The world’s richest countries are getting tougher on corporate tax avoidance. But experts predict that, new guidelines notwithstanding, companies will still find ways around the system.
The world’s 20 richest nations have endorsed measures aimed at reducing tax avoidance loopholes, which the Organization for Economic Cooperation and Development estimates erodes approximately $240 billion per year from governments’ coffers. The base erosion and profit-shifting (BEPS) measures adopted by the OECD could boost the tax paid by large companies such as Starbucks and Apple. BEPS’s list of 15 recommended actions aims to address all the reasons for base erosion and profit shifting—an umbrella term that covers the ways a company can reduce or avoid tax while taking advantage of international tax laws and treaties.
The 15 recommendations were included in a package endorsed by G20 Finance ministers at a meeting in Lima, Peru, on October 8. Countries are invited to implement the recommendations, but each country is likely to pick and choose different recommendations, which could create havoc, at least in the short term.
“This is the most significant event for international taxation in many decades, and it is going to have some very broad consequences,” says H. David Rosenbloom, a member of law firm Caplin & Drysdale’s Washington office and a former tax counsel and director of the Office of International Tax Affairs in the US Treasury Department. “What I am less sure about is where those consequences will go. The early developments will be chaotic. Countries are going to take what they like of this and perhaps interpret it in their own self-interest. The result is that there will be more international tax disputes.”
The first concrete step that large corporations will face is Action 13 of the BEPS recommendations. It requires that large companies—those with yearly consolidated group revenue above €750 million ($805 million)—present, in each country in which they operate, a detailed report, including revenue, pretax profits, income tax paid and accrued, number of employees, stated capital, retained earnings and tangible assets.
Manal Corwin, national leader for international tax at KPMG US, expects that adoption of country-by-country financial reporting under Action 13 will bring radical changes in the way large corporations report their financial results. “Companies are going to need to not only make sure they get all the information they need, but to also understand the implications of the fact that this information is now available,” says Corwin.
They will have to consider how this impacts the tax administration of the country in which they are doing business, but also the public at large. In fact, although the report is meant to remain private, Corwin says there is a fair amount of concern that it can be made public. “In that case, what would be the implication for the company either from a competitive perspective or for reputation considerations?” she asks.
Some experts predict that these country-by-country reports, once presented, could be leaked to the local media in each country, which is likely to impact public opinion and politicians. Companies will have to withstand the loss of reputation that may come as a result of this exposure even if they do not break the law. Many countries are expected to make the requirement of country-by-country reports mandatory from January 2016, with the first report expected to be filed from 2017.
TAX BREAKS NOT ADDRESSED
Despite its grandiose ambitions and the large fanfare that has accompanied its introduction, BEPS has been criticized on several fronts. For one, it remains a list of recommendations. Each state must adopt the recommendations through legislative action for them to become effective. BEPS is also considered to offer little relief to underdeveloped countries. ActionAid, a not-for-profit charity that fights poverty internationally, describes BEPS as a “sticking plaster.” “The patchy implementation that is likely to ensue now means that there is still going to be plenty of room for big companies to do quite advanced [tax avoidance] planning,” states Anders Dahlbeck, a tax justice policy adviser at ActionAid. He adds that what worries him most is that the impact of the BEPS recommendations for developing countries, which usually suffer the most from tax avoidance, has not been studied more closely.
Countries are going to take what they like of this and perhaps interpret it in their own self-interest. The result is that there will be more international tax disputes.
~ H. David Rosenbloom, Caplin & Drysdale
“These measures are proposed by the OECD and the G20, the richest countries in the world, that have come together to negotiate tax rules that will now be implemented around the world,” stated Dahlbeck. He added that the new rules do not address the issue of tax breaks as “large corporations often put the governments of developing countries under pressure to obtain tax breaks in order to invest in their countries.” According to ActionAid, developing countries lose $138 billion each year in tax breaks, yet BEPS has not considered tax competition among nations.
In an even more radical criticism, some economists say that the BEPS reforms will not produce enough positive results as governments need to reform the way in which they tax corporate profits. Gabriel Zucman, a professor of economics at the University of California, Berkeley, and author of The Hidden Wealth of Nations, is gaining international recognition for his approach on international taxation. According to Zucman’s research, tax avoidance by US corporations has increased 10-fold since the 1980s and is now equal to 20% of US yearly corporate profits. He estimates that 55% of foreign profits of US firms are made in a handful of almost zero-tax countries.
Zucman believes the plan agreed upon in Lima is insufficient. He believes firms should be taxed on profits apportioned across countries proportionally to where sales are made. Although the system he proposes may seem complicated, he says it is similar to the way in which different states within the US have always split taxes on corporations.