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By Craig A. Sharon, Esq.
Former Director of the IRS's Advance Pricing Agreement Program, Washington, DC
Much has already been said, and more will surely be written, about the report on Base Erosion and Profit Shifting (BEPS) issued by the Organisation for Economic Co-Operation and Development (OECD) in February 2013.1 Given the low profile and fast pace of the BEPS project, most of the early commentary has come from the OECD participants and tax authority representatives involved in drafting the report. Although their public comments (and the report itself) reflect a pro-government tilt, such comments also signal (more than the report does) a caution and a balance seemingly intended to tamp down the political heat, while heading off a panicked reaction within the business community that could cause short- or long-term damage to the global economy. Taxpayers, governments, and others would be well advised to follow the OECD's tempered lead as the BEPS project proceeds in the months and years ahead.
In the spirit of the foregoing, I offer a few other observations about the OECD project and the BEPS report:
All of these issues have been studied if not once, then multiple times over the years, either in isolation or as part of broader OECD projects. Search the OECD website (www.oecd.org) and you'll find any number of past and current OECD projects related to BEPS:
If you look at individual countries, you'll see that many have already taken steps to address BEPS (e.g., IRC §901(m) and the dual consolidated loss rules in the United States, limiting deductions in Denmark for payments on debt treated as equity in the recipient's country and in the Netherlands where the lender is subject to a low rate of tax in the lender's country, and the adoption in various countries of stricter thin capitalization rules and/or anti-abuse rules).
What's new and anxiety-producing for taxpayers about the current BEPS work is the political environment. Because of austerity policies adopted by many governments that impose higher taxes on individuals and on consumption, multinational companies that pay limited income tax in the places where they operate are now in the crosshairs of elected and other public officials, including heads of government. For multinationals, which represent an easy political target, such a position is an unpredictable, uncertain, risky, and possibly punitive place to be. Cool heads and a calm approach are required of all affected constituencies - business, tax authorities, elected officials, and the public at large.
The foregoing suggestions relate almost exclusively to transfer pricing, but similar taxpayer-friendly ideas exist with respect to the other six pressure points (e.g., more objective and easier-to-apply limitation on benefit (LOB) provisions in treaties and a consistent thin capitalization standard). Personally, I'd like to see a more robust discussion about the ins and outs of "double non-taxation." The BEPS report unequivocally condemns it, and while the term connotes inequity, the OECD analysis seems oversimplified in concept and practice.
Given the circumstances, business input will be critical to the success of the BEPS project. Success will turn on the development of solutions that increase certainty and reduce the potential for double taxation, and thereby encourage increased investment, economic growth, and job creation for the benefit of taxpayers, governments, and the public. The good news is that the OECD represents by far the best forum for undertaking the BEPS project, and it is openly encouraging active business participation. Business should take advantage of the offer - respectfully, of course.
This commentary also will appear in the June 2013 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Daher and Aceves, 536 T.M., Interest Expense Deductions, Maruca and Warner, 886 T.M., Transfer Pricing: The Code, the Regulations and Selected Case Law, Nauheim and Scott, 938 T.M., U.S. Income Tax Treaties - Income Not Attributable to a Permanent Establishment, and in Tax Practice Series, see ¶2330, Interest Expense, ¶3600, Section 482 - Allocations of Income and Deductions Between Related Taxpayers, and ¶7160, U.S. Income Tax Treaties.
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