June 12, 2017 by Noé Vicca - Principal
Recently the OEC announced another crucial step had taken place in relation to the implementation of country-by-country reporting (CbC).
In relation to compliance with BEPS action No. 13 “Minimum standards of exchange of information relationships” with just under a year to go before the first exchange of CbC reports take place the OECD has proudly announced that 700 automatic exchange agreements have now been established. The following statistics help to put this process into context.
• The OECD has 35 members.
• The United Nations has 193 members.
• The United Nations has further 2 observers and there are a further 11 states giving a total of 206 UN states.
If all of the active 193 UN member states entered into reporting exchange of information with their fellow member counterparts, 18,528 agreements would be required to have an ubiquitous participation. Currently on the OECD numbers, there is a 4% worldwide take-up.
This simple analysis begs the question, will CbC reporting work? In the past low taxing or “tax haven” jurisdictions have not participated in the generally accepted norms of compliance. What has changed or will change with a 4% take-up worldwide. One cannot discount some of BEPS achievements thus far, however the balancing of tax receipts to the place where ultimate ownership of corporate structures resides is complex. With only 4% worldwide coverage, the effectiveness of the initiative is questionable in the face of internal commercial structure management which involves so-called ‘Treaty Shopping’. Transfer Pricing can only go so far on its own.
Base Erosion and Profits Shifting (BEPS)
The OECD refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low and no tax locations as Profits Shifting, which results in the tax Base Erosion of the higher tax location. An extract from the OECD BEPS website states “over 100 countries in jurisdictions are collaborating to implement the BEPS measures and tackle BEPS”. (i.e. a 52% take-up on UN numbers, what about the other 48%?). As a quantum total this % only represents the execution of some 4,950 agreements.
Put another way if there are to date only 100 countries participating fully and reciprocally with each other in the BEPS CbC reporting processes, the execution of a further 13,578 exchange of information agreements would be required for all countries to have reciprocal agreements with all other countries.
If most of the BEPS measures are not unilaterally applied by all of the 193 UN Member states, this invites the question: Without a 100% take up, will the costs of implementing BEPS processes for both affected businesses and their jurisdictions outweigh the benefits to the respective Countries who have implemented BEPS. What is clear is that the smaller the economy, the more likely that there would be little to no benefit to these low tax and/or commercially challenged Jurisdictions in burdening themselves with the cost of implementing BEPS measures.
Is there therefore an alternative model that may provide a solution, such as the Low Tax model. BEPS cannot work while Low Tax Jurisdictions may have unilateral information sharing amongst themselves yet no agreements with the OECD participants, as appears to be the case now.
The Low Tax Model
Currently two of the world’s major financial and trade centre have a low tax model. The current Corporate Tax Rates in Hong Kong and Singapore are 16.5% and 17% respectively. In the same vein two of the world’s powerhouse economies, the United Kingdom and the United States, are proposing to follow suit, intending to normalise Corporate tax rates in the 15% to 20% range. If a normalisation of tax rates at around 15%-20% occurs and this discourages corporations from treaty shopping, this could achieve a more effective outcome overall.
This method albeit an option has its challenges wherein a democratic state its constituents would fear a reduction in Corporate Taxes would see Corporate taxes being replaced with Consumption taxes, seen by the masses as being born by individual taxpayers.
The reality of BEPS compliance is that implementation is costly at multiple levels, both for Countries and affected large corporations. It also creates a cost barrier to smaller corporations expanding internationally as they face exponentially increasing compliance costs. On this basis alone one could ask: Is BEPS working for the good of all?
Post GFC, the OECD embarked on a quest to rid the world of tax evasion and corporate profit shifting. In this process, have we lost sight of the ‘Cost Benefit’ analysis to society? It is hard for one to conclude that based on the current worldwide take-up BEPS alone, jurisdictions will see the commercial benefits they are seeking.
The model being espoused by the UK and USA is to commercially disincentivise Base Erosion and Profit Shifting with lower tax rates, alongside accepting some of the advantages that the BEPS processes offer. This merged approach may be what is needed to ensure the BEPS quest makes the difference it was designed to achieve.
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