Some of the world’s largest multinationals including Microsoft, Google and Apple could be forced to rethink their elaborate cross-border tax structures and contribute their fair share to government revenues under draft rules published by the Organisation for Economic Cooperation and Development (OECD) last night.
The updates to international tax rules form part of a two-year effort to crack down on profit shifting and tax avoidance by the G20 group of nations.
The OECD’s “Base Erosion and Profit Shifting Project” aims to create a single set of international tax rules to “end the erosion of tax bases and the artificial shifting of profits to jurisdictions to avoid paying tax”.
The existing rules, which involve around 3000 bilateral tax treaties, have failed to keep up with modern times and are in need of urgent reform to “prevent the existing consensus-based international tax framework from unravelling", according to the OECD.
“The project aims to help governments protect their tax bases and offer increased certainty and predictability to taxpayers, while guarding against new domestic rules that result in double taxation, unwarranted compliance burdens or restrictions to legitimate cross-border activity.”
The BEPS action plan will eventually comprise 15 items to be addressed by 2015, including a number specifically aimed at the digital economy.
The first seven of the elements were released last night, and include:
- ensuring the coherence of corporate income taxation at the international level, through new model tax and treaty provisions to neutralise hybrid mismatch arrangements;
- realigning taxation and relevant substance to restore the intended benefits of international standards and to prevent the abuse of tax treaties;
- assuring that transfer pricing outcomes are in line with value creation, through actions to address transfer pricing issues in the key area of intangibles;
- improving transparency for tax administrations and increasing certainty and predictability for taxpayers through improved transfer pricing documentation and a template for country-by-country reporting;addressing the challenges of the digital economy;
- facilitating swift implementation of the BEPS actions through a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties; and
- countering harmful tax practices.
The new recommendations were agreed to following consultation between the OECD, G20 and developing countries and relevant stakeholders, and are expected to be approved at the next G20 meeting in Cairns later this month.
The OECD expects international corporations will be most affected by new rules to stop them exploiting disparities between different country’s tax regimes to create deductions.
Multinationals will also need to provide a detailed breakdown of earnings and activities for each country they operate in to tax authorities, if the draft rules are passed. The OECD expects such an approach would make it easier for governments to spot patterns of tax avoidance.
The OECD has shied away from creating specific rules for digital companies, such as Apple and Google, after the United States was successful in fighting against such a targeted approach.
But the OECD will zero in on the tax avoidance behaviour exhibited in such companies without singling them out by making it harder for companies to transfer intellectual property to low-taxing nations, among other measures.
It will also work to ensure that digital companies cannot "inappropriately benefit" from being excepted from permanent establishment status in a particular country, and that "artifical arrangements" relating to sales of their goods and services cannot be used to avoid such a status.
"This would be relevant where, for instance, an online seller of tangible products or an online provider of advertising services uses the sales force of a local subsidiary to negotiate and effectively conclude sales with prospective large clients," the OECD wrote.
Because the digital economy is "increasingly becoming the economy itself", it would be "difficult, if not impossible", to ring-fence digital players from the rest of the economy for tax purposes.
“However, it is also recognised that the business models and key features of the digital economy exacerbate BEPS risks and therefore must be addressed. It is expected that the other actions will address these risks but at the same time a number of specific issues have been identified which must be taken into account when doing the work," the OECD wrote in an explanatory statement.
“A number of broader direct tax challenges have also been analysed, such as the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus, and further work will be carried out to evaluate their scope and urgency and potential options to address them.”
The news comes just over a week after Australian Treasurer Joe Hockey made clear his intention to crack down on the leak of multinational profits out of Australia and into a handful of international tax havens, particularly when it comes to those tech companies that insist on charging Australians higher prices for goods and services.