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OECD starts big push to stop corp tax avoidance
[SINGAPORE] The Organisation for Economic Cooperation and Development (OECD) has launched its ambitious plan to rein in corporates attempting to exploit loopholes in the global tax system - a move that will impact companies ranging from international conglomerates such as Google Inc, to smaller Singapore companies with a cross-border presence.
The first "elements" of the plan - called the "Action Plan on Base Erosion and Profit Shifting" (BEPS) - were unveiled on Tuesday, and focus largely on preventing corporates from abusing bilateral tax treaties.
Tax treaties are typically entered into by governments to prevent a double taxation of profits and benefits across borders, to encourage international trade and growth. But many corporates have been using them to pay a very low rate of tax or no taxes at all.
A Reuters investigation last year found that three- quarters of the 50 biggest US technology companies channelled revenues from European sales into low- tax jurisdictions such as Ireland and Switzerland rather than report them nationally.
Google, in particular, dominated the news on this front: the giant search engine company was reported to have used tax treaties to channel more than US$8 billion in untaxed profits out of Europe and Asia each year and into a subsidiary that is tax-resident in Bermuda - which has no income tax.
"We are putting an end to double non-taxation," said OECD's head of tax, Pascal Saint-Amans.
BEPS is intended to finally bring the international taxation system up to speed with the globalisation of corporates and the complexity of their cross-border transactions.
Broadly, the new initiatives aim to: address the tax challenges of the digital economy; create new model tax and treaty provisions to neutralise "hybrid mismatch arrangements", or arrangements that exploit differences in the tax treatment between two or more countries; prevent the abuse of tax treaties by realigning taxation and relevant substance; bring about greater disclosure through improved transfer pricing documentation and a template for country-by- country reporting; and counter harmful tax practices.
The changes are not without their challenges.
Brian Tully, head of transfer pricing business at Thomson Reuters, told Forbes: "Historically, companies only had to show the transaction flow from one country to the other. These new changes show a company's global structure with key financial metrics. This will introduce an unprecedented amount of detailed data reporting to global tax authorities. Companies have never had to collect, let alone report, this kind of data, and countries have never had to enforce it."
Companies also need to be aware that not all jurisdictions are created equal; some governments are better prepared and better equipped to manage the changes than others. How each country chooses to enforce these changes will also matter.
Alan Ross, tax leader at PwC Singapore, said: "The big worry for businesses is that different tax authorities will require different information, which could add to the administrative and cost burden for businesses. Efforts to coordinate how tax authorities respond will be challenging but crucial."
And it won't be just the large multinational companies (MNCs) that will be hit by the new OECD initiatives; smaller Singapore companies with a cross-border presence and foreign companies with a presence here will also be affected.
Looking at the impact on businesses here, Mr Ross said the treaty abuse provisions are unlikely to significantly affect Singapore- domiciled groups - unless they are using other avenues to invest in other countries (for example, by using Mauritius as a route to invest in India). But they need to keep an eye on the actions of treaty partners in the region, such as Indonesia, China and India, in the event that these jurisdictions take a different view of what constitutes an abuse of a tax treaty.
He adds that the additional reporting requirements will have more of an impact.
"This is likely to draw attention, somewhat unfairly, to taxpayers with high revenue and low headcount, paying low taxes - for example, Singapore procurement hubs of MNCs operating under an incentive. This is likely to force MNCs to justify their transfer-pricing arrangements through robust qualitative analysis.
"Singapore, which continually seeks to attract substantive business, should be well positioned in this regard. But, clearly, disputes may arise from other tax authorities if they perceive that a Singapore company's income is out of whack with its employed base, relative to its affiliates in the overseas country trading with Singapore."
Mr Ross warns that the greatest concern for Singapore in the longer term is whether the focus on harmful tax practices will ultimately impact the tax incentives provided by Singapore to attract businesses here.
"At first sight, it should not - as the focus is to align taxation with where substantive people functions take place, and Singapore can hold its head high in this respect. However, determining what is substantive is often in the 'eye of the beholder' - namely the other jurisdictions which deal with the Singapore company," he said.