Remarks of Pascal Saint-Amans at EY’s 2017 International Tax Conference
Good Morning to you all. It’s a real pleasure to be back in New York — just like Paris, it’s a city that never sleeps!
Two years ago, I couldn’t come to this event because I was in Lima to deliver the BEPS package, for better or for worse — and I think for the better, but you may have a different opinion!
These are very busy times; so I’m happy to be here with you today, what a large crowd. You may have read in the media that the (European Union) Commission is active, the Amazon case was made public a couple of days ago and you have European countries jumping on digital taxation, threatening to take some unilateral measures — perhaps a turnover tax, or something similar.
I understand that in these countries, in the area of international tax, you have a vigorous debate. You’ve had that debate for the last 10 years and you may still have it for the next 10 years — but I hope not. I hope that good, sensible tax reform will take place, but whatever the outcomes, we certainly have quite a vibrant environment to engage with at the moment.
In all this, the OECD is actually a small player, but we try to bring countries together, and I am happy today to share with you not really plans — I could hear the nervous laugh when Jeff (Michalak) said I will share with you plans for years to come. There are no real (new) plans, but instead the implementation of what has already been agreed. So no big, new thing that will be threatening or frightening, but instead the implementation of what you already know — BEPS implementation.
I would also like to highlight a new project at the OECD — which started a year ago, so it’s not completely new — and on which we pushed at the G20, which is the Tax Certainty project. So you should all have smiles on your faces, as it is favorable to taxpayers. Its aim is to reintroduce a better balance between the interactions of tax administrations and taxpayers.
And maybe I’ll then conclude with the US, the US does need to fix its system, and quickly.
So where do we stand in 2017?
Well, this is exactly the time where, almost 10 years ago, the G20 was elevated to the level of the leaders. The G20 itself was created a few years earlier, but it was then elevated to the leaders’ level, because of the financial crisis, in 2008.
And if there is one area that has produced some political will, and action, it’s tax.
I think our world has changed tremendously; and interestingly, some of your colleagues, the partners here, say “the world is collapsing; there are unilateral actions everywhere … it’s absolutely unfair to have unilateral actions.”
I am not glad to hear that, but it is quite interesting, because 10 years ago, international tax was mainly an area of national sovereignty. Countries cooperated just a little — on tax treaties, and on some transfer pricing rules; but fundamentally, the rule was that they would act on their own.
And today, because we are able to bring them together on many dimensions, people have become accustomed to the idea that countries should not move alone, actually forgetting that countries are sovereign. Look at the debate here, in the US, on tax policy reform. I read in the testimonies to the Senate Finance Committee a couple of days ago, that a number of people were saying that “we need to move unilaterally, we don’t need to pay attention to the rest of the world.” That is exactly what countries usually do.
But what has happened in the past 10 years is unprecedented cooperation. We are converging.
I know this must be extremely frustrating from your perspective on a daily basis to see more active tax administration, which is also sometimes less predictable. But fundamentally, if you extract yourself from the current position, and step back for a second, you will see that there is convergence, there is growing interest in cooperation and in trying to achieve common goals, which I think is better than the current situation.
The current situation was largely driven by the fact that countries didn’t pay much attention, which ended up facilitating planning or more aggressive positions — that you were entitled to do — but the policy has changed.
As I said, two years ago we delivered the 15 BEPS measures. We had agreement from the G20 finance ministers, and then from the G20 leaders themselves, to implement the 15 measures.
And what was striking was that the fact that the leaders thought that this was good — but not good enough.
Fifteen measures were agreed — great! — but what the OECD can do is only soft legislation. If there is consensus among our members, we can have rules that they are committed to implementing, but they are only morally committed — certainly not legally committed.
And because of that, the G20 told us it was not good enough. They wanted concrete, effective, immediate action.
“It may not be legally binding, but it must happen” they said. And this is how we came up with the idea of having minimum standards.
So among the 15 BEPS measures, there are four minimum standards, which are extremely important, and for which the G20 told us “you need to review what countries are doing. And if countries are not implementing, we’ll designate them to the G20 as bad guys — because we need to police this area, we need to level the playing field, we need to make sure that all jurisdictions will be committed.”
