The interview: Pascal Saint-Amans – Director, OECD Centre for Tax Policy and Administration

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Chris Sanger, Global Tax Policy Leader for EY interviewed Pascal Saint-Amans at the OECD’s Paris offices in late April, 2017.

Chris Sanger: One of the key areas our clients have been talking about is the OECD’s focus on this new tax certainty and growth project. Could you spend a little time explaining what that project actually means and what your aspirations are for that project?
Pascal Saint-Amans:

The tax certainty and growth project is a very important thing. It has been made one of the priorities of the German G20 presidency and, before that, of the Chinese presidency. What is it about? You know that, since the G20 was escalated to the level of the leaders back in 2008, the OECD has been solicited to deliver on tax transparency and on fighting tax avoidance through the BEPS project. We wanted to get the balance right, and we wanted to have something that would be much more favorable to taxpayers and businesses, and we suggested that we could work on tax policies to promote certainty.

These tax policies have two aspects. One is how can we ensure that governments, finance ministries and tax administrations can better promote a friendlier approach to their relationship with taxpayers through offering more tax certainty? That is the first. The other aspect: for years — for decades even — international organizations (the IMF, the World Bank, and the OECD) have recommended policies to foster growth, but at the same time identifying the issue with the level of inequality. We say to promote growth, go taxes with low rates and broad bases with indirect taxes being even better. But to reduce inequalities, you need to use progressive taxes. I don’t know how to reconcile these two pieces of advice, so what we are trying to do is to advise the G20 and the G7 on better tax policies that will have a holistic approach to the issues. So in fact, tax policy recommendations include not just revenue raising, but also improving tax certainty for taxpayers.

Now that tax administrations are better equipped to fight avoidance, to fight evasion, they also must ensurine a good level of certainty for tax payers. That is a key goal of the certainty project.

Chris Sanger: As part of the certainty project, you have had a survey and engagement with business. What are the messages you have got back from business, and how have they fed in to the project?
Pascal Saint-Amans:

We delivered a report on tax certainty to the G20, and we also received a mandate to monitor how things will improve over time and what countries do to improve tax certainty. That can be part of tax policy and tax legislation — limiting the changes, limiting retrospectivity and other aspects on that front, but it is mainly about tax administration. To substantiate the recommendations to the G20, we did a survey. I would like to thank the big firms, EY in particular, for having helped us get responses to the questionnaire, which totalled over 700 responses. We learned that this is an issue, even though it’s not necessarily the top issue in terms of investment decisions.

Second, we have learned what the main sources of uncertainty are and, not surprisingly, given who asks the question, the international aspects of a tax system are considered as important as the domestic elements, even more so in some countries. This is also an important factor in emerging economies. Drawing from that, we have made a number of recommendations. We have told tax administrations, finance ministers and we told the G20 leaders in Hamburg that tax administration must provide a better approach to cooperative compliance. We may have some experiments on how we could have this cooperative compliance offered at a multilateral level, with several countries working on that.

Promoting APAs and promoting mutual agreement procedures (part of Action 14 of the BEPS action plan), was also important. So, we have many tools. The G20 countries have endorsed these tools and they have committed to consider how to use them. We have made the tax commissioners more sensitive, and at their meeting at the Forum on Tax Administration in Beijing last year, all the tax commissioners strongly committed to ensuring better tax certainty and to eliminate double taxation. I think that it is now important that it is on their radar screen and that is something we will be monitoring and implementing.

The role of business

Chris Sanger: Can businesses do anything more to help feed into the certainty project?
Pascal Saint-Amans:

The answer is yes, and that is extremely important. Two levels. One, the best thing you can do to ensure a better relationship with tax administrations is to be less aggressive. Better compliance, spontaneous compliance and more transparency are things that will be welcomed. Again, with all this work over the past few years, I think we have seen a shift of paradigm from aggressive tax planning being a core business of tax directors. It was not only tolerated, but facilitated to a place where it became a red flag. The different tax administrations, the policymakers, the leaders, the G20 have said it’s over. The game is over. You need to change your practices. So, if you can show that you are changing your practices on a number of cases that have been red-flagged through the BEPS project, I think that will help tremendously.

Now, the second layer is as important and is made up of your active contribution to this exercise. How? We are doing a peer review of mutual agreement procedures. It is one of the four minimum standards of the BEPS project. The reviews have started. We have already seven reviews finalized and we will have even more coming up, and we are asking for taxpayers’ input. It is a bit complicated because counties were not that enthused in having taxpayers input, so the language you may find in the terms of reference and the methodology on the review of Action 14 may not be that easy to read. But what matters is that taxpayers, either directly or through whatever coalition of group or professional services firm, must input in the reviews of countries. So, if you are not happy with the access to the MAP, with the way that MAP is handled, with all the aspects of the relationship with the tax administrations that relate to the elimination of double taxation, let us know because this will be taken into consideration.

