How Wary of BEPS are the World’s Governments?: An Article Authored by Paul Oliveira, CPA from KLR - Accounting Firm Boston, Massachusetts, Providence, Rhode Island


How Wary of BEPS are the World’s Governments?

posted May 11, 2015 by Paul Oliveira, CPA

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The Organization for Economic Co-operation and Development (OECD)/G20 BEPS project is ambitious, large and complicated, and many countries are committed to it. But some may be wavering.
Although the Base Erosion and Profit Shifting project continues to roll forward, its complexity cannot be underestimated — it is in no small manner a Herculean project.

It is widely acknowledged that both the public and governments around the world view the rise of international tax planning and strategies used by multinational enterprises as a major threat to their existing tax bases and sovereignty. Tax systems around the world simply have not kept pace with the digital age and the internationalization of the business world — hence the BEPS project.

While it can be argued that BEPS has already achieved the aim of getting people to seriously address the issues and prepare to accept change, the project does face challenges. Not the least of these is the possibility of countries acting on their own in implementing measures to tax multinationals.

BEPS seeks a united global multilateral approach to the issue. If individual countries go their own way, they may precipitate tax rate shopping by multinationals and a breakdown in the overall BEPS approach. The U.K. already has announced its Diverted Profits Tax, dubbed a “Google tax,” and other countries are making noises about taxing multinationals ahead of, and outside of, BEPS.

The U.S. has plenty that it does not like about BEPS and many analysts point out that it does not support much of the project. The U.S. generally does not like worldwide treaties like BEPS. The possibility of domestic legislation in the U.S. to implement BEPS would have to be considered remote.

Australia has participated fully and strongly in the project, to date, but recent comments attributed to Rob Heferen, Executive Director, Revenue Group, at the Treasury, suggest that the country also is contemplating moving ahead of the BEPS project. At a recent Senate Estimates hearing, Heferen reportedly said Australian Treasurer Joe Hockey had asked him to look at what Australia could do to ensure that digital companies earning revenue in Australia were paying the appropriate level of tax domestically.

“Australia’s interests need to be protected,” Heferen said, adding that Hockey has made it clear that the integrity of the tax system is an important issue and that “we can’t wait until [the end of the] G20 process; we may have to do something sooner.” The Treasurer has previously indicated that the Australian government was closely monitoring the U.K.’s Diverted Profits Tax and was working with London to better understand the sorts of initiatives it is undertaking.

Heferen said the challenge for Australia was to protect its tax base, but at the same time weigh this against going too far and losing out on business to countries with more competitive tax rates and incentives.

The BEPS project was always going to be difficult to achieve, and political pressure mounting on countries to increase their revenues to fund growing debts and to finance infrastructure, etc., means that some may not be prepared to wait for BEPS to reach its conclusion. That certainly appears to be the case with the U.K.

BEPS cannot be rolled out piecemeal. It is an integrated and connected project, the sum of its parts. But it is not easy. For the BEPS project, nothing is settled or agreed until everything is settled or agreed. That itself is a challenging prospect. It is no small task to get multiple countries to agree, and governments of all persuasions are facing increasing fiscal challenges.

As pressures mount for revenue collections to grow to meet ever-increasing demands, and to ensure countries get their fair share of tax from multinationals operating in their jurisdictions, it is not difficult to imagine that other countries might be contemplating pre-emptive revenue strikes against those corporations.

The urge for governments to do something — anything — is great. However, itchy government fingers on revenue triggers could make life difficult for BEPS.