The second comment by the G20 was “all good, but you must be more inclusive.”
We thought we were not that bad — we had 35 OECD countries, 8 G20 non-OECD countries. So, all the OECD, all the G20 countries: 90% of the world economy.
But the G20 said that was not good enough: “You need to include developing countries.” So what we did — it took us a year — was to establish an Inclusive Framework for BEPS implementation.
We had already established the Global Forum on Transparency and Exchange of Information for Tax Purposes, and this global forum now includes 146 jurisdictions participating on an equal footing, looking at the implementation of exchange of information on a global basis.
On BEPS, we have created a new body, which is actually built on the existing Committee on Fiscal Affairs — where tax policymakers from all over the world come, at a senior level, to agree on the rules at the committee level, and then the working parties put it all into practice.
We have opened that decision-making mechanism to all interested and committed jurisdictions. It means that today, we have 102 countries and jurisdictions that have committed to the full and consistent implementation of the four (BEPS) minimum standards and the other BEPS recommendations.
It all means that 10 years ago, you had 50%-55% of the world economy vaguely committed to a set of goals. Today, you have 102 jurisdictions — that is close to 95% of the world economy — fully agreeing on common objectives, and fully agreeing to be reviewed with regards to consistency of their implementation of the standards, which I feel should also be a guarantee toward more consistency.
What are the four minimum standards? The first one is to put an end to harmful tax practices.
Tax competition is not bad. Countries are free to decide on the rate of corporate income tax, that is their sovereign business.
But they should not offer harmful tax practices, which are opaque — the secret ruling, for example.
It may be good for the one getting the ruling, but not great for the competitors, because it’s opaque, it’s not fair competition.
Part of the Action 5 minimum standard was to say “no more secret rulings. You will automatically exchange all tax rulings with the partners that may be impacted.”
Next, IP boxes — I know that value creation has become more and more important because of IP.
Well, I understand that it’s good for you to have tax credits. But when you develop the research and then put the patent into a country where it is not taxed because there is a patent box, you should also understand that in terms of consistency for governments, that’s not really great. If governments incentivize R&D, they should also make sure that they don’t deprive the neighboring countries or their partners of tax on the income, on the revenue that they should be receiving, and that’s where we developed the nexus approach.
These countries want to provide incentives like a patent box — even though it is bad policy. Better policy is a tax credit on R&D — but if they want to do it [a box], fine, as long as there is a nexus between the activities that have been deployed and the profit that benefits the patentees.
And as it is a minimum standard, we have launched a peer review. And in 10 days’ time, you will see that we have already reviewed more than 160 regimes across the world in these 102 jurisdictions, and we have identified a number of regimes as being potentially harmful.
You will see that there are a significant number of regimes that are being dismantled, or that will be dismantled or significantly modified in the next 18 months or so, so that they become compatible with the agreed international rules.
As regards tax rulings, we said that they should be exchanged automatically, and more than 10,000 have been exchanged automatically as an implementation of the BEPS package. So things are going ahead, I think we are delivering on that front, and I think it is good for business, as it will level the playing field, and it will make the competition more transparent.
The second minimum standard is about treaty shopping. Action 6 is to kill treaty shopping, it’s over, coming to an end.
The time where you went into India via Mauritius is over, it’s coming to an end. They already had a protocol, and even though Mauritius has not extended the multilateral instrument [MLI] to India, it will, at some point in time. Barbados has not signed the MLI, but will do so soon.
The large treaty shopping hubs have already signed, and they are pretty generous in the way they have implemented the MLI provisions on Action 6.
If you look at the Netherlands, which is probably the largest treaty shopping hub in the world — there is an official survey of the Netherlands that says there are tax lawyers in Netherlands - between 8,000 and 12,000 to be precise - who live on treaty shopping only. In Mauritius, it’s around 5,000 people. The Netherlands has signed the MLI, and it has designated all their partners and that’s what all the other treaty shopping hubs are doing: Singapore, Hong Kong, Belgium, and many others.
We are going to monitor the compliance of the jurisdictions with this minimum standard, but we will be waiting for the MLI to come into force first.
