Over the past years, while the OECD, with the support of the G20, has achieved tremendous progress in the areas of tackling tax avoidance and tax evasion and enhancing transparency, it has also worked actively on ensuring a level-playing field amongst jurisdictions applying these standards. In addition, another priority in recent years is to ensure tax certainty for taxpayers. The OECD has started this work with the implementation of new transparency standards.
New Transparency Standards And The End Of Bank Secrecy
The establishment of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) and the implementation of new tax transparency standards marked the first step. The Global Forum, now involving 158 members working on an equal footing, developed two standards: one on exchange of information on request (EOIR) and the other on automatic exchange of information on financial accounts’ information (AEOI). This new standard on AEOI provides for the exchange of non-resident financial account information with the tax authorities in the account holders’ country of residence. Participating jurisdictions that implement AEOI send and receive pre-agreed information each year, without having to send a specific request. AEOI enables the discovery of formerly undetected tax evasion. It enables governments to recover tax revenue from non-compliant taxpayers, and further strengthens international efforts to increase transparency, cooperation, and accountability among financial institutions and tax administrations. Additionally, AEOI generates secondary benefits by increasing voluntary disclosures of concealed assets and by encouraging taxpayers to report all relevant information.
By effectively ending bank secrecy through an inclusive process, this work has been a success story of the G20 and the Global Forum. It demonstrated that effective international co-operation can improve trust in the international tax system and in multilateralism. All international finance centres have a seat at the table and are now engaged in EOI for tax purposes. An overwhelming majority of them comply with the international standards. At present, over 150 jurisdictions have committed to implement the standard of exchange of information on request (EOIR) and 130 jurisdictions now participate in the Convention on Mutual Administrative Assistance in Tax Matters (the MAC), which provides a comprehensive international legal basis for all types of exchanges, with more countries joining each year. More than 100 jurisdictions have committed to exchanging information related to offshore accounts automatically and over 90 have already commenced exchanges. The collection of tax revenues from AEOI by tax administrations is huge with close to 50 million bank accounts exchanged by the beginning of October 2019 for a total value exceeding EUR 5 trillion and close to EUR 100 billion of additional tax revenues identified for collection.
By conducting peer reviews under both standards, the Global Forum is ensuring a global implementation of these EOI standards and the level-playing field amongst jurisdictions. Further progress on the EOI standards and upcoming deliverables, such as an update on the status of peer reviews, were discussed at the Plenary meeting of the Global Forum on 26 November 2019, which also marked its 10th anniversary. The reviews of the legal aspects of the AEOI implementation is ongoing, with the first determinations expected in 2020, and an update in 2021. With respect to the AEOI implementation in practice, the reviews will start in 2021 under a 2-year cycle, with updated information in 2022. The criteria remain to be developed.
Fighting Against Based Erosion And Profit Shifting (BEPS)
Delivering the BEPS project was an important milestone to equip governments with the domestic and international instruments needed to tackle tax avoidance. The OECD/G20 Inclusive Framework on BEPS (the Inclusive Framework) has brought more substance, coherence and transparency to the international tax system and has reduced uncertainty for taxpayers and tax administrations in the process.
Since 2016, the Inclusive Framework, which now has 135 members, has been carrying out peer reviews on the four BEPS minimum standards. These peer reviews serve to level the playing field and the results speak for themselves:
Under Action 5 dealing with Harmful Tax Practices (HTP) and exchange of tax rulings, almost 30,000 exchanges on tax rulings’ information have taken place since 2016 and 285 preferential tax regimes of 112 jurisdictions have been reviewed and amended where necessary. The Forum on Harmful Tax Practice (FHTP) has also revised its standard to ensure that the substantial activities requirement applies in no or only nominal tax jurisdictions to ensure a level playing field between those jurisdictions and those that have preferential regimes.
Under Action 13 on country-by-country (CBC) reporting, large multinational enterprises (MNEs) are required to prepare a country-by-country (CbC) report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which it operates. This CbC report is shared with tax administrations in these jurisdictions, for use in high level transfer pricing and BEPS risk assessments. To date, around 90 members of the Inclusive Framework have now introduced a CbC reporting filing obligation, and more have draft laws in progress. There are now over 2,400 exchange relationships in effect for the exchange of CBC reports. The second round of peer reviews were released in September 2019, which covered implementation by 116 Inclusive Framework members.
On Action 14, which seeks to improve the resolution of tax-related disputes between jurisdictions, over 70 jurisdictions have been peer reviewed with respect to making dispute resolution more timely, effective and efficient. Indeed, as novel challenges relating to international taxation surface, the necessity of having robust dispute resolution processes in place becomes increasingly apparent. The Action 14 minimum standard provides elements and best practices to assess a jurisdiction’s legal and administrative framework in preventing disputes, making available and accessible mutual agreement procedures (MAP), resolving MAP cases and implementing MAP agreements.
Beyond the four minimum standards, countries are also taking action on many fronts. To date, almost 90 countries have signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS[i] (MLI), which is an important tool for BEPS implementation. In 2020, a thorough review of the four minimum standards will be undertaken to assess what has worked well and what could be improved.
