation.
Some of the principal areas that are being considered are as follows.
The taxation of the digital economy – the bulk of the profits are attributable to the intangible assets and the ability to deliver digital products and services without the need for a substantial physical presence where the customers are situated. The approach taken for indirect taxes has been mooted as a potential alternative for the taxation of the profits.
The establishment of coherent corporate income taxation at an international level – ensuring transparency, so that tax loopholes are effectively eliminated, thus preventing the erosion of the tax base in the countries of operation. This will require a massive effort on the part of the OECD to overcome the interaction of one country’s interests, tax and legal systems, with another country’s, taking account of economic unions, for example the EU and North American Free Trade Agreement (NAFTA).
Prevention of the abuse of tax treaties – by developing model treaties that result in the elimination of double non taxation. This will require an update of the definition of permanent establishments and the universal inclusion of the limitation of benefits articles in tax treaties.
A proposal to introduce a multilateral instrument to expedite amendments to bilateral treaties that could be adopted by other OECD member states. A particular problem with this proposal is the potential shift of the sovereignty of the participating countries to institutions such as the OECD. The successful implementation of the recommendations of the action plan will be dependent on the attitude of the member countries toward making changes to their domestic legislation in a reasonably short period of time. This will require political manoeuvring as well as curbing the use of unilateral action by any country. For example the French proposal for taxing the digital economy using the ‘byte tax’ may be regarded as unjust by the highly innovative companies that seek to develop their commercial business rather than simply to avoid taxes.