Tax News & Views International Weekly: The OECD’s 10-Year-Old Tax Initiative

It’s been overshadowed by later initiatives, but in October of 2015 the Organization for Economic Cooperation and Development announced a then-groundbreaking global plan to curb international corporate tax avoidance—the Base Erosion and Profit-Shifting project. With buy-in from all of the organization’s members, including the United States, the plan comprised 15 “Action Items,” addressing issues such as interest deductibility, the pricing of intangible assets, reporting requirements, abuse of treaties and arbitrage from “hybrid” mismatches between national tax systems.

Technically, all of these items were recommendations. The OECD has no formal ability to change countries’ tax systems. But some of these recommendations were considered “minimum standards” for countries to be in compliance with the system, and most nations around the world enacted some or all of the action items.

One item that the 2015 BEPS project did not significantly address was taxation in the digital sphere—and that failure led to a new initiative (sometimes called BEPS 2.0) at the behest of the G-20, which ultimately resulted in the 15% global minimum tax. That’s a more ambitious plan, but also one that hasn’t found the same level of consensus as the initial BEPS Action Items.

How much did the original BEPS plan actually stem profit-shifting? The OECD issued a 10-year review earlier this month, evaluating its progress. The report finds that the BEPS initiatives have “allowed progress in reducing tax avoidance and improving compliance.” But it also notes that the data is still very limited and ambiguous, even after a decade.

One measurement indicating lower profit-shifting is a decrease in the ratio of income to employees in “investment hubs,” (the OECD’s polite way of referring to suspected tax havens). The report states that this shows that taxable income and real economic substance are better aligned, one of the main goals of the BEPS initiative. The OECD also found that multinational corporations’ investment decisions have become less sensitive to changes in tax rates, and that national corporate tax rates have “stabilized” after years of dropping due to tax competition.

One thing the OECD report doesn’t touch on is the number of other activities during this time period that may also account for a pull-back in aggressive tax planning. These include the European Union’s state aid investigations into the tax practices of many multinational entities, and the 2017 Tax Cuts and Jobs Act—which enacted many of the BEPS recommendations, as well as new anti-abuse concepts such as the tax on global intangible low-taxed income.

This was also a period when global tax structures came under heightened public and political scrutiny, which may have also caused companies to reconsider legal structures that, fairly or not, could attract negative attention.

The report underscores not only how much has changed about the global tax picture in recent years, but also how much is still unknown about where it’s headed.

Noteworthy Items This Week

Countries Score Concession From US in Latest Global Tax Talks – Saim Saeed and Lauren Vella, Bloomberg Tax ($):

More details on whether a country would qualify to be a “side-by-side” eligible domestic tax system were confirmed by sources familiar with the global minimum tax negotiations.

Unsurprisingly, the criteria match almost exactly the attributes of the US tax system.

Bloomberg Tax previously reported that a country would qualify as an eligible side-by-side regime if it credits domestic minimum top-up taxes. In addition, a qualified side-by-side domestic jurisdiction includes one that has a 15%—or higher—corporate alternative minimum tax based on financial statement income, sources said.

Trump Says He Won’t Resume Canada Trade Talks ‘For a While’ – Josh Wingrove and Brian Platt, Bloomberg Tax ($):

US President Donald Trump said he doesn’t anticipate meeting with Canadian Prime Minister Mark Carney “for a while,” despite Carney’s insistence that the two sides were close to a trade deal on lowering metals tariffs.

Trump halted the talks last week in reaction to a TV advertisement by the province of Ontario that criticized his tariff regime.

GOP Lawmakers Warn France Against Raising Digital Services Tax – Stephanie Soong, Tax Notes ($):

“France’s proposed increase in its digital services tax would be an unwarranted attack on America’s digital companies and leave the U.S. Congress and the Trump Administration with little choice but to pursue aggressive retaliatory actions,” the statement says.

Republicans in Congress have been adamant that they won’t tolerate any country imposing taxes that discriminate against U.S. companies, according to the statement.

Not GILTI and Pillar 2, Part 2 – Lee Sheppard, Tax Notes ($):

Pillar 2 is also moribund. The G20 countries’ principal objections are that it would intrude on tax sovereignty and restrict incentives that could be offered. Readers, the failure of pillars 1 and 2 can be partially attributed to the view of less developed countries that they deserve more control over their tax policies. Policy aside, pillar 2 won’t function as intended, and everyone knows it. Professionals tasked with making it function are being hung up by basic questions like which member of the group should be the taxpayer. The idea was that participating countries would copy the model rules, ensuring consistent application, but practitioners are pointing out areas of dispute and unanticipated results.

Standardizing Tax Residency in an Era of Remote Control – Nama Ama Sarfo, Tax Notes ($):

With “increasing globalization, digitization, the existing traditional concept of residence has become quite complicated, because businesses, including ours, operate cross border,” Sebastiaan de Buck, global head of tax at Unilever, recently said at the IFA Congress in Lisbon. “They participate virtually. Sometimes you don’t even need a physical presence. And looking at the residency rules that were probably designed mostly at the time of a different economic context, physical presence was much more important.”

Meanwhile, as the nature of work continues to evolve, tax authorities are seemingly trying to maximize their definitions of taxable activity and nexus, according to João Félix Pinto Nogueira, a professor at the Universidade Católica Portuguesa.

“We have noticed a trend to extend the jurisdiction or to expand it to the extent that is possible,” Nogueira said during an IFA plenary session on residency of legal entities for corporate income taxation.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Wildfire

Debut Year: 1941

Debut Publication: Smash Comics #25

Origin Story: Survivor of a wildfire that left her an orphan, she is imbued with powers from the god of fire.

Superpowers: She can manipulate and create fire--and she also has less combustible powers like flight..

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.

Tax News & Views International Weekly: The OECD’s 10-Year-Old Tax Initiative

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Alex Parker