BEPS Project Takes Center Stage at OECD Tax Conference
posted Jul 21, 2014 by Paul Oliveira, CPA
The Organization for Economic Co-Operation and Development (OECD) recently held a two-day conference in Washington, D.C., that focused on the international group’s Base Erosion and Profit Shifting (BEPS) project. Member nations discussed the key issue BEPS as well as topics such as transfer pricing/intangibles, and treaty abuse.
IRS Commissioner’s remarks
IRS Commissioner John Koskinen delivered the keynote address, in which he spoke of the collaborative efforts of international governments in working together “to ensure that taxpayers comply with the tax obligations of their home jurisdictions” and achieving international tax transparency. He said that this collaboration can be seen in the Foreign Account Tax Compliance Act (FATCA) and the common standard for information exchange. However, Koskinen noted that, while the policy issues and goals of tax transparency are settled, the practical means of accomplishing automatic information sharing are still in the works.
In regard to the OECD’s BEPS project, Koskinen stated that the IRS “fully support[s] the goal of developing a coordinated and comprehensive action plan to update our international tax rules to reflect modern business practices.” He added that the tax agency hopes that “this coordinated work will help prevent, rather than exacerbate, the double taxation disputes that could arise if countries unilaterally attempt to address these issues without consensus-based principles.”
Maintaining a cautious tone, however, he urged the group to consider the practical implications of its proposals, for businesses as well as for tax administrations.
Background on BEPS
BEPS relates to tax planning strategies that exploit loopholes to make profits disappear for tax purposes or to shift profits to locations where they are lightly taxed so that little or no overall corporate tax is paid. In most cases, BEPS strategies are legal.
The OECD has suggested that it and G-20 countries take a coordinated approach to developing a plan to deter such base erosion and profit shifting behavior by multinationals.
In 2013, the OECD listed 15 specific steps to address BEPS. Among other things, it called for:
- New international standards on corporate taxation,
- Better alignment of taxation with income-producing activities, and
- Improvements to the current transfer pricing rules.
It also called for greater overall transparency.
The U.S. response on Capitol Hill to the BEPS project and its potential problems was to modernize tax legislation to make it more internationally competitive. In a press release, the House Ways and Means Committee Chairman Dave Camp (R-MI) and Senate Finance Ranking Member Orrin Hatch (R-UT) further challenged the BEPS project, characterizing it as a way for other countries to increase taxes on American taxpayers. In a joint statement, they said that, when “foreign governments — either unilaterally or under the guise of a multilateral framework — abandon long-standing principles that determine taxing jurisdiction in a quest for more revenue, Americans are threatened with an un-level playing field.”
They also expressed concerns that the project’s two-year time frame raised questions about the ability of the U.S. to fully participate because of the limited ability to review, analyze and comment on the rules being proposed. Rep. Camp and Sen. Hatch concluded that the best way for the U.S. to address the potential problem of BEPS was to enact comprehensive tax reforms to lower the corporate rate to a more internationally competitive level and to modernize the uncompetitive U.S. international tax structure.
Response from Business Leaders
The business response to the BEPS project came in a letter to U.S. Treasury Secretary Jacob Lew from the Business Roundtable. It described the project as “ostensibly initiated to address potential gaps in the taxation of cross-border income and improve tax coordination among jurisdictions to prevent the creation of ‘nowhere income.”
The group, comprising chief executive officers of leading U.S. companies, stated that, while it “respects the rights of governments to assert tax, where proper, on income arising within their jurisdictions and encourages companies to comply with the tax laws,” it was concerned that “the project is being used by some governments for the purpose of imposing extraterritorial taxes on U.S. business income.”
The group pointed to the risks of an increased likelihood of double taxation, direct revenue loss to the U.S., and additional disadvantages to U.S. enterprises relative to their foreign competitors (in addition to the U.S.’s worldwide tax system).
The conference was hosted by the Paris-based OECD, which has 34 member countries, including the U.S., along with the U.S. Council for International Business (USCIB) and the Business and Industry Advisory Committee (BIAC), in cooperation with a number of other tax groups.
The issues discussed at the recent meeting indicate that the OECD and its member states have their work cut out for them. Contact a member of our International Tax Services Group for ideas on how to remain prepared for potential changes and review your options once the OECD defines and issues new and revised proposals on other issues brought-fourth at the meeting.