Richard Collier from the Centre for Business Tax at the University of Oxford discusses – among other things – BEPS and international standard setting with Pascal Saint-Amans, Director of the Center for Tax Policy and Administration at the OECD. In this interview, Collier makes it a priority to address the concerns of smaller jurisdictions.
Richard Collier: The OECD’s Base Erosion and Profit Shifting (BEPS) project is unprecedented in the scale of the international tax issues it addresses, as reflected in the 15 separate points in the BEPS Action Plan. What elements of the project do you consider stand out as particular successes and in what respects has the project not been as successful as you might have hoped at the outset?
Pascal Saint-Amans: The defining success of the BEPS Project has been bringing together such a diversity of countries to work together on an equal footing to re-write the international tax rules. This was an enormous change from the past, serving as a model for international cooperation on an issue which demands global solutions. Today, we have more than 100 countries and jurisdictions participating in the OECD/G20 Inclusive Framework on BEPS.
In the BEPS package, we have established four new ‘minimum standards’. These require countries to take action where there would otherwise be the risk of negative spill overs such as limiting preferential tax regimes and transparency of tax rulings (BEPS Action 5), prevention of tax treaty abuse (Action 6), transparency of multinationals through country-by-country reporting (Action 13) and improving dispute resolution (Action 14).
We knew when we delivered the BEPS package in 2015 that there was still work to do on the tax challenges arising from the digitalisation of the economy. While we made great progress on the indirect tax issues, establishing the destination principle for cross-border e-services which represents billions of dollars in tax revenue, the broader challenges in the area of corporate income tax remained. Today, there is a growing urgency from countries to make progress on this issue and the Inclusive Framework’s Task Force on the Digital Economy is going to be working on solutions.
Richard Collier: How do you see the practical impact of the BEPS project playing out over the next few years? Are we really going to see the end of the low-substance, low-taxed but high-profit companies located in tax havens?
PSA: The reality is that we’re already seeing the impact of the BEPS Project. Businesses are changing their tax planning arrangements so as to align their value creating activities with the location of profits and taxation. For countries, the peer review process which we’ve put in place to monitor the implementation of the BEPS minimum standards has already kicked off, and it’s clear that countries have acted quickly to implement these new requirements.
The work on preferential tax regimes and the exchange of tax rulings (BEPS Action 5) is an example of that success. To date, information on more than 6,000 tax rulings has been exchanged between tax administrations, shining a light on transactions that could give rise to BEPS concerns. In addition, more than 125 preferential tax regimes, such as patent boxes, are under review, with more than 10 regimes already having been abolished or amended in line with the new agreed rules, to ensure that tax benefits are only available where there is substantial activity being carried out by the taxpayer.
Richard Collier: The development of the Inclusive Framework of states to implement the BEPS output has by any measure been an enormous success, with over 100 states already signed up. However, there are aspects of the BEPS output and solutions that involve inordinate complexity, such as the work on hybrids, the new transfer pricing requirements, and the interaction of the transfer pricing and permanent establishment rules. Do you think it is realistic to assume that smaller states will be able to cope with this complexity in administering these rules?
PSA: There’s no doubt that resolving some of the BEPS issues calls for complex solutions, and we’re working hard to ensure that there is clear and practical guidance for tax officials and taxpayers to support their implementation. This is particularly true as it relates to the BEPS minimum standards, which all the Inclusive Framework members have committed to implement.
Still, as you note, the members of the inclusive Framework have varying levels of capacity. We’ve been very conscious of this from the outset and have undertaken targeted work specifically to address this issue. In 2014, we delivered a report that reflected the experience of low capacity countries, to identify the biggest BEPS-related challenges which we’ve faced. That work led to an agreement to develop eight toolkits that would take a very practical approach to addressing their top priorities. That work is being undertaken by a partnership of the OECD, World Bank Group, the UN and the IMF, under the Platform for Cooperation on Taxation. Together we’ve already delivered the first two toolkits, and the remainder will be delivered by the end of 2018. The Platform will also host its first global conference in February 2018, looking more broadly at the importance of strong tax systems for countries as they seek to achieve the UN Sustainable Development Goals.