The implementation of the EOI and BEPS standards has significantly reformed the international tax system. However, the digitalisation of the economy has led to the emergence of new business models, which allows MNEs to derive profits from a market jurisdiction without having a meaningful physical presence there. Notwithstanding the progress made with the BEPS package, the current international tax rules need amending to address the tax challenges arising from this new digitalising economy, which raise broader challenges related to the current nexus and profit allocation rules.
Tackling The Tax Challenges Arising From Digitalisation
The digitalisation of the economy has strained the existing international tax rules to a point where they are exposed to a serious risk of fragmentation. As a result, a number of countries are taking unilateral measures or are departing from previously agreed standards. These unilateral reactions may lead to tax uncertainty, double taxation, trade sanctions, and may increase significantly compliance burdens for business, thereby harming innovation and growth.
In this context, the G20 mandated the OECD to explore a solution to address the tax challenges of the digitalisation of the economy. The Inclusive Framework on BEPS made significant progress in 2019 towards a solution, with the delivery of the Programme of Work in May 2019, which received the endorsement of the G20 Finance Ministers and Central Bank Governors, as well as G20 Leaders, in June. The Programme of Work was based on the Policy Note published in January 2019, which provided a two-pillar approach to address the challenges. The Programme of Work sets out the technical work needed to develop new profit allocation and nexus rules under the various proposals under Pillar 1 and new rules to deal with remaining BEPS issues through a global minimum level of taxation (Pillar 2) on a “without prejudice” basis. The three competing proposals under Pillar 1 to allocate taxing rights on income generated from cross-border activities in the digital age are based on the concepts of “marketing intangibles”, “user contribution” and “significant economic presence”. These proposals have common policy features, as they contemplate the existence of a nexus in the absence of physical presence, consider using the total profit of a business, and the use of simplifying conventions (including those that diverge from the arm’s length principle) to reduce compliance costs and disputes.
Over the summer of 2019, the OECD Secretariat developed a proposed “Unified Approach” under Pillar One, which was released on 9 October for public comment. This approach draws on the commonalities of the proposals put forward by various countries and seeks to re-allocate part of the global profits and corresponding taxing rights to the jurisdictions where highly profitable MNEs have their markets, irrespective of whether they have a physical presence in those markets. It does this through the creation of new rules determining (1) where tax should be paid (“nexus” rules) and (2) on what portion of profits the MNEs should be taxed (“profit allocation” rules).
The new rules would complement the existing profit allocation rules based on the arm’s length principle, which would remain in place. The new rules would apply to MNEs having a certain level of profitability, the activities of which would fall within the scope of the new taxing right. The “Unified Approach” suggests that the MNEs that should be within the scope of the rule would be those carrying on “consumer-facing business” activities, which would cover highly digitalised business models and other highly profitable business models that interact with users and consumers. It also proposes a new nexus, distinct and separate from the existing concept of the permanent establishment, which would ensure a company is taxable in a jurisdiction where its sales exceed a certain threshold even if it is not physically present in that market. The “Unified Approach” aims to re-allocate to market jurisdictions a portion of deemed residual profits– i.e. profit in excess of a certain threshold – through a formula and based on the consolidated financial accounts of the company. This new approach would rely on a formulaic approach and other simplifying measures, which entails going beyond the arm’s length principle (ALP), while leaving the ALP untouched in areas where it does not produce difficulties. A key part of the package is strengthening dispute prevention and dispute resolution mechanisms to increase tax certainty.
The work under Pillar Two to develop rules to ensure a minimum level of taxation has also progressed. Key parameters for Pillar Two are being examined in line with the Programme of Work and being discussed at the technical level, with a public consultation document having been released on the 8th of November and a public consultation meeting taking place on the 9th of December 2019.
The political support and engagement remains strong on the Inclusive Framework’s work to address the tax challenges of digitalisation as seen in October at the G20 Finance Ministers and Central Bank Governors meeting where they endorsed the proposed “Unified Approach” and reaffirmed their “full support for a consensus-based solution”. At this stage, the objective is to reach an agreement by the Inclusive Framework on a sustainable and workable solution by June 2020.
The OECD is also working on the impact the solution could have on revenues and investments in jurisdictions, which is being adapted to the decisions on the design of the possible solutions on Pillars 1 and 2, as well as on the behavioural responses of countries and MNEs. At this point, the assessment shows that the combination of both pillars would significantly increase global tax revenues and bring a more efficient allocation of investment across economies. Low- and middle-income economies would benefit from this approach, while international investment hubs would experience significant losses in tax base. In addition, the solution would support tax certainty bringing a more favourable climate for investment, where the counterfactual would mean a proliferation of unilateral and uncoordinated measures and more tax disputes.
In conclusion, the international tax policy has changed a lot in the past decade, impacting economic growth and improving the relations between businesses and tax administrations, and bringing more confidence in the system.
[i] This MLI allows governments to modify existing bilateral tax treaties in a synchronised and efficient manner to implement the tax treaty measures developed during the BEPS Project, without the need to expend resources renegotiating each treaty bilaterally.
Deputy Director of the OECD Centre for Tax Policy and Administration