Consensus on conscience: Are we moving towards a fairer int’l tax system?
In the aftermath of the latest global financial crises, government have sought to recoup lost revenue through tax reform. This has put the spotlight on the issue of gaps in the current international taxation system that created opportunities for Base Erosion and Profit Shifting (BEPS) schemes. Simply put, BEPS are tax planning strategies that exploit the weaknesses of the architecture of the international tax system to artificially shift profits to places where there is little or no real economic activity, but where the taxes are lower or nil, resulting in little or no overall corporate tax being paid.
This is possible in the case of multinational corporations (MNCs) that have presence in several countries. While companies are taxed at the domestic level, activities within the same group that cross borders lead to an interaction of domestic tax systems where an item of income can be taxed by more than one jurisdiction. In the same vein, these interactions of differing tax systems can leave gaps, which result in income not being taxed anywhere. The BEPS are seen as strategies that take advantage of these gaps between tax systems in order to achieve non-taxation in multiple jurisdictions.
BEPS are largely not illegal. MNCs are merely take advantage of prevailing rules in the existing international taxation system, albeit those aspects that are antiquated. However, some tax planning strategies may be viewed as being so aggressive that they are reducing taxes in ways and amounts that are inconsistent with the intent and spirit of taxation laws.
Tax moralists are also saying that these practices are bordering on the immoral, bringing to fore the debate on the moral responsibility of companies to pay the “fair” amount of taxes. The aggressive use of BEPS has also made its way to mainstream media, where it is largely being questioned because of the perception that it is being used to pay minimal taxes not commensurate with the revenues that are earned by MNCs in the country or jurisdiction where they are operating. Meanwhile, the same MNCs are benefiting from the same government services being enjoyed by those paying more taxes, such as infrastructure and law and order. It is now a popular view that paying the appropriate amount of tax commensurate to earnings in a particular jurisdiction should be part of corporate social responsibility. Corollary to this, tax avoidance is now seen as rendering a company vulnerable to public accusations of greed, selfishness and even immorality.
The issue, in sum, is no longer about whether a particular MNC has duly complied with and paid the tax due in a particular jurisdiction, but whether they are seen to be paying their fair share in taxes and contributing to the communities from which they derive their earnings. Tax has now become increasingly debated in moral rather than in legal terms.
However, it should also be considered that the insufficiency of revenue, which triggered this tax morality debate, is not wholly attributable to such tax avoidance schemes. There are still cases of tax evasion, red tape, corruption, and inefficiency of tax enforcement and collection, especially in developing countries, that need to be addressed. Also, if there are gaps and problems in the current international tax systems, then global measures should be taken up to change them, i.e., both at the local and multinational levels.
True enough, as a response, the ambitious and comprehensive Organisation for Economic Co-operation and Development (OECD)-initiated BEPS Project has come a long way. Its aim is to realign taxation with economic substance and value creation while preventing double taxation. In other words, the goal is to tax profits where they are actually being generated.
From the 15-point Action Plan introduced in 2013, the OECD released its final recommendations last October 2015 to address tax avoidance through BEPS to reform the international tax system. The final BEPS package includes new or reinforced international standards, as well as concrete measures to help countries tackle BEPS.
This release marks the beginning of the implementation phase for most of the action points. However, a lot more remains to be seen (and done). For one, the OECD BEPS Action Plan represents merely best-practice and non-binding recommendations. They are soft-law legal instruments. They are not legally binding, although there is an expectation that they will be implemented accordingly by countries that are part of the consensus, and a number of countries have expressed support that they will follow the OECD recommendations set forth in the final reports.
Moreover, the “bulk” amendment of the current treaties through the enactment of a “multilateral” treaty is still left to be determined. The local tax laws of member countries should also be amended to reflect the recommendations set forth in the final report. Hence, there is still some ways to go in our move towards a “fairer” international tax system, and the actual tax reforms would largely depend on the member countries’ commitment for this change. Until then, the tax morality debate continues.
