The Rules: No more shelter for multinational tax avoidance

AS part of its Base Erosion and Profit Shifting (BEPS) project, the OECD has launched a public consultation on Action 12 – the mandatory disclosure of tax avoidance strategies by multinational companies.

The 83-page draft document provides examples of various disclosure regimes in place in member countries, setting out recommendations for a modular design for the framework. In particular, it puts forward rules aimed at catching international tax schemes.

“Access to such information, especially if this can be obtained at an early stage, provides the opportunity to respond quickly to tax risks either through timely and informed changes to legislation and regulation or through improved risk assessment and compliance programmes,” the OECD notes in the document.

The consultation is set to conclude on 30 April, while work on the BEPS Action Plan is to be completed by September 2015. A public consultation meeting on Action 12 will be held in Paris at the OECD Conference Centre on 11 May 2015.

One possible form the disclosure regime could take is that of the Disclosure of Tax Avoidance Schemes (DOTAS) operating in the UK. That system sees anyone entering into a scheme generating tax savings issued with a number by HM Revenue & Customs, which later investigates the structure.

It has proven an effective tool for the taxman: a string of contrived structures have been shut down as a result of those investigations and subsequent tribunals. Most notably, the Icebreaker and Eclipse film schemes have been defeated, and investors – including several celebrities – will be forced to repay billions in sheltered tax.

For multinationals, the regime would mean that tax authorities in jurisdictions where business is generated are notified of the business structure. Authorities would then decide whether they wish to challenge the company’s tax position.
Crucially, as with DOTAS, receiving a registration number would not necessarily mean a bill will follow. The pressure for improved yields from multinational companies has ramped up after it emerged in recent years that household names including Google, Amazon and Starbucks have used offshore jurisdictions to drive down their UK tax liabilities.

In particular, the companies have been using transfer pricing, which some claim has the effect of mitigating their liabilities. The method lets multinational corporations value and purchase goods and services moving across international borders from one of the group’s corporate entities to another. An ‘arm’s length’ principle is usually applied to ensure the transaction is made at market value, but there have been questions raised over whether all companies do so in practice.

Main plank

In September last year, the OECD published the main plank of its BEPS recommendations in seven separate reports focusing on the digital economy, hybrid mismatch arrangements, harmful tax practices, tax treaty abuse, transfer pricing and intangibles, transfer pricing documentation and country-by-country reporting, and the feasibility of developing a multilateral instrument on base erosion and profit-shifting.

The recommendations were hailed as a significant shift towards coordinated international action against such activity – which is predicated on exploiting discrepancies between different jurisdictions’ tax codes – as well as tilting the balance of power towards the G20’s tax authorities.

An automatic information-sharing deal has already been reached, with 92 countries signed up and 51 agreeing to put exchange systems in place by 2017. Under the deal, countries’ tax authorities will automatically be provided with much greater levels of information about business accounts and beneficial ownership. Mandatory disclosure is a natural extension of the mechanism.

One potential stumbling block could be gaining unanimity from the OECD’s member nations, with many countries fighting to retain some semblance of a competitive advantage.

But the OECD is used to having things its own way so far. The first part of its plan was delivered on time and intact, and, given the many impediments it came up against in that process, it would be prudent for businesses to expect similar effectiveness this time around, too.

The political will to eliminate the problem is strong and cross-party, and will continue unabated regardless of elections, and as such, businesses can plan with some degree of understanding. And while elements of the plan may alter, it is all but certain that the disclosure regime will be ushered in, with companies and their finance functions facing greater scrutiny than ever. ?