What cutting corporation tax to 10% would mean for the UK

Richard Murphy: Some of the smaller economic brains inside the Brexit camp are suggesting that the UK should cut its corporation tax rate to 10 per cent. Let me suggest some of the consequences.

On Apple tax, State must side with its citizens

Paul Sweeney: It is widely agreed that globalisation has bought immense benefits. But it is also recognised that these benefits are not equally distributed. Last week’s Apple decision demonstrates the complexity of the issue of distributing the benefits of globalisation. The Irish Government, faced with a windfall of some €13 billion, appears to have sided with the world’s largest and most profitable company against the welfare of its citizens.

The score at half time: OECD 7, Tax Avoidance ??

Today the OECD announced the deliverables on seven of their fifteen planned actions to tackle global corporate tax avoidance. (for background, see here). 

So what’s in today’s release? Quite a bit, actually. Work will continue on the digital economy, which is a good thing, as they are taking a broad holistic approach to this rather than confining their focus to techie firms. As the interim report says – digital economy is the economy now, and almost all sectors including health, education, media and financial services are impacted by the issues of mobility, reliance on data, user-created content, flipped supply chains and business models, near-monopolies and a pervasive virtuality that makes the old-fashioned taxing questions of who, what and especially where very challenging. 

There are concrete proposals on hybrid mismatches and on harmful tax practices which promise to tackle patent-box regimes. There are new proposals on preventing tax treaty abuse, but more interestingly, they’ve moved on the feasibility of a global multilateral tax treaty to replace the thousands of bilateral ones now in place. That in itself would be a game-changer. There is a lot more by way of country-by-country reporting, particularly for those patent-box regimes. The devil will be in the detail here, and of course this all poses massive challenges for developing countries who may lack the ICT infrastructure to cope. 

That and other issues will be addressed next year when the OECD report on the remaining eight actions on their original list of fifteen. This includes a lot more on aligning transfer pricing, and on data methodologies. In the meantime, because of the very public and comprehensive nature of today’s disclosure, we may see a lot of quiet tweaking of individual countries’ tax rules, in anticipation of more imposed changes. 

There are issues of democracy and mandate in all of this. None of these rules can officially be imposed on the world – they have not been voted in democratically anywhere yet. The OECD can change their model rules and the member countries will abide by them. The G20 are on board in general terms and together, they control 90% of the world’s economy (as Pascal Saint-Amans pointed out happily today). So there is an economic mandate, but not a democratic one. Developing countries are consulted, and the UN can observe, but what they are observing is a small group of rich nations acting in concert. But act they have, and next year, when the remaining eight proposals are brought forward, we will see a significantly-changed corporate tax landscape. Winners, losers, yet to be determined, but certainly some companies will pay some more tax. Somewhere. 

Sheila Killian

@sheilakillian

OECD and tax avoidance: the story so far ...

In a webcast from Paris this afternoon, the OECD updated the world on progress on the BEPS project to date. Pascal Saint-Amans stressed the process was on track to be presented to finance ministers in September 2014. Four discussion drafts have been issued over recent months, covering country-by-country reporting, the abuse of the international network of tax treaties, the rather more technical question of hybrid mismatches, and more broadly the challenges posed by the digital economy.  This article summarises where the OECD is on each of these four areas, and then makes some general observations on the process. 

The Digital Economy

The current thinking here, sensibly, is that it is neither possible nor useful to ring-fence the digital economy. Everything is digital now. So what the draft does is focus on the key features which warrant attention from a tax point of view. These are mobility of assets, customers, employers; the way new business models rely on data, sometimes very large banks of personal data; the multi-faceted nature of these new business models with value being created by customers as well as by vendors; and network effects in general.

So the working group will focus on questions such as how to restore source and residence taxation in this new context. How can value be attributed to data, given that it is created by a wide network of individuals? How can cloud-based storage be attributed to a single or even to multiple jurisdictions? What about consumption taxes?

