Changes to international tax structures are coming down the tracks
By Economics Correspondent Sean Whelan
Pay attention tax-dodgers! The OECD people have been working hard on the issue of double non-taxation, and will be producing a slew of reports over the next couple of months.
They, in turn, will feed into the G20 summit in September, when the OECD expects decisions will be taken on changes to the international tax regime that will – among other things – target ‘Double Irish’-type tax plans.
In an online briefing this week, OECD officials set out their work programme for the next nine months.
Of particular concern to stakeholders in Ireland will be action point one of the OECD’s work plan – a discussion document on the digital economy and how it impacts on the international tax framework.
One particularly interesting question that arises in this context is: are you and I supplying free labour to online companies – labour that is untaxed – by filling in digital forms with our personal information? Information which itself becomes a free commodity which can then be monetised by the digital company in question, again without taxation?
That document is due for publication in March, with a public consultation to follow in April. The final set of recommendations will go to the G20 with recommendations in September.
A meeting of national experts from OECD countries took place in October to try and analyse the different models that make up the digital economy – or perhaps more accurately, the impact of digital technology on the existing economy – and its taxation implications.
They discussed some of the features that make the “digital economy” different – notably mobility of assets, employees and most of all the raw material of the business; Data.
They also noted the “multi-sided” nature of digital economy business – that customers often provide the raw material that is monetised elsewhere, namely information about themselves.
How on earth do you tax that?
And where do you tax it?
The mobility of data and its geographically diverse processing makes it extremely difficult for tax authorities to come to grips with it – even if they work together through a process like the OECD’s BEPS project (that Base Erosion and Profit Shifting).
In a submission to a public consultation on an earlier draft, the Consultative Committee of Accountancy Bodies in Ireland (which brings together the various accounting bodies here) said of the digital economy:
“We note that the Action Plan on Base Erosion and Profit Shifting does not define “Digital Economy” but instead outlines a number of characteristics appropriate to it, including:
- An unparalleled reliance on intangible assets
- The massive use of data (notably personal data)
- The widespread adoption of multi-sided business models capturing value from externalities generated by free products, and
- The difficulty of determining the jurisdiction in which value creation occurs
The Collin/Colin report develops further the characteristic of the massive use of data by noting that digital economy consumers often provide free labour, perhaps by voluntarily inputting their personal data in connection with a purchase.
Those authors maintain that the value of this “free labour” is not reflected in any tax system.
The principal challenge from a Corporation Tax perspective is derived from the last item on this list – to establish the country of residence of the company concerned, and hence the jurisdiction with tax charging rights.
This challenge is not unique to companies within the digital economy.
The thinking on this issue should not be clouded by its relative novelty. We suggest that one important facet of the work being undertaken should be to more clearly define the industries and entities involved when considering digital economy issues.
There must still be recourse to the first principles of corporate residence as established by the domestic legislation of the countries concerned, Case Law, and the principles of construction of Double Taxation Agreements.”
A related issue is the treatment of transfer pricing of intangibles.
The OECD says media attention on taxation of intangibles such as royalties on intellectual property has led them to look into transfer pricing as an aspect of BEPS.
Their thinking so far is that although there are some very serious problems with transfer pricing of intangibles, they don’t think this should mean the end of the principles underpinning the current treatment of transfer pricing – namely the arms-length principle.
Related companies in different jurisdictions are supposed to deal with each other as if they were third parties. The OECD sees some changes around the operation of the principle, but not the principle itself.
Their aim is “to make sure the transfer pricing outcomes are aligned with value creation”.
This issue seems to have been the subject of most work in the BEPS process, having begun in 2010, with a first draft published in 2012, and another draft out last July, followed by consultation in November.
It is due to be finalised by the OECD working parties at meetings in March and May.
New Transfer pricing guidelines are expected to be approved by the OECD’s Fiscal Affairs Committee next week for publication in February.
Overall it looks like the OECD will not recommend a special tax regime for digital or online companies like Google or Amazon, but rather changes to the general corporate tax regime to take account of the fact that there is an increasing blurring of the differences between digital and bricks and mortar companies.
On the issue of harmful tax practices, the main emphasis is on defining “substantial activity” and “transparency”.
Understanding what constitutes substantial activity will be important for Ireland and other states that see a lot of money coming through them, such as Luxembourg and the Netherlands.
The tax treatment of Research and Development spending is also under the spotlight, especially where this may lead to “erosion of shifting of the tax base of other countries”.
Although they recognise that lots of states want to attract and incentivise R&D activity (and the forthcoming changes to Eurostat rules that allow states to capitalise R&D spending as part of GDP will increase that), there is scope for aggressive tax planning by multinationals who have the money for both R&D and expensive tax planning advice.
Thus the tax treatment of R&D becomes an issue of fairness in the application of tax rules, as big rich multinationals can benefit much more than small start-ups confined within a single national tax regime.
Information flow between states is going to be a big issue too, with the OECD saying that administrations need “big picture information” about the global value chains of multi-national companies.
They think business has advanced so far in this regard that the old definitions are just not up to the job, and the amount of information tax authorities have to make taxation decisions on is inadequate.
OECD officials dealing with the issue think a more streamlined approach should mean more money for states and lower compliance costs for companies.
The key to getting the information is country by country reporting of where revenue from multi-national companies goes to, what activity takes place where , and what tax is paid where.
The officials say “if you have a country where there is very little activity and a large amount of income is attributed to it, there may be a risk to you as a country from this situation”.
In terms of introducing legal changes, the OECD realise that the idea of changing some 3,000 bilateral tax treaties is a non-runner, so they are looking at developing a multilateral convention to have one instrument to amend all treaties at once.
Pascal Saint Amans, the OECD official in charge of the BEPS project says all their work programmes are on track for political decisions at the G20 summit in September.
He says the organisation is working fast because it wants to keep as many countries on board as possible –a slow down would increase the risk of individual countries breaking off and introducing their own tax changes.
One outcome they are very determined to achieve is an end to stateless – or “nowhere” income for corporations – regimes like the one Apple Computer has become notorious for.
Although the last Irish budget shut down the loophole Apple was able to benefit from, the OECD staff say there will be an end to similar regimes.
“It’s going to happen” was the response when asked if their work would put an end to Bermuda based companies having double Irish type tax avoidance structures.
So it seems change is coming.
The question is, to what extent will it disrupt current practices here in Ireland? And who will gain – and lose – as a result?
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