Breaking down the proposed new international tax laws

In this post-GFC age of austerity, public anger has been steadily mounting over multinationals – especially high-profile technology companies such as Apple, Google and Microsoft – using elaborate cross-border tax structures to minimise their contributions to government revenues in many of the nations in which they operate.

Inevitably, democratically elected governments have become more determined to tackle profit shifting and tax avoidance. In early September, the Organisation for Economic Cooperation and Development (OECD) proposed a set of draft rules, as part of its ‘Base Erosion and Profit Shifting Project’ (BEPS),  to “end the erosion of tax bases and the artificial shifting of profits to avoid paying tax.”

The new normal

The OECD argues that the current situation, which involves around 3000 tax treaties, is no longer tenable, especially given the digital economy that nations – particularly first-world ones – are increasingly operating in.

In order for governments to easily identify patterns of tax avoidance, multinationals will need to divulge to tax authorities all earnings and activities for each country they operate in. Digital companies will be prevented from “inappropriately” benefiting from being excluded from permanent establishment status in a nation and entering into “artificial arrangements” relating to sales of their goods and services in order to avoid permanent establishment status.

As the OECD puts it: “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.”

New rules

While yet to be fleshed out, new rules will be developed to embody the following principles. According to the BEPS report:

i) Companies will no longer be able to game the tax treaty system as the new rules will involve “ensuring the coherence of corporate income taxation at the international level”. This will be achieved “through new model tax and treaty provisions to neutralise hybrid mismatch arrangements”.

ii) Transfer pricing will be clamped down on with the new rules “assuring that transfer pricing outcomes are in line with value creation”. This will be done “through improved transfer pricing documentation and a template for country-by-country reporting”.

iii) Already wondering about loopholes in the new rules that could potentially be exploited? Be warned that the OECD proposal calls for “a report on the feasibility of developing a multilateral instrument to amend bilateral tax treaties” in order to “counter harmful tax practices”.

Of course, not all the proposed BEPS rules may be adopted, but given the political climate it seems almost certain that many will. And tax professionals, as well as those who provide tax courses and tax agent training, will need to adjust the way they do business appropriately.

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