Avoiding “Tax Chaos” in the Globalized, Digital 21st Century
Toward the end of the OECD’s original plan for tackling international taxation—contained within quite understated “background” material—is a short paragraph that culminates in foretelling “global tax chaos” if unilateral measures are allowed to replace the current consensus-based framework. Two years later, we’re on the cusp of the OECD’s final deliverables, and the colossal negotiating process involved in realizing its ambitions.
The OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan presents a rare opportunity to genuinely address the underlying question: how can we make taxation work better in today’s globalized, digital economy? Groundwork has already commenced for negotiating a multilateral taxation instrument amending over 3,000 bilateral treaties—the first ever of its kind. It’s a highly political process that has never been attempted before, and its success or failure will likely hinge on the effectiveness of international collaboration—and national restraint.
OECD Director Pascal Saint-Amans has expressed an “embarrassed view” about the United Kingdom’s so-called Google tax, which levies a higher 25% rate on profits “diverted” overseas (the UK’s standard rate is 20%); he has also said that unilateral actions such as the new tax are “not that great when you are negotiating a multilateral package”.
However, many more governments are responding to loud public concern about corporate taxation and looking at unilateral options. Ironically, if the temperature of public and political debate is not kept in check, we may look back and wonder why there are more complexities, divergences, and gaps than we started with.
Getting the practical settings right is essential. Dealing with BEPS has necessarily involved exploring novel approaches that can increase the uncertainty of tax positions, both from the perspective of governments and taxpayers—concepts like “looking through” contractual arrangements and judgements about “economic substance”. These concepts can be challenging for tax authorities to enforce and for taxpayers to understand.
Meanwhile, many tax authorities in the developed world are shedding staff. United States Internal Revenue Service Commissioner John Koskinen recently said the public may just need to accept that the IRS will be doing “less with less”. Australia recently cut 3,000 staff from its tax office. HM Revenue & Customs office closures and staff cuts have been frequent in the past few years.
Resourcing for tax authorities has been recognized as a major constraint in developing countries’ ability to deal with multinational taxation issues. The Tax Inspectors Without Borders initiative recently launched by the OECD in partnership with the United Nations Development Program aims to address this through an innovative “real time” learning approach.
Actions aimed at tax avoidance will also have effects on investment and infrastructure funding in developing countries, according to the United Nations Conference on Trade and Development (UNCTAD). UNCTAD asserts higher transaction costs, higher taxes on international operations and the removal of tax advantages for international investors could “diminish overall investment levels at a time when such investment is sorely needed for economic growth and development”. The OECD, in conjunction with the International Monetary Fund, UN, and World Bank, is now also conducting work on Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment.
The reality is this is not just a conversation about tax, it’s about globalization and a digital economy. Since the 1970s, we have witnessed a dramatic transformation in how connected and integrated people and economies are around the world. Emphasis in the press has been on Google, Facebook, Amazon, and other digital giants, with many governments looking at “digital tax” possibilities. But the OECD consultation has so far indicated that trying to ring-fence the digital economy is unhelpful—because the digital economy is the economy.
BEPS clearly involves many sensitive moving parts, and there are no easy fixes. The accounting profession has been providing extensive technical input from the outset. A cursory review of OECD consultations reveals the profession is committed to the objective of making BEPS work for governments, companies, and taxpayers. The profession has published accessible, plain-language material on the BEPS process on a variety of websites, enabling many to get involved in the conversation that otherwise could not.
A clear, robust conversation grounded in its context is essential to achieving fair and meaningful outcomes in rethinking tax for the globalized, digital 21st century. Activist groups and the media have been pivotal in bringing global taxation issues onto the agenda. Breathing space for sensible policy, and for tackling the bigger, tougher, forward looking questions, is needed to address, and avoid exacerbating those same issues.