How can countries tackle tax avoidance?

Global governments on Monday received the final blueprint of an international response to the need to tighten tax loopholes – which have been exploited by multinational corporations – in order to get a tighter grip on up to $240-billion lost in worldwide fiscal revenues each year.

The 2015 final package of measures of the Organisation for Economic Co-operation and Development (OECD) and the Base-Erosion and Profit-shifting (BEPS) project – released in Paris on Monday – include new or reinforced international standards as well as concrete measures to help countries tackle tax avoidance issues.

The OECD said the loss of tax revenues arose from many reasons, including aggressive tax planning by some multinational enterprises, the interaction of domestic tax rules, lack of transparency and co-ordination between tax administrations, limited country enforcement resources and harmful tax practices.

The search for additional revenues has become a key focus for global economies still reeling from the global financial crisis. The BEPS package, the OECD said, “represents the results of a major and unparalleled effort by OECD and G20 countries working together on an equal footing with the participation of an increasing number of developing countries”.

The G20 are global nations that are strategically important, including South Africa, and represent 85% of the world economy and 80% of global trade. OECD countries are democratic countries that support free market economies. Member countries have committed to the comprehensive BEPS package, consisting of 15 action points, and its consistent implementation.

Taking action on tax avoidance

The 15 measures are aimed at curbing tax avoidance and range from a commitment to address tax challenges in the digital economy to making dispute resolution mechanisms more effective.

Included in the action plans, nations have agreed on ways to neutralise the effects of so-called “hybrid mismatch arrangements” – where measures that have been put in place to prevent a multinational from being taxed twice is abused to avoid paying tax entirely, aka “double non-taxation”.

They have also agreed to strengthen the Controlled Foreign Company rules so nations can prevent taxpayers from shifting income into foreign subsidiaries

Action five sets out a minimum standard and methodology to assess a multinational’s level of activity in a preferential tax regime. And a framework also has been agreed on to enable mandatory, spontaneous exchange of information on rulings relating to BEPS concerns.

The package also includes new rules to prevent treaty shopping and abuse. Nations have committed to a standardised approach to transfer pricing documentation, including country-by-country reporting, to assist tax administrators to identify risks.

The new measures also include a changed definition of the phrase “permanent establishment” to address techniques used to avoid payment of tax.

Noting data limitations in order to measure and monitor BEPS, a dashboard of six indicators has already been established and countries have committed to assist in improving the collection and analysis of data.

Speedy implementation

The focus now shifts towards swift implementation of the measures, the OECD said. And work has already begun on developing a multilateral instrument to implement the treaty-related BEPS measures into the existing network of bilateral tax treaties.

The instrument will be open for signature to all interested countries in 2016, the organisation said.

BEPS is an issue which affects developed and developing countries alike – according to the OECD it is conservatively estimated at anywhere between 4% and 10% of global corporate income tax revenues, representing $100-billion to $240-billion annually.

All-inclusive affair

Concerns had previously been raised that developing nations had not be consulted adequately during the process of compiling the package. But since, over 80 developing countries and other non-OECD and non-G20 economies have been consulted with more than a dozen of them participating directly in the Committee on Fiscal Affairs, the OECD noted.

“Developing countries have a greater reliance on corporate income tax revenues from multinational entities as a percentage of tax revenue, while the impact on developed countries in absolute terms is significantly higher,” the OECD said in the provided documents.

The organisation said specific challenges faced by developing countries and identified by them are addressed in the course of the BEPS work and there is also a dedicated work stream to develop practical guidance on the top priority BEPS-related issues identified by developing countries.  A new joint initiative between OECD and the UN Development Programme called Tax Inspectors Without Borders will also see experienced tax auditors work with tax officials in developing countries to improve results and build tax audit capacity.

This article is published in collaboration with Mail & Guardian. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Lisa Steyn is a business reporter at the Mail & Guardian.

Image: A man walks past buildings at the central business district of Singapore.  REUTERS/Nicky Loh