BEPS Project Has Triggered Near-Global Tax Reform: OECD
The OECD has committed to providing proposals to fix the taxation of the digital economy by 2020, in an update to G20 leaders on international efforts to mitigate base erosion and profit shifting (BEPS).
In the newly released Second Annual Progress Report of the OECD/G20 Inclusive Framework on BEPS, the OECD said it would respond to a mandate agreed by the OECD/G20 Inclusive Framework’s Task Force on the Digital Economy at its July 11 meeting that the OECD should work towards an international consensus on concepts of nexus and profit allocation in relation to tax on digital firms’ activities.
The work follows the announcement that the EU was seeking to pursue new digital permanent establishment rules, potentially unilaterally if there wasn’t an international consensus on such by 2020.
On the taxation of the digital economy, the OECD has said it will “identify a clear way forward and will provide the G20 with an update in June 2019. The final report would be prepared for 2020.” Noting differences in opinions among countries on the way forward, the OECD added: “We have received a number of requests to advance the final report to 2019. Clearly, this would only be possible if there were a higher level of convergence on the path forward and on the possible ways to achieve what is clearly a shared objective.”
It said however: “Despite their differences, all members of the OECD/G20 Inclusive Framework agreed to examine the concepts of nexus and profit allocation with a view to reaching consensus by 2020.”
The OECD also provided the G20 will an update on progress since the release of its 15 recommendations on tackling base erosion and profit shifting as part of the BEPS Project. It noted that almost 120 jurisdictions are now participating in the Mutual Administrative Assistance Convention and the BEPS multilateral instrument counts 82 signatories and has just entered into force.
It noted, on tackling harmful tax practices, 175 preferential tax regimes have been reviewed by the OECD/G20 Inclusive Framework on BEPS and more than 130 regimes have already been amended or abolished or are in the process of being amended or abolished.
In addition, the OECD pointed out that the G20 insisted that countries be transparent about the types of agreements their tax administrations strike with their taxpayers. It reported that 17,000 tax rulings have already been identified and exchanged, and country-by-country reports are now being exchanged between taxpayers, to provide tax authorities with an improved understanding of multinationals’ tax affairs.
The OECD reported: “As a direct result of all this, taxpayers are changing their behavior. A significant number of MNEs have already [reportedly] taking pro-active steps aimed at aligning their tax structures with their real economic activity. In addition and as a result of voluntary compliance mechanisms and other offshore investigations put in place since 2009 thanks to the improvements in international tax cooperation, particularly the onset of automatic exchange of information, taxpayers have come forward and disclosed formerly concealed assets and income. By June 2018, jurisdictions around the globe have identified EUR93bn (USD108.6bn) in additional revenue (tax, interest, penalties) from such initiatives.”
The OECD also highlighted the size of the BEPS Inclusive Framework as a major accomplishment.
Members of the Inclusive Framework commit to implementing minimum standards from the 15 BEPS Actions, focusing on four specific areas. In implementing the minimum standards, countries agree to remove harmful tax provisions in their domestic tax regimes, amend their tax treaty rules to prevent treaty abuse, implement country-by-country reporting rules and exchange these reports with other countries, and work together to improve cross-border tax dispute resolution mechanisms.
As well as agreeing to implement the minimum standards, members of the Inclusive Framework agree to work together on an equal footing to develop further BEPS measures, commit to participate in peer reviews on BEPS measures’ consistent implementation, and pay an annual fee to the OECD.
There are now 116 members of the Inclusive Framework, the OECD reported, representing over 95 percent of global GDP.
In its report, the OECD also committed to looking at other areas that may facilitate BEPS. For example, it said blockchain gives rise to new, secure methods of record-keeping, which could provide opportunities to enhance tax administration and collection. However, the technology also underpins cryptocurrencies, which may pose risks to gains made on tax transparency in the last decade, the OECD said. It disclosed that work is already underway to better understand and address these developments, including on the appropriate tax treatment of cryptocurrencies, both for income tax and VAT/GST purposes, and how to investigate tax crimes involving cryptocurrencies.
The Second Annual Progress Report of the OECD/G20 Inclusive Framework on BEPS contains an overview and four sections of substantive content. Section one explains in broad strokes how the BEPS policy objectives are being achieved. Section two describes the major developments consisting of the work on addressing the tax challenges of the digitalization of the economy and the coming into force of the BEPS multilateral instrument. Section three describes the progress in respect of the peer reviews of the BEPS minimum standards, and section four describes the wider BEPS implementation efforts. These are followed by three annexes. Annex A shows the membership of the OECD/G20 Inclusive Framework on BEPS, Annex B catalogues the BEPS Actions, and Annex C describes the use of Country-by-Country Reporting data to measure BEPS.