These are complex questions. Taking just that last one as an example, VAT has traditionally been imposed in a particular jurisdiction based on the concept of place of supply;  if I sell you a car, for example, it is not difficult to decide where that transaction takes place. If, on the other hand, I download music produced by some Californian indie band from the cloud, to an ipad, while transiting through Manchester airport, where is that sale made? Do we look at where the customers are located? Where the service providers are headquartered?  Where the company making the sale says its sales force are? Each of these methods would give a very different tax outcome, with fairly profound implications for both companies and countries. 

Hybrid mismatches

This is a more technical area, fascinating to tax planners and tax nerds generally, almost certainly less so to the general public. It refers to any arrangement that exploits the different tax treatment in different jurisdictions of the same instrument, so for instance a financing instrument that obtains a tax deduction in one place, but is tax free in another. 

Achim Pross clarified some important issues of scope; the OECD are not looking at mismatches between tax and law, for instance, only at international tax mismatches. They are seeking rules wich are clear and easy to apply ,and which can be easily or automatically imported into domestic law without the need for taxing authorities to form a judgement about intent .  They want the new rules to be comprehensive – there is no  point in closing down one type of abuse only to let it open elsewhere in a slightly different guise. The mechanism they will probably apply is to neutralise the tax mismatch without disturbing the regulatory consequences, so the tax treatment in one state will be based on the tax treatment in the other, restoring the symmetry to the international situation that would have applied had the transaction been domestic. This raises the implementation question of which country’s rules to adapt? Whether to apply this only to group transactions or also to parties acting in concert and structured arrangements more generally? How to deal with accidental hybrid instruments? It is clear that widely-traded financial instruments which are hybrid in some way will probably be outside the scope, but there are lots of questions still to be addressed on this one. 

Tax Treaty Abuse

This is a big one, and has generated a great deal of public comment already on the discussion draft issued last month. The approach is interesting. First the purpose of treaties is established, and in particular the fact that they are intended to be bilateral, and not to create conduits. Next there are specific anti-abuse rules being developed such as tie-breaker rules on dual-residence companies, and minimum holding periods for dividend transfers. Finally, they are talking about a general provision, more or less like an anti-avoidance rule, which denies treaty benefits if the main purpose of the transaction is to obtain the treaty benefits, AND the obtaining of the benefits is contrary to the purpose of the treaty. 

This is potentially a game-changer, depending on how widely the new general provision might be applied. 

Transfer pricing and country by country reporting

Here is where things slow down a little. On transfer pricing, the OECD remain firmly committed to the principle of arms-length pricing, despite protests from many groups such as the tax justice network. Similarly on country by country reporting, the latest changes seem to limit the recommendations to high-level reporting on a country level rather than on a company level, and only to taxing authorities rather than to the general public. It is likely that companies will only need to report income, profit, tax paid and accrued in each country as well as details on the numbers of employees, tangible assets and retained earnings/capital. 

Overall points

The emphasis is on saving the system, not rebuilding it. In particular, the arms-length principle remains a staple of the current thinking. In answer to a question at the end, Pascal Saint-Amans said “So let’s fix the existing system. Which will allow us to save the arms-length principle, which will provide the certainty that countries and companies need.” 

Developing countries have other concerns on international tax, especially about commodity mispricing and tax incentives, which are less reflected in the current work programme of BEPS. The OECD have had a series of regional  consultations with developing countries, and have promised to take their views into consideration. 

BEPS is not all-embracing. For instance, a question from an Australian journalist revealed that aggressive tax planning based on after-tax hedging, is not currently under scrutiny. However, for particular structures, such as the infamous Double Irish, the writing is clearly on the wall. Asked specifically about that structure, Pascal Saint-Amans said that yes, they expect and encourage the ending of the Double Irish, and that for companies to anticipate such changes and adapt their actions in advance of proposed changes “”would be a smart move”

So change continues, with some measures such as country by country becoming more conservative, and others such as the treaty abuse measures holding out real possibility of reform. They promise more webcasts, so watch this space. 

Dr Sheila Killian

@sheilakillian

A new world order in corporate tax?

The long-awaited OECD Action Plan on Base Erosion and Profit-Shifting (BEPS) has been released this morning, in time for the G20 meeting in Moscow. This was promised back in February, and aims to tackled multinational corporate tax avoidance through a unified approach by the world’s most powerful economies. For background on the issue of corporate tax avoidance and why it matters, see my earlier post here, and for a summary of the OECD’s earlier missive which gives their logic for tackling it, see here. 

