The Organization for Economic Co-operation and Development (OECD) introduced its long-awaited plan to stave off tax evasion at the G20 meeting of finance ministers last week. But several obstacles remain in the way of implementing the plan, which attempts to level the tax playing field globally.
The OECD notes that tax-base erosion and profit-shifting issues “may arise directly from the existence of loopholes, as well as gaps, frictions or mismatches in the interaction of countries’ domestic tax laws.” To help bridge those gaps, it came up with 15 action points. Those include addressing the challenges that a digital economy now presents for businesses, such as in collecting data and figuring out the jurisdiction in which value creation occurs. OECD also says the digital economy gives rise to an unparalleled reliance on intangible assets.
The group will also be looking at rules aimed at governing controlled foreign companies, or CFCs. The rules would discourage the shifting of income to other jurisdictions by not allowing a CFC’s earned income to be deferred. They would also govern how a firm deducts interest expense, which could give rise to a condition of double non-taxation in two countries that a firm may operate in. As the OECD noted in its report, “a company may use debt to finance the production of exempt or deferred income, thereby claiming a current deduction for interest expense while deferring or exempting the related income.”
The OECD also hopes to rein in “preferential regimes” in which particular types of income from intangibles and financial activities can get tax advantages that end up harming other tax bases. It notes that “existing domestic and international tax rules should be modified in order to more closely align the allocation of income with the economic activity that generates that income.”
So how is the proposal being received? Rocco Femia, tax attorney at Miller & Chevalier, a Washington, D.C.-based law firm, calls the plan ambitious. Recommendations in the plan such as the handling of variations in multiple tax treaties and the development of the OECD’s ability to legally implement changes “are unprecedented on this scale,” he said.
The G20 countries asked the OECD to develop the global tax plan, which is set to take place over a two-year timeframe. By many accounts, though, that may be hard to achieve.
Sandy Bhogal, head of tax at international law firm Mayer Brown, sees implementation problems ahead for multinationals. The OECD’s “aim of linking the revenues of multinational businesses to particular territories and requiring reporting on a multilateral basis will be extremely complex to agree and implement.”