Improving the international tax system Pascal Saint-Amans is the Director, and Grace Perez-Navarro Deputy Director, at the OECD Centre for Tax Policy and Administration Eliminating tax barriers to cross border trade and investment is at the core of the OECD’s work on taxation. This was the foundation on which some of the OECD’s key tax instruments were based, eg. the OECD Model Tax Convention, which forms the basis of over 3,000 bilateral tax treaties, and the OECD Transfer Pricing Guidelines, which are used by countries around the world. And yet, the headlines of today’s newspapers are focused on the aggressive tax planning arrangements of major multinationals that pay little or no corporate tax, through sophisticated tax planning, which is in most cases legal under the existing framework. What has changed? The OECD remains focused on restoring robust and resilient growth by reducing tax barriers such as double taxation, but we are also committed to ensuring that the outdated international rules are revamped to deal with changing business models and the rapidly changing economic environment so that the current rules cannot be used to artificially shift profits from the location where economic activities and value creation occur. The G20 mandated the OECD in 2012 to develop responses to the causes of tax Base Erosion and Profit Shifting and thus the BEPS project was born. In November 2014, G20 Leaders welcomed the progress made by OECD and G20 countries working together to fix the international tax system to prevent tax base erosion and profit shifting. The three pillars of the BEPS work are to ensure the coherence of corporate tax systems in an era of increasing cross-border activity; strengthen the link between substance and taxation and ensure transparency while promoting certainty and predictability. These efforts will also restore trust in governments and ensure the integrity of the international tax system, essential building blocks for resilient growth in the aftermath of the economic crisis. They should also ensure a more inclusive approach to developing robust and sustainable instruments to eliminate double taxation. BEPS: the first set of deliverables Addressing BEPS is a key priority for both developed and developing countries. The aim is not only to re-align taxation with economic activities and value creation; it is also to establish a single set of international tax rules adapted to 21st century business models and to close the existing loopholes and gaps in the current international tax system. An important focus of this work is to ensure that the responses to BEPS do not result in increased double taxation, excessive compliance burdens or new barriers to cross-border trade and investment. Following the publication of the ambitious 15 point BEPS Action Plan in July 2013, the OECD/G20 BEPS Project presented the first results of the work to G20 Finance Ministers in September 2014. These results were developed and agreed by 44 countries, including all OECD and G20 countries following extensive consultations of developing countries, the business community, trade unions, academics and civil society organisations. These results, which were delivered mid-way through the two year span of the OECD/G20 BEPS project, focus on: 1. Designing new international standards to ensure the coherence of corporate income taxation at the international level with new rules to neutralise hybrid mismatch arrangements (Action 2). These provisions, once implemented by countries through appropriate legislation and modification of tax treaties, will eliminate the ability of companies to seek multiple deductions for a single expense, deductions in one country without corresponding taxation in another or the generation of multiple foreign tax credits for one amount of foreign tax paid. 2. Realigning taxation with relevant substance - ie. real economic activity and value creation - to restore the intended benefits of international tax standards related to tax treaties by setting a minimum standard to deny access treaty benefits in circumstances where they were not intended (Action 6), and by assuring that transfer pricing outcomes are in line with value creation in the area of intangibles (Action 8). 3. Improving transparency for tax administrations and greater consistency of documentation requirements for taxpayers through the new master file, local file and country-by country template (Action 13). 4. Streamlining implementation of the BEPS actions through the development of a multilateral instrument as one means of modifying the existing network of bilateral tax treaties (Action 15). 5. Identifying the cross-cutting tax challenges posed by the digital economy (Action 1). 6. Countering harmful tax practices more effectively, taking into account transparency and substance (Action 5). This work is intended to reduce the distortionary influence of taxation on the location of mobile financial and service activities so as to encourage free and fair competition. It has particular relevance in the context of the intense focus on the use of patent boxes, which resulted in a joint proposal by the United Kingdom and Germany, which is now being examined by the OECD’s Committee on Fiscal Affairs. It is also of relevance in the context of the ‘Luxleaks’ affair, in that the recommendations include spontaneous exchange of certain rulings. An added feature of the project going forward is to strengthen the involvement of developing countries through a more structured process. This will be achieved by bringing 10-12 additional developing countries directly into the work of the OECD’s Committee on Fiscal Affairs on BEPS. We will also invite regional tax organisations to participate more closely in the work and establish regional policy networks to enable all countries to have an opportunity to influence the outcomes of the work. This will ensure that the concerns of developing countries are taken into account in the development of solutions to BEPS; it will also ensure that the standards developed are truly international. Next steps in BEPS Further work remains to be done on a number of the BEPS