Tax policy and controversy briefing
It was not a surprise to find the early part of 2014 dominated by developments and news surrounding the 15-point Action Plan on Base Erosion and Profit Shifting (BEPS) that the Organisation for Economic Co-operation and Development (OECD) released in July 2013. As part of the its continuing efforts to maintain open lines of communication with the tax community, the OECD conducted webcasts on 23 January and 2 April and held regional meetings to focus on those items due to be finalized by September.
OECD and BEPS Action Plan 1
That open dialogue will be critical for the Action Plan’s ultimate success. The work of the OECD is proceeding swiftly, at a pace that OECD Centre for Tax Policy and Administration Director Pascal Saint-Amans has described as sometimes “frantic” and “crazy.” The work is resulting in the publication of BEPS discussion drafts that, when provided for comment (often for very short periods of time), have drawn many responses totaling thousands of pages. The OECD will then need to reflect on these comments and push rapidly forward in order to meet its first real deadline of September 2014.
This rapid pace is not the only issue raising concerns. For example, Robert Stack, Deputy Assistant Secretary for International Tax Affairs at the U.S. Department of the Treasury, has said, “Global tax administrators are looking for, in some cases, blunt instruments to take care of stateless income problems. The main challenge for the US is to get to the problem by pulling back from blunt instruments and moving to policies that reach the right technical results.” The web of international taxation is a difficult one to untangle and then reweave. Consequently, the most difficult stages of the BEPS reforms may occur after September, as countries seek to interpret the recommendations of the OECD and the compromise text.
One of the people who will have to align the OECD recommendations with his country’s tax system is Chris Jordan, Commissioner of the Australian Taxation Office (ATO). Our feature interview with him provides some interesting insights and perspectives from someone who only recently took over the helm of the ATO after a lengthy career in private practice. His forthright discussion of “over-engineered” governance processes and the cultural shifts that will be necessary to improve how the ATO does business is refreshing. His creation of an “integrated tax design unit” to better coordinate internal activities and decision-making processes shows that he is not shy about trying new ideas and is open to innovation. Nevertheless, some early indications of how his long-term vision to improve “customer service” will be balanced with his enforcement agenda may be reflected in the way he approaches digital e-commerce (which he touches on briefly) and how he handles the entire BEPS agenda. Whether Jordan represents a new breed of Tax Commissioner who embraces new and innovative approaches to tax administration remains to be seen, but his clear thought process and proactive agenda make his interview a must-read for anyone keeping an eye on global tax administration.
As noted, the OECD has released several discussion drafts of the BEPS Action Plan items, including one on transfer pricing and country-by-country (CbC) reporting at the end of January. The OECD then released, over just three weeks in March, discussion drafts on treaty abuse, hybrid mismatch arrangements and the digital economy. Each of these drafts is discussed in detail by our article contributors. One should keep in mind that these discussion drafts are a work in progress, albeit on an expedited timeframe. The recently proposed change to impose CbC reporting at an aggregate level instead of the entity level illustrates just how fluid some of these proposals may be during the discussion phase.
Exchange of information
Exchange of information is another area of focus for the OECD, although it is not specifically part of the BEPS Action Plan. In early February, the OECD released what amounts to a global standard for the automatic exchange of financial account information in the form of a model Competent Authority Agreement (CAA) and Common Reporting Standard (CRS). In effect, the CAA and CRS outline a global reporting standard that bears a striking resemblance tobthe Foreign Account Tax Compliance Act regime in the US. Although the CRS is a model agreement with no independent legal force, there appears to be a signifiicant amount of political support for its implementation. More than 40 jurisdictions have signed up for early adoption, and a letter of commitment to these new standards was signed by 44 jurisdictions in late March. The expectation is that these new standards could be formally adopted and implemented by the end of 2014 in several jurisdictions, which could result in new customer due diligence procedures for 2015 and various reporting requirements for 2016.
