Top Ten Items of Tax Policy Interest for 2015 - #8

Continuing with my list of ten news items and activities from 2015 that I think have particular tax policy relevance.  Today, for number 8 is the OECD's BEPS project. It looks at how tax systems may need to change to address the digital economy, such as advertising revenue generated by Google or trademark income generated by Starbuck's and other companies that can be separated from the economic activity to be taxed in lower tax rate jurisdictions. Something not easily done or possible when the economy was mostly about moving widgets between countries.

Background: At the G20 meeting in June 2012 in Mexico, the group prepared a declaration. One of the items in it stated: 

“48. In the tax area, we reiterate our commitment to strengthen transparency and comprehensive exchange of information. We commend the progress made as reported by the Global Forum and urge all countries to fully comply with the standard and implement the recommendations identified in the course of the reviews, in particular the 13 jurisdictions whose framework does not allow them to qualify to phase 2 at this stage. We expect the Global Forum to quickly start examining the effectiveness of information exchange practices and to report to us and our finance ministers. We welcome the OECD report on the practice of automatic information exchange, where we will continue to lead by example in implementing this practice. We call on countries to join this growing practice as appropriate and strongly encourage all jurisdictions to sign the Multilateral Convention on Mutual Administrative Assistance. We also welcome the efforts to enhance interagency cooperation to tackle illicit flows including the outcomes of the Rome meeting of the Oslo Dialogue. We reiterate the need to prevent base erosion and profit shifting and we will follow with attention the ongoing work of the OECD in this area.”

The OECD responded with a study on how the new economy was leading to base erosion and profit shifting (BEPS) and possible actions to address it. .

Concerns included shifting profits to tax havens which did not correspond to where the company’s economic activities took place. This is more easily done when a company derives income from services (such as advertising) and intangibles (such as licensing). The initial study released in February 2013 stated: “Global solutions are needed to ensure that tax systems do not unduly favour multinational enterprises, leaving citizens and small businesses with bigger tax bills.” [OECD, Addressing Base Erosion and Profit Shifting, 2/12/13]

Also, per the OECD FAQs: “The BEPS Project is not about increasing corporate tax rates. Non- or low-taxation is not itself the concern, but it becomes so when it is achieved through practices that artificially separate taxable income from the activities that generate it. These strategies may increase tax disputes as countries fight against tax strategies that defy common sense. Implementation of the recommendations coming out of the BEPS Project will reduce those disputes, giving business greater certainty, and reinforcing the fairness and consistency of international tax system.” [Q&A 127]

Action Items: Soon after the project began, the OECD released its 15 action items of study and recommendations. This included examining the digital economy and issues of transfer pricing. Details and links (from the OECD BEPS website):

	Explanatory Statement 2015 (EN)
‌	Action 1: Addressing the Tax Challenges of the Digital Economy
‌	Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements
	Action 3: Designing Effective Controlled Foreign Company Rules
	Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments
	Action 5: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance
	Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
	Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status
	Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation
	Action 11: Measuring and Monitoring BEPS
	Action 12: Mandatory Disclosure Rules
‌	Action 13: Guidance on Transfer Pricing Documentation and Country-by-Country Reporting
	Action 14: Making Dispute Resolution Mechanisms More Effective
	Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

 
Final Package – On 10/5/15, the OECD released the “final BEPS package.” Per the press release: ““The OECD presented today the final package of measures for a comprehensive, coherent and co-ordinated reform of the international tax rules to be discussed by G20 Finance Ministers at their meeting on 8 October, in Lima, Peru.  The OECD/G20 Base Erosion and Profit Shifting (BEPS) Project provides governments with solutions for closing the gaps in existing international rules that allow corporate profits to disappear or be artificially shifted to low/no tax environments, where little or no economic activity takes place.

“Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.”

Actions addressed include multi-country reporting for transfer pricing, eliminating treaty shopping, and rationalizing VAT collection in the digital economy. For details of the recommended actions, a short video and links to lots of background materials and recommendations, see the OECD’s main BEPS website - http://www.oecd.org/tax/beps.htm.

What will happen next? Some action can be taken by the IRS, such as their release of proposed regulations on 12/23/15 calling for country-by-country reporting REG-109822-15.  Other items will await congressional action, likely as part of tax reform - so likely not until 2017 although Congresmen Ryan and Brady might want to work on international tax reform in 2016. We'll see.

What do you think?

My list so far of news and activities of 2015 with tax policy relevance (no ranking involved):

1. Congress can alter our tax system via a lot of non-tax bills - here
2. IRS funding challenges - here 
3. Justice Kennedy called for a review of the 1992 Quill decision - here 
4. IRS disagreeing with a court decision via a proposed regulation - here 
5. Why not let the Internet Tax Freedom Act just expire - here
6. A growing amount of non-binding "guidance" from the IRS - here 
7. Due date changes starting for 2016 returns to improve tax administration - here