July 19, 2013
The Organisation for Economic Co-operation and Development (OECD) has released its new Action Plan on Base Erosion and Profit Shifting (“Action Plan”) to address tax base erosion and profit shifting by taxpayers that could signal a significant shift in the international tax landscape. The Action Plan, which was presented at the meeting of G20 Finance Ministers and Central Bank Governors in Moscow today, July 19, 2013, includes recommendations for establishing international coherence of corporate income taxation, greater transparency through the disclosure by multinational enterprises of tax planning arrangements and updates for OECD transfer pricing guidelines. For details, see the OECD’s report, “Action Plan on Base Erosion and Profit Shifting”.
The OECD’s recommendations may lead to new rules that could have a significant effect on multinational corporations that undertake generally accepted tax planning, including transfer pricing and intra-group financing transactions. In addition, the OECD proposes that countries should largely complete the action on tax base erosion and profit shifting in a two-year period, which may present a significant challenge for countries.
OECD Action Plan recommendations
The Action Plan makes 15 recommendations that focus on key areas including the digital economy, hybrid mismatch arrangements, controlled foreign corporation (CFC) rules, excessive intercompany interest payments, harmful tax practices, treaty abuse, avoidance of permanent establishment status, transfer pricing, aggressive tax planning, and greater transparency and disclosure. Among other things, the Action Plan specifically calls for:
- A holistic approach to understanding the digital economy’s business models before specific proposals are made
- Measures to address what the Action Plan refers to as “hybrid mismatches”
- Further work to develop recommendations to strengthen the CFC rules
- Development of recommendations regarding best practices to limit base erosion via interest deductions and other financial payments, including guidance on transfer pricing aspects of financial transactions
- Revamping the work on what the Action Plan describes as “harmful tax practices”, with a particular focus on transparency and substance
- Action to prevent treaty abuse through the design of domestic rules and clarification that treaties are not intended to generate double non-taxation
- Changes to the treaty definition of permanent establishment to prevent the artificial avoidance of PE status
- Significant work on transfer pricing matters to ensure transfer pricing outcomes are in line with value creation (substance), notably in the areas of intangibles, allocation of risks and capital, and what the Action Plan has labeled as “other high risk transactions”
- Changes to require greater disclosure to tax authorities regarding certain “aggressive transactions”
- Re-examine documentation requirements for transfer pricing, focusing on global allocation of income, economic activity and taxes paid among countries according to a common template
- Improving mechanisms for dispute resolution.
The Action Plan also suggests that the OECD is considering measures that go beyond the arm’s-length principle in the context of the work to be performed on transfer pricing.
The issues surrounding the tax morality and the tax transparency debate continue to captivate the attention of governments and tax authorities around the world, as well as the OECD, corporate executives and corporate boards of directors. As governments look to recoup lost revenues from the economic downturn, a large number of countries are considering, or are in the process of implementing, substantial reforms of their tax systems. As a result, governments seeking to strengthen a weak fiscal position have increasingly focused on tax payable by companies.
In February 2013, the OECD released a major study paper, “Addressing Base Erosion and Profit Shifting (BEPS)”, in which it stated that base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness. The OECD noted an urgent need to deal with this issue to prevent the erosion of the tax base of many countries and to ensure the stability of the international tax system.
More recently, in June 2013, the OECD released A Step Change in Tax Transparency, a report that details the steps needed to create a fairer and more transparent global tax system. The G8 leaders subsequently released an agreement, in which they pledged to work with the OECD to develop a multilateral model to make it easier for governments to find and punish tax evaders.
Canada’s position on tax evasion and aggressive tax planning
Today, July 19, 2013, the Canadian government released a press release stating that it has taken action to crack down on international tax evasion and tax avoidance. The release notes that Finance Minister Flaherty will encourage the G-20 to provide further leadership in developing a cohesive international approach to address these issues.
Previously in May 2013, the House of Commons Standing Committee on Finance issued a report on Tax Evasion and the Use of Tax Havens to Parliament. In this report, the Finance Committee made 11 recommendations to combat tax evasion and aggressive tax planning, including that:
- The government should work with the G20 countries and the OECD to develop measures to address base erosion and profit shifting (BEPS)
- The government should encourage all countries to sign on to the multilateral Convention on Mutual Administrative Assistance in Tax Matters and support the work of the Global Forum on Transparency and Exchange of Information for Tax Purposes
- The CRA should commit to applying GAAR to aggressive international tax planning.
Some of the measures recommended by the Standing Committee on Finance were already included in the 2013 federal budget, such as stricter foreign reporting requirements and significant resources to accompany the introduction of the Stop International Tax Evasion Program. A $30 million budget has been set aside for the CRA to combat tax evasion and aggressive tax planning including the above measures. In addition, Prime Minister Harper announced in June 2013 that Canada will adopt new mandatory reporting standards for payments made to domestic and foreign governments by Canadian companies in the extractive sector.
Until Canada formally responds to the OECD’s Action Plan, it remains to be seen what steps may be taken to adopt certain OECD recommendations and to meet the various deadlines outlined by the OECD.
For a comprehensive review of the debate drivers, the story so far, likely future developments and how to respond, see KPMG’s recent publication, Tax morality and tax transparency: An overview.
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We can help
Your KPMG adviser can help you assess the potential effect of the OECD’s Action Plan on your business, and to prepare for forthcoming changes to the international tax landscape. For more details on these developments and their potential impact, contact your KPMG adviser.
Information is current to July 19, 2013. The information contained in this TaxNewsFlash-Canada 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.
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