This topic was top of the agenda at the Lough Erne G20 meeting, and so this report, which sets out what the OECD plan to do and how, has been eagerly awaited. So what are the highlights? Is it, in fact, a new world order on corporate taxation? Well, before getting into the detail of the actions, here are five observations on the plan as a whole:      

     1.  Politics: As OECD’s Pascal Saint-Amans said at the launch, what we have here is not only technical, it is highly political. The plan now has the support not only of the 34 OECD countries of which Ireland is one, but also of the entire G20, including the eight countries which are outside of the OECD (South Africa, Russia, China, India, Indonesia, Argentina, Brazil, and Saudi Arabia). The combined block represents considerable power, both economic and political, all of which lends strength to the proposals

    2.  Timing: All the actions in this plan have short time-lines for implementation – one to two years, with a few of the deadlines bleeding out to December 2015. The reason for this is two-fold; the OECD want to seize the initiative to create something unified here while there is widespread political consensus on the need to tackle corporate tax avoidance, and secondly, they want to come up with an international response quickly before impatient politicians in the individual countries develop their own independent strategies, which might not be coherent. 

    3.  Absence of scapegoats: Unlike OECD actions in the 1990s, there is little emphasis on rogue regimes, tax havens or even very much on tax competition. This is a working document, aimed to provide solutions by neutralising tax avoidance schemes, rather than naming and shaming countries

  

    4. A top-down, multi-lateral approach: Cleverly, although the individual taskforces will come up with different recommendations under the various headings, all of these will be incorporated into a single, multilateral tax treaty by the end of the process. The (ambitious) aim is that this will then be adopted by most if not all of the countries involved, effectively replacing the current network of 3,000+ tax treaties which have been painstakingly negotiated on a bilateral basis over decades. This network is used with shocking ease by multinational firms to whisk profit in and out of various jurisdictions, exploiting minute differences to avoid billions of taxation, worldwide. If the multilateral treaty is widely adopted, and contains measures to close down some of the more egregious practices, this will mean a real change in the environment.

    5.  Limited innovation: There is a lot here that is new, but apart from the promised multi-lateral treaty, there is no radical change in the architecture of international tax. Some of what's new is essentially new to the OECD. We will have standards on information gathering, and moves to spontaneous, automatic exchange of information between taxing authorities; we will have action on residence, and on mis-match schemes including the Double Irish. There is country-by-country reporting, but not publicly. And there is no radical action on how multinational firms are taxed – no move to a single tax base, for instance; to unitary taxation; no move away from the arms-length as standard for transfer pricing. A large part of this is almost certainly political – what’s here is perhaps as much as they feel is achievable given the expanded group of countries they are now addressing with this plan. Not exactly a new world order - no central government, but a serious change nonetheless.

So what is the detail?

The plan contains fifteen separate but interlocking actions, each of which is assigned a taskforce. Two address the over-arching themes of the digital economy and the development of the multi-lateral instrument, while the central thirteen can be loosely arranged under the headings of gaps, frictions and transparency, OECD-speak for double non-taxation, double-taxation and secrecy. 

Gaps: four taskforces operate under the theme or pillar of gaps, addressing hybrid mismatches, of which more here, Controlled Foreign Company (CFC) rules, interest deductibility and harmful tax practices with a dishonourable mention here for patent box legislation. These taskforces are looking at coherence, tackling any instruments or rules which are interpreted in one way by one country, and another by a different one, leaving a little gap which can be exploited by a multinational firm. A simple example is the use of convertible shares to finance a subsidiary. In some circumstances, the profit returned to the parent company can be treated as (tax-deductible) interest when paid by the subsidiary, but as (tax-free) dividends when received by the parent – an obvious opportunity to gain a tax advantage while moving profits. However, at the launch of the report Pascal Saint-Amans specifically referred under this section to Ireland, the Netherlands, and the US check-the-box rules, so we can expect this taskforce to also address the now-infamous Double Irish (of which more here). 

