In the press release accompanying the BEPS paper, the OECD finds it objectionable that some multinationals use strategies that allow them "to pay as little as 5% in corporate taxes when smaller businesses are paying up to 30%." The OECD says that these strategies, though technically legal, erode the tax base of many countries and threaten the stability of the international tax system. In a key statement of the OECD intent in this regard, OECD Secretary General says, "As governments and their citizens are struggling to make ends meet, it is critical that all tax payers-private and corporate-pay their fair amount of taxes and trust the international tax system is transparent."
Modernization of international tax regimes
A key theme of the BEPS paper is that the international tax regimes of OECD countries have not kept pace with the rapidly changing business environment. The report notes that domestic rules for international taxation and internationally agreed standards are still grounded in an economic environment characterized by a lower degree of economic integration across borders, rather than today's environment of global taxpayers. The paper says that the existing rules do not reflect the increasing importance of intellectual property as a value driver and the development of the digital economy. Digital products, which can often be delivered over the Internet, make it possible for businesses to locate many productive activities in geographic locations distant from their customers' physical location.
The OECD says that its proposals, previously tabled to update transfer pricing guidelines in the area of intangibles and to simplify their application, should be advanced quickly to provide immediate responses to what it sees as some of the most critical profit shifting challenges.
The OECD sees international co-ordination as the key in the implementation of any solution but recognizing that countries may not all use the same instruments to address the issues of profit shifting. The OECD says that its action plan will require some "out of the box" thinking as well as ambition and pragmatism to overcome implementation difficulties.
OECD action plan
The OECD says that its action plan will specifically include the following six major components:
- Hybrid mismatch arrangements and arbitrage - Proposals that aim to end or neutralize the effects of these arrangements.
- Transfer pricing improvements and clarifications - Including the current work on intangibles in a broader framework on improvements to the transfer pricing rules to address specific areas where the current rules produce undesirable results from a tax policy perspective.
- Taxation of digital goods and services - Update solutions related to the issues surrounding jurisdiction to tax including a revision of treaty provisions.
- More effective anti-avoidance rules - Anti-avoidance rules introduced under either domestic laws or international instruments as an important complement to the effectiveness of any new measures. The OECD cites general anti-avoidance rules, controlled foreign companies rules, limitation of benefits and other anti-treaty abuse provisions as key in this regard.
- Intra-group financing arrangements - Better coordinated rules related to the deductibility of payments and the application of withholding taxes to such payments.
- Harmful tax regimes- Solutions to counter harmful tax regimes more effectively taking into account factors of transparency and substance.
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Information is current to February 19, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500