The communiqué issued by the G20 following its recent Brisbane meeting maintains the momentum on tackling international tax avoidance and evasion
After the close of its recent leaders’ summit in Brisbane, Australia, the G20 released a communiqué covering its plans to strengthen the global economy and support robust international institutions. Specific areas of concern and related action items were detailed in the nearly two dozen paragraphs of the communiqué, and some interesting points were raised (and reiterated) in paragraph 13 regarding international tax.
The G20 restated its interest in and commitment to the Base Erosion and Profit Shifting (BEPS) Action Plan that is being developed by the OECD at the behest of the G20. As a reminder, the BEPS Action plan aims to curb international tax avoidance and evasion activities through 15 separate actions in specific areas. Those actions include increased tax information sharing between countries, greater transparency regarding the tax practices of multinational enterprises and the tax incentives offered by tax authorities, and the unique impacts of intangibles and the digital economy, just to name a few.
The OECD will continue work on the BEPS Action Plan through at least 2015 and has released its first deliverables to the G20 in connection with the Action Plan just this past September. So, the G20’s expression of continued support for – and keen interest in – the completion of the BEPS work is timely indeed, if not unexpected.
The stated aim of the BEPS Action Plan is to better align taxable profits with the locations in which the associated economic activities are performed and where value is created. The unstated implication is that too much profit is currently located where value is not created and/or where relevant economic activity does not take place.
This sounds right, of course, but the devil, as usual, is in the details. For example, deciding how much economic return is appropriate for capital investment – say, for the intellectual property developed or held in a patent or knowledge box – compared with the right amount of profit that should be associated with manufacturing activities or headcount can be a vexing bit of analysis. One only needs to look at the rise of the technology or brand-based companies relative to more traditional manufacturing enterprises to realise that the concept of ‘value creation’ continues to evolve. Should it really be surprising that taxable profits have been attracted more and more to locations where such technology and intellectual property is owned?
The communiqué also reported on recent achievements and continuing activities on tax information sharing and transparency among the tax authorities. There has been a years’ long series of efforts to address the impact of bank secrecy and incomplete or inefficient information sharing on global tax compliance, but this area of international tax policy got a ‘shot in the arm’ in the past few years from the US’s efforts to implement FATCA. That set of unilateral actions to increase US tax compliance by means of increased foreign bank account and asset reporting by non-US financial institutions was, at first, viewed by many the global tax/financial community as a burdensome overreach. Lately, however, it is increasingly viewed as a very good idea. US FATCA has either spawned or accelerated the development and implementation of similar regimes by both individual countries (such as the UK) and by international collectives such as the OECD’s Automatic Exchange of Information (AEOI) and Common Reporting Standards (CRS) efforts, both of which are gaining great momentum among international tax policy makers. In the past such information sharing relied primarily on a network of bilateral tax treaties and tax information sharing agreements. The emerging trend is toward multi-lateral, self-executing information sharing, which promises to be more comprehensive and more efficient.
The increased drum beat surrounding information sharing is evidenced by how swiftly over 50 countries recently agreed to be ‘early adopters’ of this new sweeping and wide-ranging tax information sharing system.
A final interesting aspect of the communiqué is its expressed interest in outreach to and coordination with developing countries. Perhaps not surprisingly, most international tax planning – and the efforts to address perceived international tax abuses – has really been viewed as the province of the developed world. There is increasing awareness of the impact that international tax planning and practices on developing economies.
A special UN subcommittee on BEPS requested comments this year from the finance and tax authorities of developing nations and the results are interesting. In addition to a general sense that aggressive international tax planning can have extractive consequences for the tax revenues of the developing world, many of the UN comments also reflected concerns that such countries lack the resources to fully participate and effectively implement BEPS Action Plan measures. It was therefore noteworthy that the communiqué expressed strong desire to involve developing countries in the G20’s international tax policy efforts and to support those countries’ implementation activities.
In summary, the G20’s communiqué expressed continued support for the efforts of the OECD on BEPS and other international tax initiatives and signalled the continuing focus these policies and implementing actions will have among the world’s leading economic powers.
Mitch Thompson is a partner in tax strategy & benefits at Squire Patton Boggs
