The BMG participated in the plenary meeting of the Inclusive Framework on BEPS, held in The Netherlands on Thursday 22 June.
The BMG has submitted comments on a further discussion draft from the OECD relating to transfer pricing of hard-to-value intangibles.
The transfer of intangible property rights to related entities is one of the main techniques used by multinational enterprises (MNEs) to avoid taxes through base erosion and profit shifting (BEPS). Such assets are especially hard to value if they are transferred at an early stage, since their income-generating potential will be speculative, although best known to the firm itself. The three examples in the discussion draft all involve a transfer of such rights that have been only partially developed. Specifically, the examples involve a patented pharmaceutical compound that is partially through its clinical trials.
Although the draft still claims to apply the fiction of the arm’s length principle, it allows for transfer pricing adjustments based on actual outcomes, due to “information asymmetry” and its negative effects. Our comments support this approach, and propose some specific ways to strengthen it further.
The CCCTB adopts a sound approach to taxation of multinationals (MNEs), by treating them in accordance with their business reality as unitary firms. It aims to identify the tax base of the whole corporate group, disregarding internal transactions between the affiliates, and to apportion the taxable profit according to factors reflecting the firm’s real activity (sales, assets, employees) in each country. In our view, this is the most effective way to end both competition between states to offer tax incentives, and tax avoidance by MNEs shifting income between affiliates to minimise tax.
In our view, however, the aim should be to create a level playing field in relation to tax on corporate profits not only within the EU but worldwide. Unless this is done, EU member states will continue to compete with each other to offer tax preferences to MNEs from outside the EU. They will also continue to be vulnerable to tax competition from jurisdictions not covered by the CCCTB (including the UK, after Brexit). The CCCTB can and should be recast so that it attributes to the EU as a whole a portion of the worldwide profits of MNEs reflecting their actual activities within the EU, as well as allocating that profit among EU states, using the same criteria.
We also propose a ‘compensation mechanism’, in case another country (e.g. the US) adopts the alternative which has been proposed for a destination-based cash-flow tax with a ‘border adjustment’.
We also warn against the 2-stage approach proposed by the Commission, and criticise the proposed ‘super-deduction’ for R&D expenditures, and the so-called Allowance for Growth and Investment. As some business groups have also argued, it is better to define the tax base broadly, allowing scope for cuts in the rate (which are already taking place), than to build in selective and distorting special allowances.
16 May 2017
The BMG has now published its Explanation and Analysis of MC-BEPS to implement the tax treaty related provisions of the BEPS project. (A slightly revised version was substituted on 24 April 2017, to add a couple of sentences at the bottom of p.8 explaining the procedure for entry into effect under article 35.7).
This multilateral convention aims to implement the tax treaty related changes recommended by the G20/OECD project on base erosion and profit shifting (BEPS), by modifying existing tax treaties as rapidly as possible. It is open for all countries to join, even if they are not otherwise participants in the BEPS project. It is formulated so that it can apply to all tax treaties, whether based on the OECD or the UN model, or indeed another.
It is understandable that some countries may feel resistance to accepting provisions which they had little or no involvement in formulating. We also have been critical of the BEPS project outcomes, which fell short of providing a comprehensive and cohesive approach to reform of international tax rules. Nevertheless, it is important to evaluate the provisions in this convention in relation to existing tax treaty provisions. This report aims to provide an explanation and analysis of the convention, including most importantly also our recommendations for individual country implementation of the convention. We hope this will help to inform those in government as well as the wider public about its effects.
Overall, we consider that most of the provisions would be improvements on existing tax treaty rules. Tax treaties generally restrict rights to tax income at source, in favour of the residence countries of taxpayers. By restricting abusive techniques which erode the tax base, these provisions help to restore some source country taxation powers. The provisions against tax treaty abuse, including treaty shopping, will also strengthen the general powers of tax authorities to control tax avoidance.