The European Commission (EC) is also active on various BEPS issues, specifically identifying hybrid financing structures as an area of concern. The EC is working on an amendment to the Parent-Subsidiary Directive (PSD). This mechanism was designed by the European Union (EU) to eliminate tax obstacles for profit distributions between parent companies and subsidiaries based in different Member States, as well as to reduce the incidence of double non-taxation.
Under the amendment, Member States would have to include a symmetry principle for intra-EU dividends in their domestic law. In addition, another proposal would introduce a general anti-abuse rule into the revised PSD. According to the current proposal, the PSD should be translated into national law by 1 January 2015, leaving the Member States just six months for implementation. While all Member States seem to accept the anti-hybrid provision, several — particularly the Netherlands and Finland — have criticized the general anti-abuse rule. As all Member States must agree on the proposal before it is adopted, a possible compromise may be the adoption of the anti-hybrid provision without the general anti-abuse rule. If this compromise takes place, it would seem realistic that the PSD could be implemented by the end of 2014.
Tax Policy Outlook survey results
We are also pleased to highlight some of the more interesting data points from our annual Tax Policy Outlook publication, which in 2014 surveyed 61 countries. As an example, just 10 countries have announced reductions to statutory corporate income tax rates for 2014, while overall corporate tax burdens are expected to increase in 16 countries. The increase in only 3 of those 16 countries (France, India and Israel) can be attributed (at least in part) to a higher statutory rate, while the increasing tax burden in the other 13 countries is the result of expected “base broadening.” Many of these base broadeners might be described as BEPS-related, including limitations on the tax treatment of losses, tighter transfer pricing and thin capitalization rules, changes to withholding tax regimes, tougher controlled foreign company (CFC) rules and limitations on interest and business expense deductibility, including a rapidly growing focus on payments made to low-tax jurisdictions. The primary focus in protecting and enhancing the revenue base, however, is tax enforcement. Nearly 40% of the countries surveyed are looking to improve their tax enforcement efforts by requiring more disclosure and transparency and focusing on business “substance” in reviewing transactions and, more often, scrutinizing transactions using general anti-avoidance rules (GAARs).
Tax reform remains high on the policy agenda, and many countries have either put in place or are planning significant tax reforms in 2014. Brazil has restructured its system of worldwide income taxation for both corporations and individuals, while Panama enacted a new worldwide tax regime at the very end of 2013 only to repeal it in the opening days of 2014. Japan has adopted an earlier-than- planned repeal of the 10% corporate surtax it enacted in 2012 following the Fukushima disaster, reducing the top corporate rate from 38.01% to 35.64%. At the same time, Japan has increased its consumption tax (VAT) from 5% to 8% in 2014, and it is scheduled to increase further to 10% on 1 October 2015. France, too, has entered the reform debate in vigorous fashion, with new Prime Minister Manuel Valls announcing a tax and payroll stimulus package that, if passed, would result in significant corporate tax rate reductions.
Tax reform in the US, meanwhile, remains stalled under a cloud of uncertainty, even though House Ways and Means Committee Chairman Dave Camp’s highly ambitious Tax Reform Act of 2014 discussion draft lays the groundwork for continued tax reform debate as the US moves toward midterm elections.
With all this change, both at the international and the national level, we can expect the rest of this quarter and the next few to continue to be interesting and dynamic. The pre-emption of the BEPS project to date has led to much change that companies need to adapt to and can, at least in part, predict. As the debate moves forward and those Actions that are on a 2015 delivery plan come ever closer, we can expect to see yet more change. However, while countries still need to work together to deliver a coherent international tax regime that supports cross-border investment, while addressing the risk of unintended tax reductions, the themes of tax competition and the fight for foreign direct investment remain. These two objectives can be rationalized but are unlikely to lead to a simple tax world in the future. Continuing to monitor the developments in tax policy and controversy, and predicting outcomes where possible, remains the order of the day, month, year and potentially even decade.