Australia

Details

  • Service: Tax, Topics, Base Erosion and Profit Shifting
  • Type: Regulatory update
  • Date: 12/05/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Grant Wardell-Johnson

Grant Wardell-Johnson
Leader, Australian Tax Centre

+61 2 9335 7128

gwardelljohn@kpmg.com.au

G20 International Tax Symposium – Notes from Tokyo on BEPS 

by Grant Wardell-Johnson, Australian Tax Centre

On 9-10 May 2014, John Salvaris and I were fortunate to attend the G20 International Tax Symposium in Tokyo. More than 220 people from over 50 countries, including senior business people, Treasury and Tax Administrators, and members from civil society, attended the conference. Speakers included Pascal Saint-Amans from the Organisation for Economic Co-operation and Development (OECD), Chris Jordan and Mark Konza from the Australian Taxation Office (ATO), Barry Sterland, Australian Finance Deputy, Professor Richard Vann from the University of Sydney, Michael Barbour from Westpac, Ross Lyons from Rio Tinto and Michael Croker from the Institute of Chartered Accountants in Australia (ICAA).

The Symposium was co-sponsored by KPMG. The program involved seven panel sessions each with approximately five panellists from around the globe including the OECD, World Bank and IMF. The topics covered included flaws in the current system and the Base Erosion and Profit Shifting (BEPS) project, the digital economy, country by country reporting, tax treaties, automatic exchange of information and the perspective of developing countries. The notes below contain the main discussion points drawn from the Symposium.

 

Flaws in the current system and the BEPS Project

 

Tax has irreversibly moved into the political arena. There is a widening gap between rich and poor, a widespread feeling of dissatisfaction at the community level over the fairness of the tax system. The current base erosion and profit shifting situation is a result of intense competition amongst international businesses. The effective tax rate is part of that competition. Although many of the questionable practices we are concerned with today were and are legal, it was said by some that they are a result of some businesses going too far without consideration of the reputational risk. They moved beyond traditional tax planning and sought to take the lot without considering reputational risk.

 

The OECD BEPS Action Plan, despite its frenetic pace, is a valuable beginning to address these issues. The project is intimately entwined with the G20 resilience and growth agendas. Businesses ultimately fear fragmented unilateral action rather than coherent and co-ordinated multilateral action. It was said that the Action Plan was a take-off point not a landing point.

 

Difficult issues:

  • tax should be paid where business activity takes place and value is created. However, these are very difficult to determine
  • real consensus on these issues is needed. Tax is at the heart is each country’s sovereignty, and no one likes to feel coerced on so fundamental a level
  • OECD covers 55 percent of the world economy; the G20 covers 85 percent. The need to get input from the remaining 15 percent of developing countries is being addressed through multiple fora

 

Business concerns:

  • Potential for double tax (rather than double non-taxation)
  • additional costs
  • more uncertainty
  • increased tax auditing
  • consistency and coherence.

 

Digital economy

 

The digital economy that is often spoken of is more accurately described as the digitalisation of the economy, which involves a spectrum of digitalisation.

 

OECD-G20 deliverable in September will be an action plan on Action Plan item 1. It is not clear yet what the consensus will be in this area, particularly in relation to permanent establishments (PE), Controlled Foreign Companies (CFC) and treaty abuse.

 

If the desire is to tax where the business activity is performed, the question arises as to whose activity, the customers or the activity of the business itself. The preference in the direct tax space is to look at the business itself and not the customer. It was thought that consumption taxes were not the silver bullet here.

 

Difficult issues

  • ability to have a significant presence in a country without being liable to tax
  • challenging to determine where real value is under multiple business model
  • production and use of an iPhone involves 38 countries.

 

Business concerns

  • an electronic publishing business may deal with 180 countries. If a virtual PE was created where each customer existed, then determination of profit referable to each jurisdiction would be problematic. A challenge by one jurisdiction could result in amendment to 179 others
  • political and community reception of the Action Plan conclusion.

 

Country by Country reporting

 

A common template is being developed for reporting to tax administrations 'to see the big picture'. The fundamental question is getting the right balance between providing useful information to tax authorities and minimising compliance costs to business. What is proposed is a common CbC reporting template with the creation of a master file containing all the standardised information for all entities of a multinational group and local file relating to information for the local jurisdiction.

 

Difficult issues:

  • the level of information required. Civil society would like more, business less
  • ensuring the information is not used for non-tax purposes.

 

Business concerns:

  • there should be a materiality criteria and not reporting based on the last dollar
  • the costs of auditing to the last dollar are excessive
  • confidentiality
  • many businesses would prefer a revenue to revenue passing of Master file information to a local jurisdiction, rather than the local jurisdiction being able to request the master file.

 

Tax treaties

 

The main issue is that businesses can structure equity paths into jurisdictions to get a better tax outcome than would exist for direct investment, thus constituting an abuse of tax treaties. Currently, there are about 3,000 tax treaties. Some, including all of the US Treaties, have ‘Limitation of Benefits’ (LOB) clauses which seek to stop benefits where an entity is a mere conduit. Others have a 'main purpose test' where the benefits are disapplied where one of the main purposes of the equity path is gain the tax treaty benefits. The OECD-G20 discussion paper proposes entities having to satisfy both an LOB model and a main purpose test model.

 

Difficult issues:

  • the LOB model often disapplies treaty benefits where they should genuinely operate
  • the main purpose test is vague.

 

Business concerns:
  • lack of a consistent approach as different countries place 'reservations' on the OECD proposal 
  • the main purpose model would be improved if it dealt with the dominant purpose rather than 'one of the main purposes'.

 

Automatic Exchange of Information

 

Currently there is a system whereby information can be exchanged between revenue authorities on request. This is problematic because it fails to pick up cases of non-compliance where the revenue has no indication of particular activity. Automatic exchange of information would essentially require financial institutions and insurance companies to provide information in a specified format so that it can be passed from one revenue to another, or directly to another revenue. This will involve costly changes to information gathering systems of financial institutions.

 

Difficult issues:

  • confidentiality
  • limiting the use of the information to the purpose for which it was collected
  • infrastructure for appropriate production and use of information by developing countries
  • the need for a transitional period for developing countries where information flowed one-way.

 

Business concerns:

  • cost of upgrading systems to facilitate compliance in some cases in the $100m plus mark
  • some businesses would like flexibility on timing for implementation to coincide with a general upgrade of their systems.

 

BEPS and developing countries

Developing countries have a particular interest in BEPS. Company tax, on average, represents about 20 percent of t

heir revenue take, where it represents about 8-10 percent of the tax take for developed countries. Many developing countries may not have the necessary skills base to deal with BEPS and have higher priorities in dealing with basic tax evasion.

 

Difficult issues:

  • poorly undertaken cost-benefit analysis of tax incentives can create significant distortions in the economy
  • poorly administered incentives can promote corruption
  • lack of data and skill for developing countries to apply appropriate arm’s length tests in transfer pricing.

 

Business concerns:

  • businesses are looking for certainty in relation to the tax position of their investment. An incentive would only be one factor in many considerations to choose to locate in a particular country
  • there was also concern that developing countries would cherry-pick from the BEPS program, thus reducing coherence.

 

Overall

 

The Symposium was a positive contribution to the BEPS debate at a critical time, as various working parties finalise their positions prior to September for the first round of deliverables. It also has given kudos to Australia in the region given the significant involvement of our neighbours including Indonesia and Papua New Guinea (PNG).

 

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