OECD's BEPS Will Fail Without More Transparency: U.K. Panel

Bloomberg BNA’s Premier International Tax Library is a comprehensive global tax resource. Trust Bloomberg BNA's Premier International Tax Library for the guidance you need on...

Aug. 3 — The OECD's massive plan to tackle tax avoidance will fail without greater transparency, according to a U.K. parliamentary report.

The Organization for Economic Cooperation and Development's 15-item plan to tackle tax base erosion and profit shifting hasn't yet secured the public country-by-country reporting necessary “to open up the affairs of global companies to public account,” Margaret Hodge, chair of the U.K.’s All-Party Parliamentary Group (AAGP) on Responsible Tax, said in a statement released with the report Aug. 3.

“Only when we know who owns what, where the assets are owned, where the money is earned and what tax has been paid, can we have confidence in the fairness and integrity of the tax system,” said Hodge, a Labour Member of Parliament.

The AAPG report also criticized the BEPS project, which the Group of 20 countries approved in October 2015, for adding new rules to “an already complicated tax system” while failing to keep up with both digitalization and globalization.

The U.K. government came under fire as well for “facing both ways” by leading on the OECD's work in public on the one hand while simultaneously undermining the effectiveness of the same proposals behind the scenes.

The report was based on oral evidence given by witnesses including OECD tax chief Pascal Saint-Amans during two parliamentary hearings and written evidence (115 TMIN, 6/15/16).

The APPG was formed in September 2015 to examine how international tax rules should change to respond to global corporations and the digital economy.

Missed Opportunity

Although the report commended the OECD for introducing country-by-country reporting, the OECD missed a “real opportunity” by requiring the data to be made public.

Arguing that “transparency is the best way to restore people's trust,” the report said that while confidentiality can be defended for individual citizens, different standards are appropriate for corporate entities, especially if they are publicly listed companies.

In particular, making public registers mandatory would help developing countries where enforcement agencies are “weaker and less well-resourced and therefore less able to identify avoidance and evasion.”

The report said the threshold for disclosures is too high to be effective, applying only to companies with consolidated global group revenue of 586 million pounds ($780.5 million) or more. According to the OECD's own estimates, that will exclude between 85 percent and 90 percent of multinational enterprises.

‘Sticking Plaster' for Digital Economy

Although BEPS will give tax authorities better tools to crack down on tax avoidance, the report said the actions are nevertheless a “sticking plaster” on a global tax system that is struggling to remain fit for purpose with the growth of multinational companies operating in a digital environment.

The report particularly criticized the OECD for deciding not to treat the “digital economy” as separate from the rest of the economy and relying instead on existing rules built on the idea that subsidiaries and branches of a company are separate legal entities that trade with each other and are not part of one company.

In creating the BEPS project, the OECD failed to question the current rules underpinning the allocation rights for tax between source countries, where the income is earned, and resident countries, where the person who earned it is based. That concept needs to be revisited in a digital workd, the report said.

The OECD was also “too vague” in coming up with a new definition on what is meant by a permanent establishment, and hence a taxable presence in a country, which the report warned could lead to double taxation.

U.S. Must Implement Proposals

Many jurisdictions signed up “more quickly” to automatic exchanges of country-by-country reports after the Panama Papers scandal, but the report highlighted that participating countries like the U.S. and secret jurisdictions like the British Virgin Islands have yet to do so.

More broadly, the report said the need for the U.S. to implement the agreed proposals is a challenge, particularly as the country has been “one of the more skeptical participants of the process.”

As the resident country of many of the digitally-based multinational companies, the report said the U.S. “is fiercely protective of their global companies” who may be tempted to move their businesses away from the U.S., with its high corporation tax rate, to Europe, with its low corporate tax rates.

Alternatively, aggressive EU countries could in the future lay claim to tax revenue that should belong to the U.S.

To contact the reporter on this story: Ali Qassim in London at correspondents@bna.com

To contact the editor on this story: Molly Moses at mmoses@bna.com

For More Information

The Aug. 4 U.K. parliamentary report is at http://src.bna.com/hqt.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.