Sixty-eight countries have signed — and actually, it is 71 jurisdictions that are covered — and we have another 30 in the pipeline. So by mid-2018, the MLI will cover around 100 jurisdictions and the minimum standard of Action 6, there is no choice, has to be adopted.
And in 2019 we will be able to identify who is playing by the rules and who is not. So if you are doing treaty shopping, indeed it is time, more than time, to revisit the way you are channeling your profit into third countries.
The third minimum standard is about country-by-country reporting.
It’s happening now, country-by-country reporting, and I think it’s going to have a big impact. It’s also a great opportunity for CFOs and CEOs to look into the broader picture — what does the planning of your company look like? Is it sustainable or not? Are there issues? How do you explain these issues? How do you build a narrative?
And if you are not able to build that narrative, then you probably need to change a few things.
We have made sure, by developing the legal instruments, that the information you will provide to your country of residence will be exchanged, securely, with other jurisdictions.
We [the OECD] strongly believe that the CBCR data should not go public, though. We know that some in the European Union, and in the European Parliament, are trying to push for this, but we don’t favor it, and we remind all the jurisdictions of the agreement that was reached in 2015 that these CBC reports should not be made public.
There are other measures — the fourth minimum standard, I will come back to it — which are part of the BEPS package, and are extremely important — the transfer pricing measures, for example, are having an impact. Have things stabilized in the area of transfer pricing? I am not sure, because transfer pricing is complex. Things will never be satisfactory for everyone. It may not be a great system, but I am not sure that there is any better system.
We need to fine tune and make sure that globally we have outcomes that are aligned with policy objectives and with common sense. I think we have made significant progress there, even though I recognise that it is hard work for companies, in terms of making sure they have the right transfer pricing policies.
On Action 2, my view is that hybrid mismatches are dead.
So if you still have some hybrids, it’s really time to get rid of them, because of the EU’s ATAD Directive and because of Action 2.
On interest deductibility, many of the European countries, as well as India, have already moved to limit interest deductibility, and I would not be surprised if we see more countries, including I think, the US, move in this direction, too, given the money that they are losing from treasury coffers due to interest stripping.
So BEPS is being implemented, and the plan for the years to come is to make sure that they [the BEPS Actions] are properly and consistently implemented. We would like to go even further than the minimum standards, and ensure that on transfer pricing, for instance, we are able to understand who is doing what at the national level.
I’d like to turn now to something that is extremely important and dear to my heart, which is the work on tax certainty.
Two years ago, in China, we had a G20 finance ministers’ meeting and I suggested to them to start work on improving tax certainty.
What’s the philosophy? With transparency, with BEPS, tax administrations are better equipped with the information they need, and the counterpart to this is the need to provide certainty. They owe you better service. They owe you a balanced approach. It’s time to move away from the lack of mutual trust.
We used to call it the enhanced relationship, and then we moved to cooperative compliance. How can you strengthen mutual trust? By transparency, but also by new commitments from tax administrations.
To get this started, we had more than 700 multinational companies respond to a questionnaire, and then we reported to the G20 finance ministers that we had to (all) increase our focus on this issue.
Action 14 — which is the fourth minimum standard — to improve mutual agreement procedures is being implemented. The first six reviews of countries were released last week, at the meeting of the OECD Forum on Tax Administration.
I think it showed that the six countries are doing well — which does not surprise us, because we started with strong countries. In a way, peer reviews are a pressure mechanism; some countries have said “Don’t review us too quickly!” so we said “OK, how much time do you need to hire people, to train them up? Two years? Fine, then we will review you in two years” – and we have now teams of people that are in training. That’s massive progress.
I’d also like to mention mandatory binding arbitration that we are also promoting through the MLI. Twenty-six countries have opted into mandatory binding arbitration. I think it is a pity that the US did not sign the MLI on mandatory binding arbitration, as they would have had 26 new partners to work with. But it’s not too late.
Finally last week, in Norway, we launched a new initiative called ICAP — the International Compliance Assurance Program — which is a voluntary programme (for companies), with seven countries currently piloting it — and not just the usual suspects. We also have Italy and Spain, for example, while France is an observer. And some emerging economies might be interested in joining this initiative, too, which is great.
