BEPS: Australia at the forefront of the debate
David Linke: Hello my name is David Linke and I’m the National Leader of Corporate Tax at KPMG and I’m here today with Grant Wardell-Johnson who leads our Australian Tax Centre. The title of this video is Australia at the forefront of the BEPS debate and by BEPS we mean Base Erosion and Profit Shifting. Grant, I was wondering if you could just tell us a bit about where the issues that gave rise to the BEPS.
Grant Wardell-Johnson: I think BEPS came from Europe; its beginnings are actually in the Greek Financial Crisis. I think it’s the confluence of five streams here. Firstly, a lack of revenue; government revenue and the need for greater expenditure. Secondly, the rise of corporate social responsibility in relation to taxation, so following the environment and diversity issues, tax is there. Additional media focus in relation to taxation issues and importantly the internationalisation of business, fragmentation of supply chains and then the digital economy.
David Linke: One issue that continually arises in a BEPS debate is transparency, Grant, or the lack of it. Is that a key plank of the OECD Action Plan?
Grant Wardell-Johnson: Absolutely, so it is an important part of one of the 15 Action Plans. Denmark has led the debate there, their Revenue publishes the tax paid by corporates and Australia has recently passed laws doing a similar thing. In our laws for companies with a turnover greater than 100 million dollars will have the tax payable reported income and taxable income disclosed.
David Linke: Australia has recently made some changes in thin capitalisation and proposes some others in terms of financing Grant. Just talk to us about how they link with the BEPS debate.
Grant Wardell-Johnson: Yes David, in the budget last year there was an announcement to change three areas; thin capitalisation, the repeal of 2590 and a third one in relation to the treatment of dividends. Australia is at the forefront of this debt dumping type issue emanating from that which is part of the Action Plan as well.
David Linke: You used the term forefront, how does that link with Australia’s leadership at the G20?
Grant Wardell-Johnson: Treasury and the Assistant Treasurer have said Australia should take a prominent role in relation to this. Of course, Australia hosts the G20 in 2014 and it will be setting the agenda in relation to this.
David Linke: What should our clients be doing now Grant?
Grant Wardell-Johnson: Very much making sure that they are aware of the debate and that they’re seeking to influence that debate because that will affect the shape of international tax rules in the future.
BEPS: Are your existing structure future proof?
David Linke: Hello my name is David Linke and I’m the National Leader of Corporate Tax at KPMG and I’m here today with Grant Wardell-Johnson who leads our Australian Tax Centre. Grant, the title of this video is: Are existing structure future proof? In the context of the Base Erosion and Profit Shifting debate or BEPS as it has been commonly known, talk to me about that and in particular I suppose where we start is hybrids.
Grant Wardell-Johnson: Well one of the items in the Action Plan is very much a focus on addressing hybrid mismatches and they really take four forms where you have a mismatch between the tax treatment of one transaction over two jurisdictions so it might be true that it’s a debt instrument here but an equity instrument elsewhere.
Secondly, hybrid entities so you might have a check the box entity that’s transparent in one jurisdiction and not in another. Thirdly, hybrid transfers such as repose that are considered big borrowings in one jurisdiction but actual transfers in another.
And the final one is dual resident companies and the OECD’s focus is trying to undo those mismatches and it’ll do so in two ways. It will look at the model convention but also recommend domestic law changes which will encourage countries to say; ok the treatment in this country is dependent on the treatment in another country.
David Linke: And that’s quite a change from where we have been historically from a tax policy point of view?
Grant Wardell-Johnson: Quite right David. So traditionally we have actually focused on our jurisdiction alone rather than have a look at the taxation elsewhere.
David Linke: And so when I commonly hear the term 'Double Irish Dutch Sandwich', it is a hybrid structure used by a number of parties.
Grant Wardell-Johnson: Absolutely and that particular structure relies on the fact that in one jurisdiction you have central management control that determines tax residence and the central management control is taken away from Ireland.
