A cross-party UK parliamentary group says international proposals to fight global tax evasion don’t go far enough and may create loopholes that could be used to avoid taxes.
In a report, the group says that, while the Organisation for Economic Co-operation and Development (OECD) had made major progress in gaining cross-country agreement on sharing tax information, the rules aren’t enough.
In its first report, the All-Party Parliamentary Group said it believes that the Base Erosion and Profit Shifting (BEPS) process will fall short of creating the fair and transparent global system needed to tackle global tax avoidance.
The BEPS proposals will reform existing rules and give tax authorities better tools to crack down on tax avoidance, the 21-page report said. But it added that the proposals are “sticking plaster” on a global tax system that’s struggling to remain fit with the growth of multinational companies operating in a digital environment. The BEPS process should represent the first step in a longer process of radical reform, the group added.
According to the report, the OECD proposals are likely to add to an already complicated global tax system. The new complex rules could provide opportunities for new loopholes. National governments should consider acting collectively to prevent companies from exploiting new loopholes. For example, jurisdictions could require companies to seek prior approvals through tax rulings before they use new tax avoidance measures.
The United States is a key challenge
The report considers that a key challenge for the BEPS project is the need to ensure that the United States executes the proposals, particularly as it has been one of the more skeptical participants. As the resident country of many of the digitally based multinational companies that have received a lot of public scrutiny, the skepticism in the United States comes from the view that the BEPS project originated in part as a means for foreign governments to capture more tax revenue from U.S.-based multinationals.
The United States is fiercely protective of its global companies and its corporate tax revenue, the report notes. It said there are fears that, in the wake of the BEPS Action Plan, multinational companies will be tempted to move their businesses away from the United States with its high corporate tax rate to Europe with its lower rates.
Another concern is that aggressive European Union (EU) countries will lay claim to tax revenues that should belong to the United States. However, the report says the evidence indicates that the United States itself is by far the biggest loser of revenues due to tax avoidance by U.S. multinationals.
To restore public confidence in the integrity of the tax system, there’s a need for transparency. The BEPS proposals don’t deliver the level of transparency needed, the report said.
More talking points
Other key elements from the report — titled A more responsible global tax system or a “sticking plaster?” An examination of the OECD’s Base Erosion and Profit Shifting (BEPS) process and recommendations — include the following:
- By failing to secure public country-by-country (CbC) reporting, the OECD has missed a real opportunity to open up the tax system. Simply providing more information to tax authorities isn’t enough to restore confidence.
- The OECD didn’t explore or challenge the principles at the heart of the international tax system. As a result, while it may improve existing rules in the short term, it will fail to stamp out corporate tax avoidance. The UK government should take the lead and pass laws to introduce public CbC reporting for UK publicly quoted companies while pressing the case for such reporting on a multilateral basis.
- The success of the BEPS process lies in its execution across all participating jurisdictions. There are also concerns about the capacity and capability of developing countries to take advantage of the new protocols. The parliamentary group recommended that the OECD monitor strictly the execution of BEPS year-on-year to ensure that its recommendations are being fully executed and that developing countries are given the tools to successfully put the proposals into effect and to challenge multinational companies who shift profits out of their jurisdictions. Their monitoring data should be publicly available.
- The OECD didn’t question the basic concepts of residence and source. The current rules underpinning the allocation rights for tax between “source” (where the income is earned) and “resident” (where the person who earned it is based) need to be revisited in a digital world. The aim of the tax system should be to ensure that tax is paid where value is created.
BEPS implementation concerns
The OECD’s proposals aren’t legally binding but there’s an expectation that participating countries will put them into effect. Where consensus couldn’t be reached, the OECD adopted best practice and common approach guidelines that could be ignored or be adopted on a basis of the lowest common denominator, thus limiting their effectiveness. The report considers this a weak alternative to binding rules.