The BEPS report identifies a number of principles in domestic and international rules on the taxation of cross-border activities. The report finds that it is often not any particular country’s tax rule that creates a BEPS opportunity. Rather, it is the way the rules of several countries interact. The OECD has been at the forefront of efforts to eliminate double taxation – and we know there is still work to be done. There is increasing recognition that double non-taxation creates the same distortive effects to cross-border trade and investment as double taxation does, and that shall be addressed. Is it fair to say that most of the tax planning strategies under review are legal? Yes, it is. Most BEPS strategies are technically legal and accord with the letter of the law of the countries in which they are implemented. This raises serious policy issues, especially when many governments are facing budgetary constraints. At the same time, other strategies are not in line with current law and tax administrations are actively tackling them.
The main finding is that while corporate tax planning strategies may be technically legal and rely on carefully planned interactions of tax rules and principles, the overall effect is to erode the corporate tax base of many countries in ways that domestic policy does not intend. As an example, some rules were introduced on the assumption that one country would forgo taxation because another country would impose tax. In the modern global economy, this assumption is not always correct, as planning opportunities may result in profits ending up untaxed anywhere.
Political attention is growing because it is hard to explain why some profitable companies pay small amounts of tax at a time when taxes on individuals or small and medium-sized businesses have increased dramatically almost everywhere. For example, VAT rates have increased in 25 out of 33 OECD countries having a VAT system.
Because many BEPS strategies take advantage of the interaction between the tax rules of different countries, it may be difficult for any single country, acting alone, to fully address the issue. An internationally coordinated approach is needed that will not only facilitate and reinforce domestic actions to protect tax bases but will also provide comprehensive international solutions. Unilateral and uncoordinated actions by governments responding in isolation could produce the risk of double – and possibly multiple – taxation for businesses.
No, it does not. Policy makers cannot blame businesses for using the rules that governments themselves have put in place. It is their responsibility to revise the rules or introduce new rules to address existing concerns. The goal of the BEPS project is to develop a coordinated, comprehensive approach that prevents double taxation and double non-taxation, leveling the playing field for all taxpayers.
No. Every jurisdiction is free to set up its corporate tax system as it chooses. States have the sovereignty to implement tax measures that raise revenues to pay for the expenditures they deem necessary. That said, the OECD favors low rates and broad bases, which are more growth-friendly.
There is no magic recipe. The report calls for a comprehensive action plan to address the issue holistically. At the moment, work is ongoing and a number of options are on the table. Policy makers are looking at cases where the existing rules work and where they do not in order to identify possible corrective actions.
The report calls for the development of an initial comprehensive action plan to address BEPS by June 2013. The plan will identify actions needed to address BEPS, set deadlines and identify the resources needed and methodology to implement these actions.
The action plan will also consider the best way to implement the measures in a timely fashion upon which governments can agree. A comprehensive approach will also consider possible improvements to eliminate double taxation, such as increased efficiency of mutual agreement procedures and arbitration provisions.
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