{"id":21633,"date":"2013-07-19T09:04:31","date_gmt":"2013-07-19T08:04:31","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=21633"},"modified":"2013-07-19T09:18:14","modified_gmt":"2013-07-19T08:18:14","slug":"the-oecd-fails-to-rise-to-the-challenge","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2013\/07\/19\/the-oecd-fails-to-rise-to-the-challenge\/","title":{"rendered":"The OECD fails to rise to the challenge"},"content":{"rendered":"

I have already explained that the OECD has in its new\u00a0Base Erosion and Profits Shifting (BEPS) report has acknowledged that the\u00a0arguments\u00a0of the tax justice movement <\/a>have been right on the issue of international tax avoidance by\u00a0multinational corporations and that their own past attempts to deal with this issue have been inadequate<\/a>. I do, of course, welcome both\u00a0admissions.<\/p>\n

That welcome is, however, muted. The third chapter of the OECD report lays out an action plan that the OECD says will address the issues it has acknowledged exist. Unfortunately I doubt it will deliver. When there are 15 action points that it details that seems churlish but the\u00a0concerns\u00a0come down to three things, fundamentally<\/p>\n

First is this comment in the report:<\/p>\n

In \u00a0 the \u00a0 area \u00a0 of \u00a0 transfer \u00a0 pricing, \u00a0 the \u00a0 rules \u00a0 should \u00a0 be \u00a0 improved \u00a0 in \u00a0 order \u00a0 to \u00a0 put \u00a0 more \u00a0 emphasis \u00a0 on \u00a0 value \u00a0 creation \u00a0 in \u00a0 highly \u00a0 integrated \u00a0 groups, \u00a0 tackling \u00a0 the \u00a0 use \u00a0 of \u00a0 intangibles, \u00a0 risks, \u00a0 capital \u00a0 and \u00a0 other \u00a0 high-\u00adrisk \u00a0 transactions \u00a0 to \u00a0 shift \u00a0 profits. \u00a0 At \u00a0 the \u00a0 same \u00a0 time, \u00a0 there \u00a0 is \u00a0 consensus \u00a0among \u00a0governments \u00a0that \u00a0moving \u00a0to \u00a0a \u00a0system \u00a0of \u00a0formulary \u00a0 apportionment \u00a0of \u00a0profits \u00a0is \u00a0not \u00a0a \u00a0viable \u00a0way \u00a0forward.<\/p><\/blockquote>\n

The\u00a0inevitable\u00a0consequence\u00a0of this, as the\u00a0Tax Justice Network has said in its response to the BEPS report, is that:<\/p>\n

It does not point to a new approach towards taxing transnational corporations (TNCs), but aims at strengthening the existing rules. It therefore does not address the fundamental flaw in the current system, which attempts to tax TNCs as if they were separate entities operating independently in each country. Since in reality they are unified firms under central direction, we consider that the only effective way to tax them is using a unitary approach, as we have explained in our previous Briefing<\/a>, and earlier reports. This is understood and accepted by many tax experts, even some at the OECD.<\/p><\/blockquote>\n

In other words, the OECD has said there is a fundamental problem in the international tax system that its approach to date has not\u00a0addressed\u00a0that threatens the credibility of tax\u00a0systems\u00a0and\u00a0government\u00a0revenues as well as social justice nationally and internationally but that all it will do in response is tweak the existing arrangements that have failed to deliver fair taxation to date. From the outset this report is, therefore, flawed.<\/p>\n

The arm's length transfer pricing system is\u00a0fundamentally\u00a0flawed by design by assuming groups of companies are made up of separate entities when that is not the case. Nothing but the eventual replacement of this flawed system will overcome this problem. However, as someone said at a\u00a0meeting\u00a0I\u00a0attended\u00a0this week, asking the OECD to give up arm's length pricing is a bit like asking the church to give up\u00a0belief\u00a0in God. It's deep in its DNA and for the time being immovable. When the OECD has acknowledged that the system is broken then this is at the same time clear indication of a lack of willing to fix it properly, and that undermines all this new work schedule seeks to do.<\/p>\n

