The OECD BEPS project:Striving for a lasting legacy
The first major challenge of the G20/OECD Project on Base Erosion and Profit Shifting (BEPS) has been met, with the publication of the 15 Action items in advance of the G20 Finance Ministers meeting.
This was a significant task, bringing together many countries and perspectives in an effort to forge consensus on how business should be taxed. That consensus was important in the 1920s when the network of double tax treaties was in its infancy. It is even more essential now, as the extent of global trade has increased to levels unimaginable at that time, driven by advances in technology and communications.
Reaching this stage in proceedings has involved a significant level of compromise, and the fact that this has been achieved is testament to the power of combining tax technical firepower with political will. While this was the first challenge, there are many to follow if the objectives are to be realized. What has been produced so far is a blueprint for change, and its success will depend on how nations implement the recommendations. Strong political leadership will again be required; consensus must be retained and should not be diluted by different interpretations of how each Action might be construed. Without clarity and consistency regarding implementation, we will see further disparities and conflicts between tax systems, which in turn will increase costs of investment, undermine certainty and potentially damage both businesses and countries.
One of the BEPS Project’s aspirations was to create a system for resolving the numerous tax disputes that are likely to arise, as businesses and countries adjust to both new rules and a far greater volume and transparency of information. The inability to secure broad consensus on mandatory, binding arbitration is a real disappointment around the BEPS actions that will inevitably prolong controversy and potentially weaken the case for investment in some countries. Businesses desire certainty over the taxes they pay; this ability to achieve certainty is required at the time of sanctioning investment, or through established procedures to avoid protracted discussions and cost for many years. Such mandatory resolution procedures apply already to some bilateral investment treaties, and a strong commitment to resolving multiple jurisdiction disputes must be integral to the work on BEPS going forward. It is hoped that further efforts can be made to deliver the kind of certainty or process of resolution that will allow businesses to proceed with investment decisions with confidence.
Given the failure to deliver on global mandatory binding arbitration, other forms of dispute resolution will be under even greater pressure. The political consensus should be extended to include monitoring of the level and nature of disputes that arise around the globe, with a focus on countries where there is a clear divergence from the coherence intended by the BEPS Project. This peer-led review should be active and transparent if we are to avoid disputes that lead to an erosion of the BEPS Project’s objectives.
There are three things that finance ministers should be asking from the BEPS Project at this juncture:
• Firstly, the proposals have been developed in isolation, which is understandable given the aggressive timetable. The interaction among the recommendations must be considered. Even more importantly, countries must consider how the various recommendations would mesh with their existing rules in these areas.Countries will need to adapt the rules to fit their circumstances.
• Secondly, the implementation and administration of the recommended measures is every bit as important as their policy design. Effective tax administration is critical in an environment where fundamental changes in tax rules are being made. Countries will need to ensure that they are deploying the necessary resources in this area.There is a strong role for the OECD to play in developing best practices and providing support in identifying and addressing the tax administration challenges so that countries realize the objectives of of the BEPS agenda.
• Finally, but perhaps most importantly, effective mechanisms for dispute resolution will be more important than ever.. To leave the goal of Action 14 unfulfilled would ultimately undermine the very essence of the OECD, namely to improve the economic and social well-being of people around the world. The focus on double non-taxation should not be allowed to give rise to unpredictable, unresolved double – or even multiple – taxation. As the G20 and OECD look ahead to the next phase of the BEPS Project, the focus on improving dispute resolution mechanisms must continue and the objective of eliminating double taxation must be given renewed emphasis. Increased cost of controversy and increased double taxation are not outcomes that policy makers should accept.
In conclusion, this meeting will mark a critical juncture in the BEPS Project. However, if the G20/OECD BEPS Project is to deliver a lasting legacy, this meeting must represent the completion of the map, not the journey.