Mark O’Sullivan, a European corporate tax lawyer and Partner at Irish law firm, Matheson, quizzes Pascal Saint-Amans, Director of the Centre for Tax Policy and Administration at the OECD, on BEPS, digital taxation, BEAT and GILTI.
Mark O’Sullivan: It’s been two and a half years since the final BEPS reports were issued and many countries are in the midst of implementing the BEPS recommendations in their national tax systems. Overall, are you satisfied with the level and pace of implementation?
Pascal Saint-Amans: Very satisfied. Ensuring implementation and a global level-playing field is vital to making sure the era of double-non taxation is truly over and the implementation of the base erosion and profit Shifting (BEPS) project is well underway. The peer review processes of the four BEPS minimum standards have started – 175 preferential tax regimes have been reviewed, 11,000 tax rulings have been identified and are now being exchanged. Since the adoption of the BEPS package in 2015 and the establishment of the Inclusive Framework in 2016, countries are taking action on many fronts, including on BEPS actions that go beyond the four minimum standards. For example, the international provisions of the recent tax reform in the US include measures that, not only implement BEPS actions on interest deductibility and anti-hybrid rules, but also impose a minimum tax on certain foreign income. The BEPS multilateral instrument has now been signed by 78 countries, amending more than 1,200 treaties and will come into force in the coming weeks. This will be one of the most important tools for BEPS implementation.
Taken together, these developments show great progress in increasing transparency, coherence, certainty and ensuring that taxation is based on substance (meaning where economic activities and value creation occur). However, the implementation of the BEPS measures is still at an early stage, and more tangible results are yet to come. As recognised in the BEPS Action 11 report on Measuring and Monitoring BEPS, a major challenge of assessing the scale and impact of BEPS is the scarcity of relevant data and the significant limitations of existing data sources. As a step towards addressing this challenge and with a view towards providing more accurate monitoring of the impact of BEPS and the effect of the BEPS package over time, a series of new data collection processes and analytical tools have been developed and are now being put in place, such as Country-by-Country reporting (CbCR) requirements. The Inclusive Framework will publish its annual report following its meeting in Lima, Peru at the end of June to show the good work that has been done so far.
Mark O’Sullivan: The recent US tax reform incorporated many elements of the BEPS recommendations, along with newer and somewhat controversial concepts, which are designed to combat base erosion, including the BEAT and GILTI. Will the OECD consider these new US concepts in future discussions on international tax reform and what sort of impact do you think these US tax reform proposals will have on jurisdictions in Europe which have historically served as EMEA hubs for US multinationals?
Pascal Saint-Amans: The US tax reform is a major development which will potentially impact many countries across the globe. It is important to point out first that the new law contains a number of international tax provisions that will align the US tax system with international standards and practice – this is the case on BEPS, where the US implements measures beyond the minimum standards: on controlled foreign corporation rules, on hybrid mismatch arrangements and on limitation of interest deductibility. When it comes to the GILTI and the BEAT there is no doubt that this will have a major impact on how US MNEs plan their international business. Whether that means that investments that used to go through one jurisdiction or another are re-located will of course depend on many factors specific to each business. Although there are some aspects of the US tax reform that raise concerns with their partners, overall, it is important to note that this tax reform shows that the US is serious about providing a competitive tax system while at the same time protecting its tax base. The imposition of a minimum tax on certain foreign income will mean that the days when US companies could arrange very low effective tax rates, going through certain hubs located in Europe or elsewhere, are over; which is a significant change. This will certainly have an impact on discussions regarding tax policy in the OECD, not just because the US is the world’s largest economy, but because developments in any of our member states are important and relevant to our discussions.
Mark O’Sullivan: The recent interim report on the challenges arising from digitalisation acknowledged the lack of consensus on how these challenges should be addressed. Do you think the remarkable period of consensus-building at OECD level that was evident throughout the BEPS process is now over, or are you optimistic that consensus can be reached on addressing digitalisation by 2020?
Pascal Saint-Amans: It is important to keep the international community together to face the important challenges ahead. Countries must work with the cooperative institutions that have been developed to advance the precious multilateral dynamic that has been built. In March 2018, the members of the Inclusive Framework on BEPS agreed an Interim Report on the Tax Challenges Arising from Digitalisation. The report acknowledges different point of views, both on long-term solutions and short-term measures.