Under frictions the OECD is on more familiar ground – they are aiming to restore the effectiveness of existing standards, and so taskforces here will look at countering tax treaty abuse (of which more here), and tightening up the rules on permanent establishments, possibly with an eye on making it impossible for companies to be entirely stateless. Three taskforces will look at transfer pricing, specifically examining ways to make the arms-length standard effective for intangibles, for the transfer of risk and capital and to address the greyer-than-grey area of management fees and other such payments. What’s interesting in this cluster is that these actions look to reinforce and tidy up existing ways of doing business rather than taking a radical approach, such as unitary taxation or even the type of apportionment of taxing rights envisaged by the European Commission with the Common Consolidated Corporate Tax Base (CCCTB). 

Finally, under transparency, four taskforces will look at the mechanics of gathering data which can be exchanged between taxing authorities. This is no easy task, and involves issues of data protection, IT compatibility, a common template for reporting, etc. Companies will be obliged to report more on their aggressive tax plans, but not publicly, not yet. There will be more mutual assistance among taxing authorities, and common approaches to dispute resolution, etc. 

When will we see change? 

Some of the taskforces will report in a year, and the new standard is slated for the end of 2015. As every finance student knows, however, the market anticipates change, and so as soon as this has been absorbed by the tax planners, we can expect to see a change in tax plans, and a knock-on impact on how investments are structured and how and where groups of companies are arranged. Climate change doesn’t happen overnight, but still it happens, and has real and present impact. 

How solid is the support for this?

Pascal Saint-Amans insists there is extremely solid and widespread support for these measures, even beyond the OECD and G20. He acknowledges that some large firms should end up paying more tax if his plan works, and so some in the business community may be less than thrilled. Interestingly, while they are invited to submit observations, they are not a formal part of any of the taskforces. Nevertheless, he explains that while some countries or companies will protest publicly, they accede privately, and will support the measures once they are developed. Or as he put it: “the conversation in the room and the conversation in the corridor are not the same.” It should not take long to see which conversation carries the most weight. 

Sheila Killian

@islandtotheleft

Tax transparency: a step change or climate change?

The OECD has another new report out today on tax transparency, this time to tie in to the G8 meeting in Enniskillen. Formally, this report was commissioned by the G8, though any impression given that the G8 are driving OECD activity in this area may be misplaced.

So what’s in this one? Well, an ambitious title for a start – “A Step Change in Tax Transparency” which is calculated to raise expectations and signal a serious commitment to change. The content focuses on reassuringly practical aspects of automatic exchange of tax information between jurisdictions. Anyone who has ever worked in a large organisation knows how difficult it can be to persuade computer systems or databases on one side of the building to talk to those on the other, so you can imagine the difficulties inherent in exchanging taxpayer information automatically between, say, the UK and Mozambique. This report seems to have been written by someone who has thought about the issues and is genuinely trying to work them out. The recommendations are practical, and focus on establishing relationships, getting the legal basis clear, defining the scope of information to be exchanged and lining up IT systems to receive the information.

Notably, the use of a common multilateral convention on information exchange is proposed as a practical solution. This has echoes of the idea floated by the OECD in April of a single multi-lateral tax treaty to replace all or part of the 3,000+ bilateral tax treaties currently in force around the world.  The latter is of course a far bigger proposition, and one which has serious potential to close off aggressive “treaty shopping” activities – the kind of artificial channelling of funds around the tax treaty network designed to avoid withholding taxes. It would be interesting if information exchange opened up the real possibility of this kind of close coordination.

There are obvious issues to be overcome, not least building the capacity of taxing authorities in less developed countries not only to gather and provide the information but to securely store and process it, and in setting the scope of information to be reported and defining what entities provide that information. Calling this one report a step-change may be gilding the lily, but taken with the OECD’s work on BEPS, recent UN guidance on transfer pricing for developing countries and more widespread developments on capacity development for taxing authorities in the Global South, this is certainly part of a shift in the climate around international tax avoidance.

Maybe not a step change just yet, but definite signs of climate change.

