OECD BEPS DRAFT GETS A REACTION

As predicted It hasn't taken long for the  self serving "discussion" over the BEPS strategy to start . 

There is a fear in the US  that the initiative  will be a catalyst for  US businesses to relocate to other jurisdictions to avoid the outcome of double taxation  and rising compliance costs . The concerns are varied and include country by country reporting requirements . In addition to the reporting aspects the prospect of shifting the point of taxation may have a major impact on the US tax take. Interestingly , various surveys have shown that business acknowledge that the current rules are no longer fit for purpose .

The cooperation of some 90 plus jurisdictions , to implement the entire plan is likely to require a time frame of 5 years + according to the Australian Taxation Office response yesterday .The Australian position is to keep engaging with overseas investors to encourage economic activity while being mindful of the entire picture . i.e Australia is aware that everyone needs to be able to preserve their own tax base based on the economic activity .While it sounds positive , and there appears to be the political appetite to address the global tax problem  the question will always be , which part of the economic  activity is ( more ) relevant . The customers location, the producers location etc .and what will it cost "us" in revenue dollars without shredding the revenue base in favor of  other locations. A real concern is that of unilateral actions taken by jurisdictions which could very well undermine and slow down the project on a multi lateral level .While various jurisdictions may not act unilaterally , the pace of change will mean that there is a risk of a compromised outcome in the next few years . 

What is clear despite the uncertainty , which is considerable at the moment , the world has changed and the rules as we knew them , have been consigned to history. Based on this new landscape larger businesses need to consider their current models  .This includes likely reporting requirements  and what transparency of data means to the business world and competition . Who will see the data  . There is also the issue of the reality that tax compliance costs  will increase  considerably .

Critically , what will increase , is the tax take  which will impact on the profit levels previously enjoyed by business. The challenge therefore is to ensure that under the new world order that is emerging , the strategy will be focused on minimizing  double taxation . What we will see is that existing operations are likely to face  considerable rearrangement and management must start now to get a handle on these issues. 

Australian Budget May 2014 - what the tax industry is expecting: preliminary views

May 2014 Budget Australia – Background and what is likely

Overall no major tax hikes anticipated

Long term deficits are clearly a reality unless some realignment takes place. With current debt levels and long term deficits being a problem combined with our terms of trade and high cost of doing business in Australia, it is clear that action is needed.

One problem however is that the political system isn’t conducive to the long-term thinking needed to improve the tax system. So what is likely to be in store has been the subject of much debate but the general theme that is emerging from the economic observers is as follows:

Raising income taxes is not the issue especially if looked at on a global scale when comparing Australia’s revenue as a percentage of GDP with other economies. Australia is quite high which is why there has been a long time call for lowering Australia’s income tax .

Tax incentives in order to stay competitive on the international stage. By way of example employee share plans need a strong overhaul to stop companies exiting Australia as a corporate headquarters.

Large spending cuts are not considered likely but the pension and social security aspects are very much a target with the likely lifting of the pension age. In addition the level of services being provided is likely to be reworked.

Health care is a global issue and Australia is no different. There may be some changes here. One possibility is the change to the funding model for public hospitals. The suggestion is to move to a model that sees funding based on procedures.

Australian tax office audits of multi-nationals

In the wake of the G20 meeting in Australia last month and the Tax Office Compliance in Focus 2013-2014 publication of July 2013, it is no surprise that tax audit activity is on the rise.  As part of the global initiative to prevent BEPS the Australian Taxation Office has commenced audit activity on 86 multi national businesses. No doubt the usual names are considered to be on this list but the ATO are being somewhat guarded as to the targets .

The question that comes to mind is whether audit activity is the answer. It seems that the problem lies with the current law, as in many cases the multinationals (that have received press coverage about their tax payments)  have acted within the framework of what is the law.

The law it seems is what is out of sync with current business operations and dynamics. The forming of a global set of robust rules is where the attention is required but equally very challenging as evidenced by the recent response to the OECD transfer pricing recommendations).  It is relevant to note, as highlighted by the ATO , transfer pricing is not suggesting illegal activity unlike profit shifting.