Action items referred to above, including addressing implementation issues and ensuring the coherence of the solutions identified thus far with the remaining elements of the Action Plan. The 2015 deliverables include: • The design of effective controlled foreign company (CFC) rules to provide countries with more effective tools to tackle the large amounts of untaxed profits booked offshore (Action 3). • The development of best practices for rules that prevent base erosion via interest deductions and other financial payments (Action 4). • Rules to prevent the artificial avoidance of permanent establishment rules (Action 7). • Further work on transfer pricing issues such as risk and re-characterisation, hard to value intangibles and commodity transactions (Actions 8-10). • Indicators of the scale and economic impact of BEPS (Action 11). This will facilitate the assessment of the effectiveness of the BEPS measures once implemented. • Mandatory disclosure rules of aggressive tax planning arrangements (Action 12). The development of these rules will be informed by the rules already developed by certain countries and will be focused on international tax planning arrangements. The objective will be to develop flexible rules that ensure consistency but allow for country specificities and particular risks identified in those countries. • Improvements to dispute resolution mechanisms by addressing the obstacles that prevent countries from solving treaty disputes (Action 14). A major step forward in this area was already announced in October by the OECD’s Forum on Tax Administration as discussed further below. Resolving disputes: Heads of Tax Administrations commit to improve Mutual Agreement Procedures (MAP) The ongoing globalisation of business, the increased complexity and significance of international tax issues and the resulting emphasis of tax administrations in fulfilling their mandates has increased the levels of tax risk and uncertainty for both governments and business. The OECD Model Tax Convention and most bilateral tax treaties in the world recognise the need for dispute resolution mechanisms to alleviate potential double taxation and to ensure that taxation is in accordance with the terms of tax treaties. The mutual agreement procedure established in most treaties is designed to deal with these issues. However, the effectiveness of these procedures is routinely put into question, in particular by the business community. The OECD, as part of its efforts to improve the timeliness and processing and completing mutual agreement procedures, publishes statistics on MAP cases. The most recent statistics, released on the 25th of November, show the steady increase of the inventory of these cases since 2006 when the statistics were first published, confirming the growing importance of addressing this issue. At the October meeting of the OECD’s Forum on Tax Administration (FTA), which brings together the heads of 46 tax administrations, the FTA unveiled a Multilateral Strategic Plan on Mutual Agreement Procedures: A vision for Continuous MAP Improvement. The plan involves the creation of a new forum – the FTA MAP Forum — to meet regularly to discuss general (not taxpayer-specific) issues related to MAP programs and to work together to collectively improve the MAP process. The Strategic Plan reflects a strong new commitment to fix the MAP system: FTA Statement of vision and commitment The competent authorities participating in the FTA MAP Forum recognize that the purpose of the mutual agreement procedures, and thus the central mission of the competent authorities, is to ensure that the principles embodied in our global network of tax conventions are properly applied to minimize to the fullest possible extent incidents of double taxation, unintended double non-taxation and taxation otherwise not in accordance with the provisions of applicable tax conventions. It is the vision of all MAP Forum participants that the effectiveness of our mutual agreement procedures should be collectively improved in order to meet the needs of both governments and taxpayers and so assure the critical role of those procedures in the global tax environment, and that this can best be accomplished through the collaborative work of the MAP Forum in accordance with this Multilateral Strategic Plan. The FTA MAP Forum’s work will be a valuable new support to the implementation of the BEPS Action item on removing impediments to effective dispute resolution at a very practical level. The areas of strategic focus reflect a commitment to address the resource challenges faced by competent authorities around the world, to establish appropriate governance arrangements to ensure that MAP cases respect the convention–based mandate of competent authorities rather than revenue considerations and a number of process improvements to ensure that MAP cases are resolved as efficiently and effectively as possible, including consideration of multilateral case resolution procedures, and enhancement and streamlining of taxpayer involvement. Conclusion Bringing the international tax rules into the 21st century involves both elimination of double taxation as well as double non-taxation. Double non-taxation is currently grabbing headlines but if we want to encourage cross-border trade to spur growth, we need to ensure that tax disputes, which are growing in number, can be resolved in an efficient and timely manner. Rebuilding the world’s economy and encouraging resilient and stable growth, also requires countries to remain competitive, attracting quality investment and real jobs. Countries must work together to develop fair and transparent tax rules, rather than triggering a ‘race to the bottom’. A more transparent international tax system is also critical if we are to restore trust in government amongst the citizens who bore the brunt of the crisis. Overhauling the global tax system and its practices is therefore fundamental if we are to deliver stronger growth for a post-crisis world. Overhauling the global tax system and its practices is therefore fundamental if we are to deliver stronger growth for a post-crisis world