Sheila Killian

@islandtotheleft

International tax avoidance - an update

In advance of the G8, it might be useful to update what’s happening with the main international movers on the question of international tax avoidance. For a primer in this, see this earlier post.

The OECD at the end of last month formally reaffirmed their commitment to address tax base erosion and profit shifting (BEPS - of which more here). Again, their motivation is mainly economic, arising from the damage done to tax revenue and the integrity of the system by tax avoidance, and the impact this might have on growth and employment. This time they specifically mention the damage done to emerging and developing economies also, which marks a move by the OECD to be more inclusive on this process. The next BEPS report is now due in July, and this will set out a timeline for the full project. At this stage, it’s anticipated that concrete changes will be coming in perhaps two and a half years.  In the meantime, there is a commitment on the part of OECD ministers, including our own, to collaborate more; to work on transfer pricing rules with a specific focus on intangibles; to consider revising treaties to take account of digital goods and services and to address arbitrage. The idea of a multi-lateral tax treaty to replace the many bilateral treaties is still on the table. 

The OECD is not, of course, as inclusive a body as the UN, and in fact the UN has observer status at OECD meetings on tax. The UN itself is starting work on the taxation of mining, oil and gas companies, with a particular focus on how this impacts development in the global south. They have also officially launched their Practical Manual on Transfer Pricing for Developing Countries, and continue to work on capacity-building for taxing authorities in less-developed economies. They do serious work, and are also seriously under-funded.

The EU continue to work on their action plan published last December, the main recommendations of which include blacklisting non-compliant jurisdictions, and including a clause on double non-taxation in new treaties. They also work with the UN on supporting capacity-building for the Global South. The EU specifically note that aggressive tax avoidance contravenes the principles of corporate social responsibility, which is interesting in the context of recent comments by, for example, Apple’s Steve Wozniak on the ethics of tax avoidance. 

Meanwhile, David Cameron has summoned the leaders of Britain’s overseas territories, asking them to sign up to information-sharing. This is an effort to address so-called “secrecy havens” such as Jersey and the British Virgin Islands, which not only form a key part of the global tax avoidance chain, but are also potentially used in money-laundering more broadly. None of this addresses domestic UK tax rules. Cameron has said he aims to make tax transparency a key theme of the G8 summit. 

These are interesting times. Some very senior tax planners of global 

multinationals spoke to me last week of their reaction to the outrage about Apple’s tax affairs. They could see that very aggressive tax planning was becoming unacceptable, but having built successful careers in the practice, were mostly taken unawares at the force of change. As one put it: “Suddenly all this is supposed to be wrong?” The wind of regulation is shifting. Both multinational companies and countries which seek their international investment need to work hard to keep up. 

Sheila Killian

@islandtotheleft

Multinational tax avoidance and international responses (1 of 2)

Ahead of tomorrow’s release by the OECD of what promises to be an interesting report on their plans to address multinational tax avoidance, this post is a primer on the issue and on the role of the OECD. I’ll follow up tomorrow with some analysis of the report itself.

What’s the issue

Multinational Corporate Tax avoidance: the perfectly legal but shockingly complex process of arranging special purpose companies and capital flows in artificial ways so that the group as a whole pays as little tax as possible worldwide. It’s a huge problem – the IRS figure for profits offshored by US corporations is 1.7 trillion dollars - and that’s just American firms. The problem is that while taxes are imposed by individual countries, multinational firms roam the world in search of advantage, setting up a management firm here, a registered office there. Individual tax authorities find it difficult to see the whole picture. These days too, most of the value in large companies comes from intangible things like brand and intellectual property, which are far harder to trace than physical sales or factories.

Avoiding tax is a game as old as tax itself, but lately opposition to multinational tax avoidance has gathered momentum and political support.

Why is this a problem ?

That $1.7 trillion kept offshore by American firms is not just a loss to the US exchequer – profits it might reasonably have expected to tax. It also makes an uneven playing pitch for American companies. The bigger multinational ones can avoid tax more easily than smaller, domestically-centred firms. That gives them an immediate advantage that biases against entrepreneurship, growth, and all the things needed to kick-start the economy.