You can talk to your country of residence, you can talk to the OECD Secretariat; there are many ways of inputting. The reason why I am emphasising this is that there are some — and I have heard something recently that really displeased me — who say all this is set for failure. And do you know what? I am pretty sure that some professionals would actually not enjoy, but benefit from such a failure, because then it makes them more important saying “I can offer my service to better solve a MAP or whatever.” But this is not set for failure. This is set for success. Why? Because bringing mutual agreement procedures on the radar screen of the decision-makers, who are the tax commissioners, will have a behavioral impact, much more than whatever other instruments are available, like arbitration. We are supporting arbitration, but this will drive a real behavioral change, and we can see it already. We can see some large emerging economies now putting much more resources into the mutual agreement procedure because they want to look good to their leaders, and, as the reports will be made to the leaders of the G20, they want to look good. So, there will be a behavioral impact.

So how can tax payers contribute? By letting us know what they think. If they don’t, they should not complain.

Have tax disputes risen?

Chris Sanger: Has the number of tax disputes risen? And if so, why?
Pascal Saint-Amans:

Tax audits probably have increased. We don’t have global data, but I firmly believe that there has been an increase. Is it a consequence of the BEPS project, or is it just a reflection that has justified the BEPS project? I think it’s probably mixture of both.

What has happened is that globalization has happened, is still happening; you have had more and more aggressive tax positions — taken by key players — why? Because this globalization was not looked at from a tax perspective and there was no cooperation between the tax administrations. And at some point when the people in different countries — because of the action of NGOs, but also because of the mainstream media — realized that there was something wrong, tax administrations shifted the focus on auditing more international transactions, and this happened at the same time as the G20 paid political attention and delivered the BEPS projects. So that’s the environment, and I think there is no single cause.

The reason is more aggressive tax planning from companies, more openness of the world, tax administrations’ feeling that they didn’t have the right instruments, with some frustration And also a very simple fact that you have the emerging economies where you have more business performed, which need to collect more taxes, whether it’s China, India, Brazil, South Africa or some smaller countries like Colombia or Vietnam, and these countries can see that they don’t get much corporate income tax, and they are auditing because they need this money. So it is a global, complex environment that we are in.

What we strongly believe at the OECD is that we need to level the playing field between tax administrations that should have as much of a global view as the multinational company — that is by the country-by-country reporting, to do the risk assessment on the one hand. But also leveling the playing field in terms of fairness, or in terms of fair behavior. Companies must be more transparent. They must be less aggressive, they shouldn’t do a number of, if not technical abuses, then treaty shopping, which is contrary to the spirit of the law — and we have changed the letter of the law, because we know that companies can do what is legal and they should do what is legal. So we changed the law, we have done that. But — and it’s about the balance — we need to increase certainty.

Companies shouldn’t face double taxation, if, at the end of the day, mutual agreement procedures are appropriately handled, if the access to the MAP is secured, if the tax administrations have the best practices, meaning that the tax auditor can defend from an international, standard perspective to another competent authority. In this environment you will have elimination of double taxation through the MAP, but also there will be a spillover at the time of the audit, because the auditors will stop doing stuff that would be dropped at the end of MAP.

So we need to think of the whole integration, the whole chain here, and we strongly believe in the tax certainty agenda. That’s why we have promoted it to the G20, and it is now one of the three pillars of the G20 tax work. Transparency. BEPS and tax certainty. It’s not just to pay lip service to business, it’s about putting that on the radar screen of the decision-makers of tax administration, making people more sensitive.

So yes, there are more audits because the world has globalized: there are more international transactions than ever and therefore it’s legitimate that tax administrations do the audits. And it’s also very legitimate that the taxpayers ask for more certainty and for fair treatment, so that we have a balanced approach, and that’s what we believe in at the OECD.

Are we moving to a more subjective tax world?

Chris Sanger: But will a greater use of principal purpose tests result in a more subjective approach by tax administrations — and therefore, a greater number of new disputes?
Pascal Saint-Amans:

The BEPS project has brought some new provisions that some could consider as too subjective. It’s not completely untrue. The principal purpose test is about something where at some point somebody would make a judgment call. And when you have judgment calls as an investor, you may be frightened that it will depend on the mood of the day or weather of the day and that’s not good. That’s why you have very detailed guidance on all the things we have done, both on transfer pricing and on tax treaties. I would not deny that there may be some more uncertainty related to that.

But on the other hand, 100% certainty on everything is the road toward full tax avoidance. Make a judgment call yourself as a taxpayer, such as “is what I am doing good enough, reasonable enough, does it pass the test of common sense?” is something very important for taxpayers to do. So having something like a wake-up call to tax directors, to investors, that what they do must make sense, is something that I think will help. Or you end up “I checked the box, it’s all good”, and “we check all the boxes that we are 100% sure that we do something that is not what the legislators intended” - then you have the disputes, the unhappiness, the frustrations, the lack of confidence; and then the system doesn’t work. So that’s not good. We have introduced some guidance, as precise as possible, to avoid that tax administrations may decide issues in an arbitrary manner. So here it’s a balanced approach that we need to seek and the tax certainty project is about this trade-off. You may have slightly less certainty here and you need to compensate for it by reasonable tax administration, which will be under scrutiny for instance, because Action 14 is a minimum standard for the elimination of double taxation. Things are complex, so at the end of the day we ideally should have a reasonable and constructive dialogue between open, transparent taxpayers and fair and reasonable tax administrations.

How do we get there? Given the diversity of the world, given the level of capacity in some countries, it’s not an easy task. But the very fact that you have all tax administrations talking to each other and agreeing on tax certainty being one of their objectives, I think it’s probably better than yesterday where you didn’t have these mechanisms.