Regarding long-term solutions, the different perspectives among the members of the Inclusive Framework can generally be described as falling into three groups. The first group considers that the reliance on data and user participation may lead to misalignments between the location in which profits are taxed and the location in which value is created. However, the view of this group of countries is that these challenges are confined to certain business models and they do not believe that these factors undermine the principles underpinning the existing international tax framework. Consequently, they do not see the case for wide-ranging change.
A second group of countries takes the view that the ongoing digital transformation of the economy, and more generally trends associated with globalisation, present challenges to the continued effectiveness of the existing international tax framework for business profits. Importantly for this group of countries, these challenges are not exclusive or specific to highly digitalised business models. The US is included in this group, which reflects a massive opening from the US to engage in a constructive discussion which would address the tax challenges of the digitalisation of the economy.
To bridge these divides, further work will need to be carried out, but what matters is that countries have agreed to continue to work together towards a consensus-based solution. Specifically, as reflected in the March G20 communiqué, countries have agreed to review the concepts of nexus and profit allocation – these concepts relate to the question of when a business has enough presence in a jurisdiction to attract a taxable presence and how much of its profit should be considered as earned in that jurisdiction. These are concepts that have been around for almost 100 years, and the time is right to look at them again more closely to ensure they are fit for purpose. This is a major challenge, and no one should underestimate the hard work that will be needed. What gives me confidence that we can do it is that over the past decade the international community has built the institutions and the trust that are vital to accomplishing this.
Mark O’Sullivan: Many of the unilateral proposals on taxing the so-called ‘digital economy’ allocate taxing rights to marketplace jurisdictions. Is it inevitable that turnover based taxes, which would ignore the profitability of the relevant activities and the contribution of a local permanent establishment, will now become the norm? How should those countries respond to such a movement away from established international tax principles and concepts? Will companies established in smaller market place jurisdictions in Europe inevitability see their revenues squeezed by turnover taxes, applying at source, based on the location and number of customers in that market?
Pascal Saint-Amans: No, it is not inevitable. The danger of competing, unilateral measures is precisely what governments – and businesses – want to avoid and what we are working on through the OECD/G20 BEPS Inclusive Framework. A total of 116 countries and jurisdictions are working together and, as long as they do so, there is no inevitability to the kinds of unilateral measures you describe. Moreover, there are also sound policy reasons for opposing them. The risks and adverse consequences that could arise as a result of such measures include negative impacts on investment, innovation and growth, the possibility of over-taxation, distortive impacts on production and increasing the economic incidence of tax on consumers and businesses, as well as increased compliance and administration costs.
Moreover, it is also important to recognise the legitimate concerns of some countries that are considering interim measures. They recognise these challenges, but believe that there is a fiscal and political imperative to act, particularly because developing, agreeing and implementing a global, consensus-based solution will take time. They take the view that value is being generated within their jurisdiction that would otherwise go untaxed, challenging the fairness, sustainability and public acceptability of the system. They think the challenges need to be weighed against the policy challenges of not acting in the interim and consider that at least some of the possible adverse consequences can be mitigated through the careful design of temporary measures.
The Interim Report therefore reflects the framework of design considerations, identified by countries in favour of introducing interim measures, which should be taken into account when considering introducing such measures. This framework takes into account some constraints, including that any such measures should be in compliance with existing international obligations, and should also be temporary, targeted and balanced. Short-term measures should minimise over-taxation and they should be designed to limit the compliance costs and not inhibit innovation.
Mark O’Sullivan: It seems that since the BEPS project we are moving to a position where double tax has become acceptable (and for some countries, seemingly more palatable than the risk of double non-taxation). Do you agree that some level of double tax has become inevitable or even acceptable? Do you think that a base level of double tax is an inevitable outcome of the fight against double non-taxation?
Pascal Saint-Amans: Absolutely not. The BEPS project was designed to stop countries and companies from competing on the basis of a lack of transparency, a lack of substance or the exploitation of loopholes or differences in countries’ tax systems. It is focused on avoiding double non-taxation without creating double taxation and it was meant to deliver on a global basis. That is what it is doing. It is making tax planning transparent to all tax authorities concerned, requiring substance from both companies and countries, and closing off cross border tax loopholes. And it is doing so within a forum – the Inclusive Framework – that now has 116 members representing over 95 per cent of the global GDP to ensure a truly level playing field.