David Linke: Another issue I continually hear about in the OECD Plan is permanent establishments Grant. Talk to me about what the OECD concern is there.
Grant Wardell-Johnson: That Multinationals can fragment operations in such a way that they don’t have a taxable presence in a particular jurisdiction. In particular, they can rely on exclusions from permanent establishment rules where an activity is preparatory or ancillary so that will be a focus for the Action Plan.
David Linke: So potential changes to the definition of permanent establishments in our treaties?
Grant Wardell-Johnson: Yes, absolutely.
David Linke: And how do I go about amending 3000 treaties? What’s the current thinking on that?
Grant Wardell-Johnson: One of the items in the Action Plan is the introduction of a multilateral instrument so countries at high level may agree together on a particular course of action and that will impact all the treaties sitting under there so that’s a particularly clever way of changing a large number of treaties.
David Linke: And the digital economy Grant and I hear a lot about data, what is the current thinking on that?
Grant Wardell-Johnson: Well, the Action Plan actually recommends further review of the digital economy. It is actually quite a hard thing to deal with but there’s the prospect that data crossing international borders may be taxed in the future and with a concept that a permanent establishment may change with specific rules in relation to the digital economy.
David Linke: For a number of years Grant or at least for the last decade Australia has moved to sort of a light touch CFC approach from its own tax perspective. How does that link with what the OECD Action Plan is talking about?
Grant Wardell-Johnson: Well, we had a proposal in 2006 and it’s over a number of years to simplify our rules which do require simplification. Unfortunately that has been put on hold pending the outcome of the OECD Action Plan so we can expect activity in that domain probably in 2015-2016.
David Linke: Do we expect to move away from this light touch approach potentially from a CFC perspective?
Grant Wardell-Johnson: I think our CFC rules are quite comprehensive now so I think it’s a matter of other countries coming up to where we are now but that doesn’t deny that we need to simplify our rules.
David Linke: So finally Grant what should our clients and their boards be thinking about? I mean in a lot of these sort of complicated structuring issues reputational risk comes to the fore. So, what will we recommend our clients think about?
Grant Wardell-Johnson: Well firstly they need to look at their international structures, make sure that they’re future proof. Secondly, they need to develop a tax narrative to communicate more broadly or to the public in relation to their tax affairs and thirdly they need to be quite mindful of reputational risk in a way that they haven’t had to do in the past.
David Linke: And so just in terms of the OECD Action Plan, September 2014 seems to be the key date for these changes or key issues?
Grant Wardell-Johnson: Yes, most of the changes occur by September 2014 but some September 2015 and some December 2015.
BEPS: Template for allocation of income, economic activity and tax
David Linke: Hello, my name is David Linke and I’m the national leader of Corporate Tax at KPMG Australia, and I’m here today with Grant Wardell-Johnson who leads our Australian Tax Centre to once again discuss Base Erosion and Profit Shifting. And the issue I want to talk to you about today Grant is the template that’s proposed by the OECD which would disclose the multinational companies their relative income tax paid in the multiple jurisdictions in which they operate. Some of our clients in the extractive industries have been across this for some time but what’s proposed by the OECD in this regard.
Grant Wardell-Johnson: David, I think this one is a game-changer. What’s proposed here is that multinationals will be required to give to all relevant governments information of their income, their economic activity, and the tax they paid, right throughout the supply chain so that revenues (revenue authorities) will be able to see the big picture in a way that they cannot at the present time.
David Linke: For many of our clients Grant, in the extractive industries, those sort of reports include not just the income tax but mining taxes and royalty taxes; salary taxes; you know, VAT; GST. Is there suggestion from the OECD that the full gamut of taxes will be included in that report as well?
Grant Wardell-Johnson: Well the focus is actually on income tax but I think it could well be broadened and it may well be in the interest of companies to actually give a bigger picture because for many that’s a very good story to tell, to the additional taxes that they actually do pay.
