12 Aug 2013

Base erosion and multinational profit shifting: Where to from here?

A couple of weeks ago the G20 group of countries signed off on an OECD Action Plan to tackle tax base erosion and multinational profit shifting. Dr Niv Tadmore sets out what this will mean for corporate taxpayers.

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Base erosion and multinational profit shifting: Where to from here?
Dr Niv Tadmore, Partner, Clayton Utz

A couple of weeks ago the G20 group of countries signed off on an OECD Action Plan to tackle tax base erosion and multinational profit shifting. Shortly after the G20's announcement, the Australian Government issued a report endorsing the Action Plan. What is the Action Plan seeking to address?

Dr Niv Tadmore

The Action Plan is seeking to address two tax issues: profit shifting and base erosion. If you picture a lake, and lots of fishing boats on that lake casting the nets, each fishing boat would represent a government and each net would represent a tax system.

Profit shifting is about the effectiveness of the nets. Are they damaged? Are there too many holes? Are the holes too big? Or do we have a situation where too many fish can escape the net?

Base erosion is a slightly different question. It is about the size of the net. Are the nets too small? Base erosion goes back to the genesis of international tax. Our current rules were designed almost 100 years ago in an era where you needed tangible things that you could feel and touch in order to make profits. Today we live in a different era and business models, economic values and profits do not always depend on physical presence, but the tax laws have not caught up with those developments. So there is a disconnect between the tax design and the business realities.

So what OECD is trying to do within the next two years is to seek to repair the nets and probably make them bigger.

In the past we have seen big ticket tax reform agendas which were not carried through. Will it be different this time around?

Dr Niv Tadmore

I think it will be different. It is almost a perfect storm. At the political level, the G20 has endorsed that action plan and the political pressure is critical to any global corporation. In Australia, the Government has put together a special reference group that has worked Treasury and in those meetings I got a very strong sense that the Government is strongly committed to those issues and to address those issues, and of course the OECD action plan.

And in Australia what we also have is a new, an upgraded tax system mainly in the areas of transfer pricing and Part IVA so the ATO has a strong set of tools to deal with these issues. And the ATO itself has received special funding and established a special task force to deal with these issues. So we almost have a perfect alignment of the planets in terms of global political consensus and a strong commitment, a robust and comprehensive tax system and a funded ATO.

What will this mean in practice?

Dr Niv Tadmore

Australia already has a sophisticated and robust tax system so I don't think that we'll see major game changes in Australia, but I think that we will see three major developments.

The first one will be in the area of transfer pricing and that will be a push that will come from the OECD which has said it is going to look intangibles and financial transactions.

Our laws incorporate the OECD guidelines by reference, so whatever the OECD may do with its guidelines will have a direct impact in Australia.

The second area is a much more sophisticated corporation information sharing arrangement between countries. That means that the ATO will have much more information to look at when it reviews the affairs of an Australian taxpayer or subsidiary of a foreign taxpayer in Australia.

And the third area will be I think will relate to disclosure. I believe that what the OECD is trying to do in Australia is to ask companies to disclose much more about their tax affairs when they lodge their returns and when they go for an ATO review.

So if you want to wrap it all up, I don't think that we will see any huge storms on that lake, but there'll be waves, there'll be some wind, and some fog, so we're going to go into an area of uncertainty for a couple of years and then things I believe will clear up.