It is true that the BEPS Actions are bringing a lot of change to the tax landscape because countries are implementing them. Rules are changing, and this means an adjustment for taxpayers and tax administrators. This is why the G20 has looked to the OECD to consider the issue of tax certainty and how governments can provide the appropriate tools to ensure that tax outcomes are clear and fair. The work being done on dispute prevention and resolution holds great promise for improving tax certainty and a much enhanced level of cooperation and coordination between taxpayers and tax administrations. The focus of this work is on dispute prevention and to ensure that, where disputes do arise, the systems are in place to provide taxpayers with an efficient, predictable and transparent avenue to resolution. The advent of CbC reporting is providing tax administrations with a much clearer view as to the activities and organisation of MNEs and therefore a more refined ability to measure risks and target audit activity accordingly. This in turn feeds cooperative compliance programs such as the International Compliance Assurance Program (ICAP), launched this year by tax administrations in eight countries, and which aims to deliver earlier tax certainty for groups wishing to be transparent and compliant, as well as providing greater assurance for the tax administrations involved.
Mutual agreements procedures are a vital tool to ensure that cases of double taxation are dealt with appropriately, effectively and in a timely manner. The Action 14 minimum standard requires countries to publish their specific ‘MAP profiles’, meaning public information on their competent authority details, links to their domestic Map guidelines and to other useful information regarding MAP process, pursuant to an agreed template. Publishing MAP profiles promotes the transparency and dissemination of jurisdictions’ MAP programmes. In this respect, more than 80 MAP profiles have been published on the OECD website. Furthermore, jurisdictions reported their MAP statistics under the new MAP Statistics Reporting Framework and the statistics for 2016 have been published. MAP statistics for 2017 are due by the end of May 2018 and will be published in the second semester of 2018, for the first time with a country-by-country break down. The numbers we see from the MAP inventories are very encouraging. Over 85 per cent of MAPs concluded in 2016 resolved the issue at stake. Almost 60 per cent of MAP cases closed were resolved with an agreement fully resolving the taxation not in accordance with the tax treaty and almost 20 per cent of them were granted a unilateral relief while almost 5 per cent were resolved via domestic remedy.
Importantly, one of the outcomes of the BEPS action on treaty abuse is to ensure that bilateral tax treaties clearly express that the intention of the parties is to eliminate double taxation, without creating opportunities for double non-taxation. In this regard, countries’ signing of the BEPS Multilateral Instrument will help to ensure certainty by providing a tool for consistent implementation of the tax treaty related BEPS measures.
Mark O’Sullivan: The EU has taken significant steps to promote its vision and version of tax fairness. Some of these steps, including the state aid investigations, the Common Consolidated Corporate Tax Base and the recent proposals on the taxation of the digital economy seem to be at odds with the stated OECD position. Do you still regard the EU as a collaborator, or is it now ‘doing its own thing’? Most of the proposals from the EU appear to disproportionately favour larger market jurisdictions – do you think these measures have been designed to favour the likes of France and Germany, to the detriment of smaller countries?
Pascal Saint-Amans: The EU participates in the work of the OECD and the Inclusive Framework, represented by the Commission. Almost all of the EU Member States are also members of the Inclusive Framework and they make up a large part of the OECD membership. So the EU is an important voice in our constituency. The EU follows our standards on BEPS and on transparency. This is what is happening with the anti-tax avoidance directives and the directive on administrative cooperation. Their list of non-cooperative jurisdictions is generally based on our standards. There are areas where they have their own agenda, and that is their sovereign right. I mentioned before that some governments feel pressure to act quickly ahead of a long-term solution on digital; many of these are EU countries. So this is where that dynamic is playing out. In terms of their proposals and who they favour or do not favour, I think that is a question for the EU. But that does not mean they are ‘doing their own thing’. Where EU Member States have agreed on standards within the OECD or the Inclusive Framework, they have followed through.
Mark O'Sullivan Mark O'Sullivan is a partner in the firm's Tax Department and advises on all aspects of Irish corporate taxation. His primary focus is advising overseas clients establishing operations and doing business in and through Ireland. Mark also advises extensively on all aspects of international tax planning, including IP planning, cross-border reorganizations and financing transactions.
Pascal Saint-Amans Mr Saint-Amans, a French national, joined the OECD in September 2007 as Head of the International Cooperation and Tax Competition Division in the CTPA. He was responsible for the OECD’s work on harmful tax practices, money laundering and tax crimes, the tax aspects of countering bribery of foreign officials and administrative cooperation between tax authorities, while playing a key role in the advancement of the OECD tax transparency agenda in the context of the G20. In October 2009 he was appointed Head of the Global Forum Division, created to service the Global Forum on Transparency and Exchange of Information for Tax Purposes, a program with the participation today of over 120 countries and jurisdictions.