Limitations to BEPS when tackling corporate tax evasion

Global Tax Weekly -- Although the OECD’s base erosion and profit shifting (BEPS) project is viewed by many as the best tool to tackle corporate tax evasion, global tax experts say it comes with limitations with regards to tax avoidance in developing countries and it could even encourage competition on tax rates.

With some notable exceptions (the US, perhaps?), a consensus has emerged among the world's governments that corporate tax avoidance is a major problem that needs tackling, and that the OECD's BEPS recommendations are the best tools for the job.

Equally, however, there is a body of opinion outside officialdom which warns the one-size-fits-all approach represented by BEPS is far from ideal, and is leading to some unintended consequences.

Mitsuhiro Furusawa, deputy managing director of the International Monetary Fund, was heard to suggest at a recent international tax conference in Indonesia that the BEPS project has its limitations, particularly with regards to preventing tax avoidance in developing countries, which have their own unique set of problems not generally experienced by the wealthy nations driving the BEPS project.

Furusawa also observed that BEPS, while encouraging a more even international corporate tax playing field, is failing to counter aggressive tax competition. Indeed, some conclude that BEPS is actually encouraging competition on tax rates, while some jurisdictions are replacing special tax regimes deemed ‘harmful’ under the project with new or improved mainstream tax incentives, such as research and development tax credits and intellectual property income ‘boxes’.

According to a recent EY survey of tax policy professionals in 50 countries, 30% of these jurisdictions intend to invest in broader business incentives to stimulate or sustain investment, with new or updated business incentives being offered in 27% more countries than in 2016.

On the other hand, concerns about a more uncertain tax environment, in which there are increased chances of being doubly taxed or experiencing more aggressive and frequent tax audits, continue to be expressed by multinational taxpayers. And such issues were highlighted at a recent conference jointly hosted by the International Chamber of Commerce, the Business and Industry Advisory Committee to the OECD, and Business Europe, where it was observed that the BEPS recommendations are creating new burdens and risks of double taxation for businesses, especially those engaged in cross-border activities.

One key message was that businesses are increasingly seeking certainty from tax policymakers in deciding where to invest and whether to increase investments, a point with which Pascal Saint-Amans, Director of the OECD's Centre for Tax Policy and Administration, concurred.

However, there is little that the OECD can do to prevent jurisdictions from putting their own local slant on their BEPS measures. Indeed, survey after survey would appear to suggest that the issue of tax certainty (or the lack of it) is a number one priority for the majority of multinational taxpayers. Yet there are few indications that the situation will change any time soon.

The consequence of a more uncertain tax environment globally seems to be conservatism. One survey indicated that most firms have not changed their tax planning policies in response to BEPS, which at first glance appears a surprising outcome considering how BEPS has changed the tax landscape. However, it was concluded from these results that companies have adopted a wait-and-see approach instead of reacting hastily to changes in tax laws and regulations.

Nevertheless, if the results of a report by Allen and Overy earlier this year are to be believed, there is a definite shift towards 'safer' tax planning taking place, with 90% of respondents to its survey saying that tax risk played a part in formulating tax strategy. These findings were supported by Deloitte's 2017 Asia-Pacific Tax Complexity Survey, which also found that companies in certain key economies were employing more conservative tax planning methods.

This response from taxpayers to BEPS-related changes may suit those countries concerned if it leads to companies paying more tax. But perhaps the trade-off for higher tax revenues is lower investment, as multinational firms practice a policy of caution.

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