Richard Collier: The Inclusive Framework mentioned above involves both OECD Member countries and non-Member countries working in concert to implement BEPS. However, the ongoing daily work of the OECD on tax matters, particularly in relation to the operation and development of the OECD’s Model Double Tax Treaty involves only OECD Member countries, a collection of largely developed states whose interests are not regarded as necessarily coinciding with non-Member developing states. This position may cause a number of tensions. How will the OECD be able to maintain and expand its role as the leading international tax standard setter in the light of these tensions?
PSA: An inclusive approach is key to the success of our work – a single set of international tax rules which are globally implemented. Today, all members of the Inclusive Framework on BEPS participate on an equal footing – this means they participate in all of the technical work and decision-making alongside OECD members, having a full say in the work on BEPS. What’s more, this year we’ve also taken an extra step towards greater inclusiveness, with the OECD Council agreeing to allow nationals of any member of the Inclusive Framework to be hired in the Secretariat to work on BEPS issues.
This sort of deep integration is ensuring that the full range of issues, as seen by a diverse range of countries from different parts of the world and with different economic profiles, are being identified very early on in our reflection process, which means that any tension points can be addressed. We must also recognise that even between OECD member countries there are differences, so the Secretariat has extensive experience working with countries to find common positions. You can also see how this goes far beyond BEPS – for example, our work on tax transparency issues with the Global Forum on Transparency and Exchange of Information for Tax Purposes. Restructured in 2009, the Global Forum now has 146 member countries and jurisdictions who are successfully working together to monitor the implementation of the standards on exchange of information on request and of the automatic exchange of information. We also have a global Revenue Statistics Programme that now covers more than 70 countries, as well as a range of multilateral and bilateral assistance through our Global Relations and Development Programme, as well as initiatives such as our Africa Academy for Tax and Financial Crime Investigation.
So our collaboration with jurisdictions beyond OECD members goes far beyond our work on BEPS, and is also supported by our strong engagement with regional tax organisations, including the African Tax Administration Forum and the Centre for Inter-American Tax Administrations (ATAF) which have a formal role as Observers to our work, which provides yet another channel whereby the views of their members can be represented. Through the Platform for Collaboration on Tax, we are also working with other international organisations (the IMF, World Bank group and the United Nations) to ensure that we have a more coordinated approach to providing support to lower capacity countries on tax matters. For example, the Platform members are working together to deliver a number of toolkits designed to help developing countries implement the measures developed under the BEPS Project and on other BEPS-related priority issues for low income countries. A toolkit on options for the effective and efficient use of tax incentives was published in November 2015, and another toolkit was delivered in June 2017 to help developing countries address the lack of comparables for transfer pricing analyses, complemented by a study on the information gaps on the prices of minerals. Two other toolkits will be delivered in 2017 (on indirect transfers of offshore interests and on transfer pricing documentation and a further four in 2018 (on tax treaty negotiation, BEPS risk assessment, base eroding payments, and supply chain management).
Richard Collier: The anti-treaty shopping measures contained in the BEPS output have been criticised as having the potential to disrupt the intended operation of double tax treaties, potentially undermining the functioning of the international tax system. Do you recognise this as a possible danger of those measures?
PSA: The anti-treaty shopping measures of the BEPS Project (Action 6) actually aim at restoring the original intent of tax treaties – to remove barriers to investment such as double taxation – while ensuring that they do not also facilitate unintended tax avoidance or evasion. The goal is also to ensure certainty for taxpayers. Another key outcome of the BEPS Project aims at improving dispute resolution mechanisms in case of a dispute arising in relation to tax treaties, through the BEPS Action 14 minimum standard. The tax treaty-related measures from the BEPS package can be implemented through the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. To date, 71 jurisdictions have joined the so-called ‘BEPS multilateral instrument’, strengthening their tax treaty network. Ratification processes are underway and we expect the BEPS multilateral instrument to come into force in 2018.
Richard Collier: A number of smaller states have historically been used as locations for offshore financial activities, holding companies, treasury companies, companies holding intangibles, etc. In many of these states these activities have been important to the local economy. Do you expect the BEPS output to impact materially the scale of such activities? If so, does this mean that the economies of some of these smaller states will need to be re-focused?