What somehow seems to have gotten lost in translation, is that financial engineering does not mean that something has been done incorrectly. Inappropriate practices will get caught by these audits but it will be interesting to see if in fact the outcome will be matched by the ATO view that lower taxation has arisen due to inappropriate practices .

A significant part of the problem is determining how to tax online business, the digital economy. The business economists face a challenge in working through the modelling as to how to determine what revenues and costs are to be attributed to the various locations.

Into this mix comes the added dimension of different jurisdictions wanting to attract business and offering tax based incentives. How difficult will it be for all locations wanting to be pulled in the same direction while endeavouring to be more attractive than their global neighbours? In many cases, such jurisdiction based benefits have been the catalyst for corporations moving location.

Going back some 13 years, James Hardie Industries (unashamedly) moved to the Netherlands due to the change in global operations and tax inefficiencies. As cited on their website

“In summary, the establishment of a Dutch-based parent company and the restructure were driven by the group’s increasingly global focus and international financial tax efficiencies. .”

Such taxation considerations, including tax concessions as business drivers illustrates just how challenging these issues are. The R & D concessions are an example of how countries (appropriately) try to attract business.

Relocation of businesses and how they transact is clearly a battle zone, the rules for which shall take some time to develop. In the meantime the tax authorities continue to rely on audit activity to catch those parties that they feel have not been doing it correctly. It will be interesting to see the dollars raised against the cost of the recent audit initiative .

OECD - Global standard on information exchange - just released

OECD and BEPS – Global standard on information exchange.

For those in the cross border tax advisory arena, the world is a rapidly changing one. The changing face of business and cross border dealings including but not limited to e commerce is pregnant with issues of how business and the tax regimes can cooperate while not adding disproportionate costs (being only one of the concerns) in preserving the tax base.

Last week the OECD unveiled a uniform global standard for the automatic exchange of information between tax authorities worldwide.

Discussion about this new standard by some respected commentators and industry participants suggest that it does not achieve what it set out to do. One concern as expressed by PWC was that it caters for needs of the revenue authorities without regard to business. Concerns include costs and confidentiality. These aspects alone gives rise to serious reservations about the success of the standard.

Of particular concern was the 2 tier file system that business will need to maintain. Specifically the requirement to keep a file that meets country requirements as well as a separate “Master” file that will need additional documentation. One fear is that there will be a mismatch resulting in double taxation.

Some interesting points are also made in a paper put out by Bond University and whether the ‘modernisation’ provides a solution to BEPS or whether the solution to BEPS lies in international cooperation. The paper can be found at : http://epublications.bond.edu.au/rlj/vol23/iss1/3

Dirkis, Michael Dr. (2013) “On the eve of the global response to BEPS: Australia’s new transfer pricing rules,” Revenue Law Journal: Vol. 23: Iss. 1, Article 3.

According to the OECD, the standard is a “game changer” in terms of cooperation and transparency in the fight against tax evasion. The underlying thinking behind the strategy is an extension of the thinking behind the US legislation FATCA and general anti money laundering positions of many jurisdictions. The question is whether in fact it has given sufficient thought to the totality of the situation?

Annual data is to be automatically provided rather than on a request basis. The level of data to be provided by financial institutions and the taxpayers to whom it applies will be better known once the report is presented at the next G20 meeting in Australia on February 22nd / 23rd .
Apart from the strong reservations of PWC, other jurisdictions have made comment that they are reviewing the standard but they may not adopt it at this stage.

Hong Kong by way of example is of the view that their current legislation which was introduced in 2009 is adequate to protect against inappropriate taxation practices and in principle is in line with the OECD program. Hong Kong will seek feedback from stakeholders at this stage.

The OECD is expected to deliver a more detailed Commentary on the new standard, as well as technical solutions to implement the actual information exchanges, during a meeting of G20 finance ministers in September 2014.