What’s this initiative about? Well, it offers the option to taxpayers to meet, multilaterally, the entire group of countries to discuss their CbCR reports, and show some transparency on their tax structuring in order to get an assessment of the perceived risks. And if the risks are low, then you will have an assurance that there will be no audit. Or, if one or two points are highlighted, then there will be a multilateral audit that will be targeted at these issues. I think this is a great model for the future, and the US’ IRS is leading the charge there.
Two challenges ahead of us, if I may.
A big thing which has not been dealt with adequately by the BEPS project is the digital economy.
The Action 1 report said “it’s not the digital economy, it’s the digitalization of the economy that we need to fix.” It’s the tax consequences of digitalization that we need to address, which means that we cannot ring-fence a solution to tech companies alone. Digitization is pervasive, and all sectors are being affected.
Second, BEPS is exacerbated by the digitization of the economy, so the BEPS measures should provide a response — on the location of IP, on the use of hybrid mismatches and so on.
Third, VAT. There were no clear VAT rules, so we established clearer rules and reached agreement on implementing them in more than 100 jurisdictions. Not in the US, where you don’t have VAT. VAT is important in the digital context — countries need to clarify where VAT is due.
Fourth, the ability of countries to tax digital activities deployed in their territory without a physical presence. We are not sure what to do here and there is no agreement. We should explore the idea of a “Digital PE” or a “substantive economic presence.” We may need to revise the profit allocation rules, but there is no clear way forward, which means that currently, countries will do what they want, if there is no consensus.
We have a mandate from the G20 to deliver in a report in April 2018 on where we stand. We are working on this, and there will be a public consultation in the first week of November, in San Francisco.
But will you will have seen the Europeans say, “We are impatient, and our people don’t understand that some players don’t pay any tax. The international principles have not kept pace with technological changes, and we must come to an agreement.”
We, at the OECD, strongly disapprove of unilateral measures.
But it’s going to be hard to tell countries not to move, if there is no prospect of any form of agreement. That’s where we turn to the US, and hope that the US will send messages that there is the possibility of an agreement of new rules being developed in the next couple of years.
I was in Japan yesterday to meet the finance minister and his G20 team. Japan is interested in making sure that in 2019 there will be a framework or some form of agreement. And next week we [the OECD] are back to Washington to discuss that with the G20 finance ministers, and hope that we can have some prospects of political agreement, around which the technicians can deploy a technical solution.
My closing words: maybe the highest source of uncertainty in today’s environment — and this is what the Chinese delegate told the Forum on Tax Administration last week, and in particular, told the US Tax administration — is US tax reform.
Will or won’t it take place?
It will take place. The question is when. The system is broken. It needs fixing, and I will limit my remarks to the international tax aspects of corporate income tax, and not get involved in the personal income tax aspect of the reform.
In relation to the international parts, the OECD recommendation is that you need to lower the rate. 35% is too high — you’re higher than the French! Twenty to 25% would be fine. And if you want to do that, you need to broaden the base. Sorry, but that’s something you’ll need to do.
There are many other solutions. But let’s make sure that they are not disruptive for the international world. I am thinking of the DBCFT — the Destination-Based Cash Flow Tax, some of you may have liked it, but frankly speaking from my perspective, it’s hard to manage. I think we moved away from that, even though the issue of destination is still around, especially for trade deficit countries.
And finally, and perhaps most obviously, you have to move to a territorial system, like all the other countries.
Japan, 10 years ago … the UK. … - It took some time to join the other European countries, but if you want to grow your competitors, your champions, your multinational companies, in a way that allow them to grow abroad and then to repatriate their profits, to create employment in this country, you must move to a territorial system.
The worldwide system, check the box: it doesn’t work for the US, and it doesn’t work for the rest of the world. It creates the opportunity for schemes that no one understands, and then we end up with State Aid cases, and so on.
I wish you all good luck, I invite you to continue contributing to the OECD work, and also to convince the US Government to be successful in its tax reform endeavors. Many things are still going on, and the OECD is in implementation mode on BEPS.
It’s a challenging environment, globally, but that’s our job, and we enjoy it.
Thank you very much, and I wish you all a highly successful event.