New Reality: Plan to Combat Delusion of Taxation Basis and Withdrawal of Profits from Taxation

For years the Organisation for Economic Co-operation and Development (OECD) has advocated a policy of improved international tax co-operation between governments, including better information exchange and transparency to counter international tax avoidance and evasion. The OECD’s work in this area focuses on helping governments to respond more quickly to tax risks, to identify trends and patterns already identified and experienced by some tax administrations, and to share experiences in dealing with them.

Base erosion and profit shifting (BEPS) is a global problem which requires global solutions. BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises.

In an increasingly interconnected world, national tax laws have not always kept pace with global corporations, fluid movement of capital, and the rise of the digital economy, leaving gaps that can be exploited to generate double non-taxation. This undermines the fairness and integrity of tax systems. Fifteen specific actions (Scheme 1) are being developed in the context of the OECD/G20 BEPS Project to equip governments with the domestic and international instruments needed to address this challenge. The first set of measures and reports were released in September 2014. Combined with the work to be completed in 2015, they will give countries the tools they need to ensure that profits are taxed where economic activities generating the profits are performed and where value is created, while at the same time give business greater certainty by reducing disputes over the application of international tax rules, and standardising requirements. For the first time ever in tax matters, non-OECD/G20 countries are involved on an equal footing.

Scheme 1

ACTION 1: Address the tax challenges of the digital economy

ACTION 2: Neutralise the effects of hybrid mismatch arrangements

ACTION 3: Strengthen CFC rules

ACTION 4: Limit base erosion via interest deductions and other financial payments

ACTION 5: Counter harmful tax practices more effectively, taking into account transparency and substance

ACTION 6: Prevent treaty abuse

ACTION 7: Prevent the artificial avoidance of PE status

Action 8 – Intangibles

Action 9 – Risks and capital

Action 10 – Other high-risk transactions

ACTION 11: Establish methodologies to collect and analyse data on BEPS and the actions to address it

ACTION 12: Require taxpayers to disclose their aggressive tax planning arrangements

ACTION 13: Re-examine transfer pricing documentation

ACTION 14: Make dispute resolution mechanisms more effective

ACTION 15: Develop a multilateral instrument

*ACTIONS 8, 9, 10 Assure that transfer pricing outcomes are in line with value creation

There are number of key areas of work on which the OECD Committee on Fiscal Affairs, through its subsidiary bodies, is currently focusing on. These include:

• Aggressive Tax Planning;
• Transfer Pricing;
• Tax Treaties;
• Tax Policy and Statistics;
• OECD’s Programme on Tax and Development;
• Tax Compliance.

OECD and G20 countries have agreed three key elements that will enable implementation of the BEPS Project:

• A mandate to launch negotiations on a multilateral instrument to streamline implementation of tax treaty-related BEPS measures;
• An implementation package for country-by-country reporting (CbC) in 2016 and a related government-to-government exchange mechanism to start in 2017;
• Criteria to assess whether preferential treatment regimes for intellectual property (patent boxes or IP boxes) are harmful or not.

August,7 2015 the OECD released three new reports to help jurisdictions and financial institutions implement the global Standard for automatic exchange of financial account information. The Standard calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. Over 90 jurisdictions have committed to implement the Standard, with the first exchanges starting in 2017/2018, subject to the completion of necessary legislative procedures.

The Global Forum is the continuation of a forum which was created in the early 2000s in the context of the OECD’s work to address the risks to tax compliance posed by tax havens. The original members of the Global Forum consisted of OECD countries and jurisdictions that had agreed to implement transparency and exchange of information for tax purposes.

The Global Forum has been the multilateral framework within which work in the area transparency and exchange of information has been carried out by both OECD and non-OECD economies since 2000. The Global Forum’s main achievements have been the development of the standards of transparency and exchange of information through the publication of the Model Agreement on Exchange of Information on Tax Purposes in 2002 and the issuance of a paper setting out the standards for the maintenance of accounting records Enabling Effective Exchange of Information: Availability Standard and Reliability Standard developed by the Joint Ad Hoc Group on Accounts in 2005.

The Global Forum meeting in Mexico on 1 and 2 September 2009 was a turning point in the global progress to improve transparency and exchange of information for tax purposes. In response to the G20 Leaders’ call for jurisdictions to adopt high standards of transparency and information exchange in tax matters, the Global Forum was restructured as a consensus based organisation where all members are on an equal footing. All OECD countries, G20 economies and jurisdictions participating in the existing Global Forum were invited to become members.

With an ambitious agenda to improve transparency and exchange of information for tax purposes, the Global Forum agreed on a three-year mandate to promote the rapid implementation of the Standards through the peer review of all its members and other jurisdictions relevant to its work. The Global Forum is chaired by Mr Kosie Louw, from South Africa.

The Standards require:

• Existence of mechanisms for exchange of information upon request;
• Availability of reliable information (in particular bank, ownership, identity and accounting information) and powers to obtain and provide such information in response to a specific request in a timely manner;
• Respect for safeguards and limitations and strict confidentiality rules for information exchanged.

The Global Forum now includes 126 member jurisdictions and the European Union, together with 15 observers, making it the largest tax group in the world. Membership of the Global Forum is open to all jurisdictions willing to:

1. Commit to implement the international standard on transparency and exchange of information on request.
2. Participate and contribute to the peer review process, and
3. Contribute to the budget.

Its current membership includes all G20 countries, OECD member countries, off-shore financial centres and many developing countries, all of whom have committed to adhere to the international standard. The procedure for becoming a member of the Global Forum is simple. A request letter of membership (English template) signed by an authorised person in the government should be sent to the Global Forum Secretariat.

There are multiple benefits in joining the Global Forum.

1. It ensures participation in a unique forum where all financial centres are present, which considerably enhances developing countries’ ability to negotiate information exchange agreements.
2. The Global Forum is a unique source of expertise on transparency for tax purposes. All Global Forum members have found that the peer review process provides an opportunity to reflect on how their legal frameworks can be improved.
3. To help in improving their legal framework for transparency and exchange of information members may benefit from assistance which the Global Forum may provide directly or in partnership with other providers.
4. By monitoring and reviewing the implementation of the new global standard on AEOI, the Global Forum help its members to recover tax revenue lost to non-compliant taxpayers, and further strengthen international efforts to increase transparency, cooperation, and accountability among financial institutions and tax administrations. Additionally, AEOI will generate secondary benefits by increasing voluntary disclosures of concealed assets and by encouraging taxpayers to report all relevant information.
5. Being a member of the Global Forum provides your jurisdiction with international visibility and heightens their profile as a reliable locations in which to do business.  It should also assist in the fight against corruption and money laundering.

All members have an equal voice in the decision making process of the Global Forum as all decisions are taken by consensus.

Anna Senchenko, LL. M.

Leading Lawyer

Tax and Legal Practice

Korpus Prava (Russia)