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