PSA: The BEPS Project aimed at ensuring that the location of profits and taxation would be aligned with the location of the underlying economic activities and value creation. Though the BEPS Project was not about dictating whether countries should have a specific corporate income tax rate, it certainly has an impact on regimes that seek to attract foreign investors without requiring any economic substance. I would hope that many jurisdictions could, as a result of BEPS, attract more of that economic activity which would justify the very high profits which are being held there, as well as providing a boost for the local economy.
Where those countries are not able to attract that economic activity however, it is certainly possible that they will need to pivot to focus on new sectors, beyond financial services. We have identified this issue in the BEPS Project, and have raised it with the IMF early on. The IMF will have an important role to play in ensuring that they have a clear vision for helping these smaller jurisdictions to survive and thrive as the global economic environment changes so significantly due to BEPS but also a wide range of other forces.
Richard Collier: Do you think the current very high focus on, and concern about, the tax affairs of multinationals which we see coming from politicians and the general public (and with all its implications for the conduct and scrutiny of multinationals) will continue indefinitely?
PSA: On BEPS, there has been ongoing political support to address international tax issues at the G20 level and to make it a priority (since 2012). Even before that, since the G20 began meeting at the leaders’ level following the onset of the global financial crisis, tax has been on their radar, starting with the issue of tax evasion and bank secrecy. The media and NGOs played an important role in bringing the international tax issues to the public’s attention, and helped uncover affairs that clearly raised a broad awareness of this problem and accelerated the political process. The strong political willingness to act has been key to advancing the BEPS project and to achieving consensus among participating jurisdictions.
So far at least, the global issue of tax fairness seems to remain an important political concern at the highest levels. Whether tax retains the same high profile or not though, we know that there is still a lot of work to be done, particularly to ensure there is consistent global implementation of the standards that have been agreed.
Richard Collier: What are the OECD’s priorities on tax for the next two to three years?
PSA: The digitalisation of the economy is raising tax issues which go beyond BEPS, some of which were identified in the BEPS Action 1 Report, and addressing these will be key over the next few years. This is a global issue that will require a global solution. We know though that many countries are eager to act rapidly, including many EU member states, and it’s important that we make sure that we minimise any negative spill over impacts from unilateral measures. In April 2018, the OECD will deliver a report on this issue, looking both at short-term, temporary options for those countries which feel they must act quickly, and also identifying the fundamental principles and building blocks for a more sustainable, longer-term solution.
Beyond BEPS, another important topic is the monitoring of the first automatic exchange of information (AEOI), which more than 100 countries and jurisdictions have committed to begin by September 2018. The first exchanges have already started in September 2017 for approximately half of the committed jurisdictions, while the other half will begin next year. In the meantime, terms of reference will be prepared that will form the basis of the peer reviews on the effective implementation of AEOI. The core requirements of the Terms of Reference for the AEOI reviews will be approved at the next Global Forum’s plenary meeting in November 2017, with the first comprehensive reviews planned to start in 2020.
Richard Collier: Finally, what are your own goals for the next three to five years?
PSA: Implementation, inclusivity and innovation are the key words for the years to come.
Implementation of the standards we have developed over the past few years: transparency, BEPS, tax certainty ... We now need to move to full and consistent implementation through tax cooperation. Inclusivity is first about making sure all countries are involved in the international tax debate. Today we have 146 Global Forum members and 103 members of the Inclusive Framework. We must ensure that these countries work well together. Second, inclusivity will be about conceiving tax policies conducive to reducing inequalities while promoting investment and growth. We intend to advance this work, notably with the incoming Argentinian G20 presidency.
Innovation will finally be a challenge for tax policies and administrations: how do we collectively adapt to the digital age? What kind of rethinking is needed? We are working on the tax challenges of the digitalisation of the economy. This is urgent but will also take time if we want to get it right.
Pascal Saint-Amans is the Former Director of the Centre for Tax Policy and Administration at the OECD. Mr. Saint-Amans, a French national, joined the OECD in September 2007 where he played a key role in the advancement of the OECD tax transparency agenda in the context of the G20. Prior to his appointment as Director, he was the Head of the Global Forum on Transparency and Exchange of Information for Tax Purposes since 2009. Mr. Saint-Amans graduated from the National School of Administration (ENA) in 1996, and was an official in the French Ministry for Finance for nearly a decade.
Centre for Business Tax at the University of Oxford. He specialises in cross-border allocation of income.