Second, it is important to note that there are some aspects of the work programme that are welcome. Measures to strengthen the\u00a0Controlled Foreign Corporation (CFC) rules fall into this\u00a0category, although in that context it's important to note that the current UK\u00a0government\u00a0has done all it can to undermine them in\u00a0this\u00a0country. In addition, proposed work on limiting the\u00a0deductibility of interest and other payments to related entities in low-tax or no-tax jurisdictions, e<\/span>nding arrangements that facilitate tax treaty-shopping, such as the `Dutch sandwich\u2019 highlighted in the Google case and reforming the concept of permanent establishment, abused by so many IT companies, are all steps forward. So is work on hybrid entities.<\/p>\n

I should add that the thirteenth work stream, on\u00a0transfer pricing\u00a0documentation, says:<\/p>\n

The \u00a0rules \u00a0to \u00a0be \u00a0developed \u00a0will \u00a0include \u00a0a \u00a0requirement \u00a0that \u00a0 MNE\u2019s \u00a0 provide \u00a0 all \u00a0 relevant \u00a0 governments \u00a0 with \u00a0 needed \u00a0 information \u00a0 on \u00a0 their \u00a0 global \u00a0 allocation \u00a0 of \u00a0 the \u00a0 income, \u00a0 economic \u00a0 activity \u00a0 and \u00a0 taxes \u00a0 paid \u00a0 among \u00a0 countries \u00a0according \u00a0to \u00a0a \u00a0common \u00a0template.<\/p><\/blockquote>\n

Without using the term this appears to be an explicit endorsement of the demand for\u00a0country-by-country reporting issued by the G8, and naturally I welcome that.\u00a0However\u00a0critically,\u00a0despite\u00a0all the talk of\u00a0transparency\u00a0there is none in this document on most tax processes, and certainly not on public reporting. The use of country-by-country reporting referred to here is for tax purposes and not for publication.\u00a0That is a significant failing on its part and will undermine confidence in the\u00a0proposed\u00a0processes.<\/p>\n

But, and it's a very big but, my third point is to sound an alarm bell. The work programme has been split into 15 parts.\u00a0Knowing\u00a0how the OECD works I suspect a working party will be\u00a0established\u00a0on each. Tax authorities and big business will dominate each working party. There will be little or no developing country representation I am afraid, and that will undermine the credibility of this\u00a0work which will, inevitably, as a result focus on the needs of\u00a0developed\u00a0countries\u00a0and\u00a0multinational corporations. There will also, almost certainly, be little involvement from civil socoety and I am quite sure the OECD will not fund any. That is, again, a massive oversight. If the outcomes of this proposal are to counter the dissatisfaction throughout the political system with\u00a0multinational corporation taxation then engagement with civil\u00a0society\u00a0is essential, but is under-invested in by the OECD.<\/p>\n

But that is not important as the fact that now 15 works streams have been\u00a0identified\u00a0the OECD will argue that any\u00a0representations made\u00a0to it have to\u00a0fit\u00a0into one of those fifteen work streams or they will not be able to address them. That, though, will be very\u00a0convenient\u00a0for it. The real problem with the whole OECD\u00a0approach\u00a0in this document is that it is fundamentally flawed. But, having spread the work 15 ways the OECD will now say representations to that effect have no place to fir into the process - and so can be laid aside. In other words, the OECD is seeking to play a game of divide and rule\u00a0by\u00a0setting the rules of\u00a0engagement\u00a0as being solely on its terms from the outset on this issue and that will be the biggest threat to the credibility fo\u00a0this\u00a0work.<\/p>\n

You can seek to reform something that does not work for as long as\u00a0you\u00a0like, but if the flaw is\u00a0fundamental\u00a0no amount of tweaking will remedy the central fault. And that is the trap into which the OECD has fallen.<\/p>\n

I am not sure if it can or even wants to get out of this trap. And whilst the OECD report is to be welcomed for what it says,\u00a0especially\u00a0in its first two chapters where it clearly recognises the issues that it must face, its failure to face them adequately in its work programme suggests that the problems in\u00a0international\u00a0tax will not be going away soon - which is why national agenda may be become as important.<\/p>\n

I'll say more on the later soon.<\/p>\n","protected":false},"excerpt":{"rendered":"

I have already explained that the OECD has in its new\u00a0Base Erosion and Profits Shifting (BEPS) report has acknowledged that the\u00a0arguments\u00a0of the tax justice movement
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