Although we endorse some of the improvements to the mutual agreement procedures for amicable resolution between tax authorities of conflicts over interpretation of legal provisions and factual situations, we do not support those which entail a shift towards legalized dispute resolution, especially arbitration. International tax rules, especially on allocation of MNE profits, are subjective and discretionary, so it is inappropriate for states to assume a binding obligation to accept the decisions of arbitrators. Public opinion will not accept the legitimacy of decisions involving substantial government revenue being taken in complete secrecy by a small community of specialists likely to remain dominated by corporate tax advisers and officials mostly from rich countries.
We applaud the continued interest of the OECD and Working Party 6 in its work to make the profit-split approach a more viable and important tool in intercompany pricing.
In this submission we propose the development and use of defined allocation keys and weights to apply the profit-split method to actual profits of common business models (see Appendix). In our comments to the specific questions we point out that the examples in the discussion draft assume, without explicitly saying it, that the various business units of a multinational enterprise (MNE) are normally independently managed, albeit with common ownership and some top-level management over policy and direction. In contrast to this assumption, we believe that most MNEs operate as centrally-managed unitary businesses performing core functions and using intangible property in multiple countries. We therefore suggest that it is appropriate to apply the profit-split method to actual profits in these cases. Nevertheless, if Working Party 6 takes a different view, due to their belief that some level of integrated risk sharing is required for application to actual profits, the profit-split method with defined allocation keys and weights could be applied to anticipated gross profits or other measure appropriate for the specific business model. Whether our recommended approach or this alternative is chosen and inserted into the Guidelines, it would greatly simplify things for taxpayers and tax authorities alike.
A presentation was made on behalf of the BEPS Monitoring Group by Professor Kerrie Sadiq, to the first meeting of the Enlarged Framework of the OECD Committee on Fiscal Affairs, in Kyoto (Japan) on 29 June 2016. The outline of this presentation is here.
The BMG submitted on 30 June 2016 these Comments on Action 15 on the proposed Multilateral Instrument which will amend existing tax treaties to implement changes agreed in the BEPS project.
The reports resulting from the project on Base Erosion and Profit Shifting (BEPS) include a number of proposals for changes in tax treaties, formulated as amendments to the OECD Model Convention and its Commentaries. The Multilateral Instrument (MLI) is intended to provide a method for quickly amending existing bilateral treaties. Hence, it must take the form of an actual self-standing treaty, and not a model. However, there are differences in the texts of the actual treaties to be amended, especially those involving developing countries, and based on the UN model. Hence, we suggest that the MLI should be accompanied by Country Schedules, bilaterally agreed, to ensure clarity as regards which treaties are amended and how. This would ensure that tax authorities, taxpayers and courts know which treaties have in fact been amended and their new language.
The core provisions of the MLI should be the basic provisions for preventing abuse of tax treaties and eliminating double non-taxation. Several variants have been proposed in BEPS Action 6, and it is essential that the MLI includes options which are suitable for developing countries. The revisions of the Permanent Establishment definition have been drafted in relation to the OECD Model, and a variant should be included which is compatible with the UN model, in consultation with the UN Committee.
The proposals for strengthening the Mutual Agreement Procedure (MAP) for resolving tax treaty disputes are unsuitable for developing countries, and should remain purely voluntary. This applies in particular to Mandatory Binding Arbitration, which we regard as illegitimate for all countries. Tax treaty provisions are binding in domestic law, and can be enforced through national tribunals. Accordingly, MNEs should not be given further privileges over other taxpayers. The MAP is an ‘amicable procedure’, and it is not appropriate to try to convert it into a supranational dispute settlement procedure. It is contrary to the due process of law, and indeed in many countries regarded as unconstitutional, for contentious interpretations of legal provisions to be made by secret and unaccountable administrative procedures, rather than by courts or tribunals in an open legal process. To make it mandatory for all conflicting interpretations to be resolved would provide a guarantee that aggressive tax planning would be riskless, and create an incentive to continue BEPS behavior. The main cause of the increase in tax disputes is the subjective basis of the transfer pricing rules, and it is inappropriate to expect the MAP to resolve issues which negotiators have failed to deal with in a principled manner.