According to speakers at Cayman Finance’s International Tax Initiatives seminar Jan. 23, the 15-point action plan is based on the assumption that corporate tax bases of governments are at risk because tax rules have not kept pace with changes in global business and tax practices of some multinational companies.
“BEPS is going to result in major changes to the tax landscape,” said James Tobin, global director, International Tax, with Ernst & Young in New York. “A good number of the action plan items will have application to Cayman.”
Former Monetary Authority Chairman Tim Ridley agreed: “If you thought FATCA was bad, you probably need to put BEPS next on the list.”
Both panelists noted that depending on the rules the Organization for Economic Cooperation and Development is going to develop, most of Cayman’s financial services from funds and securitization to reinsurance and captive insurance could be impacted.
The OECD Base Erosion and Profit Shifting project was fully endorsed by the G20 at the St. Petersburg summit in September 2013. The OECD says the existing international regime has shown weaknesses, particularly in instances where the interaction of tax rules from different countries leads to “double non-taxation or less than single taxation.”
Problems also relate to arrangements that result in no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place.
“What causes the tax policy concerns is that, due to gaps in the interaction of different tax systems, and in some cases because of the application of bilateral tax treaties, income from cross-border activities may go untaxed anywhere, or be only unduly lowly taxed,” the action plan notes.
In addition, expansion of the digital economy also poses challenges for international taxation that BEPS aims to address. Companies like Google, Amazon or Apple were singled out last year for criticism of their very low effective corporate tax payments in hearings held by the U.K. Public Accounts Committee and by U.S. Sen. Carl Levin.
The OECD says the digitalization of business models raises questions as to how these enterprises add value and make their profits, and where they generate their income for tax purposes.
Tech companies, however, have lobbied heavily against special tax treatment. A letter to the OECD by law firm Baker & McKenzie, which acts on behalf of the Digital Economy Group, a lobbying organization of various Silicon Valley firms, argued that enterprises that employ digital communications models operate in all sectors of the global economy.
“We believe that enterprises operating long-standing business models, subject to established international tax rules, should not become subject to altered rules on the basis that they have adopted more efficient means of operation,” the letter dated Dec. 23 stated.
Pascal Saint-Amans, the leading tax official at the OECD, indicated to the Financial Times last week that it would not be viable to design separate tax rules for digital companies. “The findings are that there is no such thing as digital companies rather than digitalization of the economy. There may not be therefore a solution for the digital economy, but we will need to draw on features of digital economy when we revise the system.”
But he added, “Most of the tax planning by these companies will be addressed by this.”
Producing an action plan that will resolve the perceived weaknesses of the current regime will be “daunting” and it will be difficult to come up with solutions and rules that both developed OECD nations and BEPS action group members like China and India can agree to, said Mr. Tobin.
However, one area that will be implemented very soon, he said, is the requirement that multinationals provide additional disclosure on tax practices and a country by country reporting, because it has been mandated by the G20.
The OECD will produce a template for multinationals to detail certain business indicators such as income, tax, sales and the number of employees by country. Some corporations like Vodafone have already adopted this practice voluntarily.
The OECD confirmed last week it will publish in March a first series of draft BEPS recommendations aimed at the impact of the digital economy on government’s ability to collect taxes. This will be followed by consultations with businesses and other stakeholders in April and May, and the delivery of a final set of recommendations to G20 leaders in September.
G20 governments and OECD members will receive the completed recommendations for action on all 15 BEPS items by December 2015.