A wider problem is that it’s not just the US that is losing tax: as discussed here, the loss in relative terms to countries in the global south is even greater. A recent Action Aid report details the case of a Zambian sugar company routing interest and dividend payments through Ireland and the Netherlands in order to avoid tax in Zambia; this in a country where 45% of children are undernourished, and 90% of rural dwellers live in poverty. Lives are, quite literally, at stake here.

It’s hardly surprising in this context that US President Obama harks back again and again to the need for corporate tax reform. Indeed, politicians the world over are excited about this issue now. South African leaders have spoken out about this for years. It’s debated in the UK parliament, makes primetime news in France, home of the OECD. This media coverage drives more political debate, which in turn puts pressure on the big international bodies to do something about this.

So who are these international bodies?

In this part of the world, the three international bodies shaping international tax are the European Commission (EC), the UN and the OECD. The EC has been working for the last seven years on the Common Consolidated Corporate Tax Base (CCCTB), of which more here.  Basically, this is a way of allocating the taxing rights on profits earned in the EU across the member states, depending on where the company has located its assets, its employees or its sales. It’s an idea that bubbles steadily under the surface, but for now, and as long as unanimity is required for big tax changes like this, it is not an immediate prospect.

The UN is obviously the most representative of the three bodies. It’s also the most focused on the global south, and last October produced a detailed Practical Transfer Pricing Manual for Developing Countries.  Like the OECD, its focus is on the tax rules in place between countries – tax treaties and transfer pricing arrangements. The UN models tend to favour developing countries by allowing tax to be withheld on royalty and interest payments of the kind documented in the Action Aid report mentioend above. However, while the UN may have the mandate, and the EU the immediate proximity, the OECD has the resources, and now, spurred on by increased political pressure, is developing new strategies to tackle the issue.

What has the OECD been doing so far?

The OECD is the body behind the dominant model tax treaty, which forms the basis for most bilateral treaties negotiated worldwide. It has fairly standard clauses on who has taxing rights in cross-border transactions, and aims at eliminating double taxation. They started looking at tax havens, or harmful tax competition in the 1990s. They developed a three-part test whereby a country with low or zero tax rates ring-fenced to a subset of companies and with a general lack of transparency would be regarded as a tax haven. The penalty effectively was to lose the benefits of the tax treaty network. Around this time, Ireland’s switch from a 10% rate in Shannon and for manufacturing, to a 12.5% rate for all neatly sidestepped the new rules. We have a low tax rate, but we’re not a tax haven as defined because we have no ring-fencing of the low rate to a particular subgroup of companies.

As well as identifying countries with harmful practices, the OECD focuses on transfer pricing, of which more here. Simply out, a transfer price is the price at which goods are sold between sister companies. It can be abused as a way of shifting profit from high-tax to low-tax locations by manipulating the prices or more commonly the level of royalty or management charges paid. Such transactions should be at “arms length”, meaning that the same rates and conditions should apply within a group of companies under common ownership as between unrelated firms. This is straightforward enough to police if you are looking at the selling price of something tangible, like cars or computers. It’s virtually impossible in the case of royalties for which there is no benchmark price outside of the group.

As if this wasn’t challenging enough for taxing authorities, there has been a raft of new and very complex tax structures adopted and mimicked by multinational firms in recent years. The best known locally is The Double Irish.  As reported by Bloomberg , this is a now-infamous means used by large US firms to channel royalty payments through Ireland on to Bermuda, reducing their overall tax bill to negligible levels. Ireland is not the only country whose tax system is used in this way. Even without a detailed knowledge of the particular techniques used to shift profit, there are signs plainly to be read: the number of companies now headquartered in The Netherlands, for instance; the levels of investment flowing in and out of Luxembourg. The issue is enormous, complex and difficult to tackle. How do you establish an arms-length price for something which is only sold to one related company? How can you determine where a company has operations if its product or service is as nebulous as the very cloud in which it hosts its files?

The way in which business is done by multinational firms has changed dramatically, and tomorrow the OECD reports on how it will change its approach to multinational tax evasion in response. A blog post here will analyse their new approach, and some of its implications.

Sheila Killian

@islandtotheleft