David Linke: So the proposition is I prepare this template, it then gets shared through multiple revenue authorities throughout the world. That seems to me to give the potential for disputes (Grant: Absolutely) between multiple jurisdictions around the world in terms of their relative take. Can you talk to me about that for a few minutes?
Grant Wardell-Johnson: Yes, and one of the action items is to actually have strengthened mutual agreement procedures so that when revenues get together, and arguing in relation to how tax should be divided up, there are better procedures in place, mandatory and binding procedures to ensure that that’s a simplified answer.
David Linke: What our clients tell us Grant is that the mutual agreement procedures are long, they’re costly and you’re actually at the vagaries of a particular authority actually, you know deciding to go into that process. Is there obviously some thought being given regarding this.
Grant Wardell-Johnson: I think there’s a sense in everyone, businesses and Australians alike, that the current system is broken and in desperate need of repair.
David Linke: I mean in terms of this transparency issue, there’s one other plank to it and that is, in the OECD plan is aggressive tax planning. Is there some thinking of disclosure of aggressive tax planning as well?
Grant Wardell-Johnson: Yes, so the US and the UK currently have rules in relation to disclosure of abusive and aggressive schemes. And the OECD is recommending that they become worldwide so yes there will be a focus in the future on ensuring that such schemes are brought to light.
David Linke: So Grant, thinking about the timing on that template, many of our clients and their Boards in the Resources industry will be familiar with that sort of reporting. What should clients in the other industries be thinking about at the moment?
Grant Wardell-Johnson: They should be thinking that many of their tax affairs that have been closed to the public in the past are going to be open in say two years time. So there’s a short time to prepare for a tax narrative in relation to that disclosure and to ensure that damage to one’s reputational risk is actually minimised.
BEPS: Reflections on the positions of the major players
David Linke: Hello, my name is David Linke and I’m National Leader of Corporate Tax at KPMG Australia and I’m here today with Grant Wardell-Johnson who leads our Australian Tax Centre to once again discuss Base Erosion and Profit Shifting. And in particular this time, I want to have a discussion about Australia’s impending leadership of the G20 in 2014 and what the position of some of the global major players involved in the G20 will be on the issue over the next year or two. So if we can start with Europe, where are the UK and France at in terms of this BEPS issue?
Grant Wardell-Johnson: The UK, David, has pretty much led this debate. They’ve had a public affairs committee which is a house committee that’s chaired by Margaret Hodge and very aggressively interviewed one of the big 4 major corporates doing business in the UK and that reportage has been in the front page of major papers. Secondly, they’ve actually been the host of the G8 and so they have been pushing the agenda in relation to particularly transparency and beneficial ownership on that front. Across the channel in France, their focus is more cultural in nature or they’ve got a slightly different dimension but they are very much concerned about the international economy and taxation of data across border.
David Linke: It’s quite interesting Grant because historically international tax has really been a black box. But what seems to have happened in Europe is societal concern about companies paying their 'fair share' has led to interest in this issue and driving some of the underlying reforms. What’s your take on that?
Grant Wardell-Johnson: I agree that the focus on this 'fair share' is a major point and there’s a sense in Europe that the system is broken and needs substantial repair and that occurs at all levels of politics and both left and right of the spectrum.
David Linke: But there has been a confluence of society’s concern and the tax system for the first time and potential ever.
Grant Wardell-Johnson: Absolutely.
David Linke: Okay, the US. Where is the US at?
Grant Wardell-Johnson: The US is the elephant in the room and you won’t get significant change unless the US comes on board. But I actually think it’s reached a tipping point and if you take the Apple inquiry which was in May of this year, there’s a sense from both sides of politics that the system was broken and particularly within the Republican party. Dave Camp, who chairs the joint Commissioner of Taxation, he said, the system is broken and needs fixing so I think it’s past the point and the US will come on board in relation to major changes.
David Linke: Many countries actually view the US as the problem in terms of their hybrids and check the box issues.
Grant Wardell-Johnson: Yes, but there is a sense within the U.S. that taxation, or profits being moved offshore outside the US tax base and that’s where they’ll lead the change.