Finance Ministers from the Group of Twenty (G20) countries met in Sydney, Australia on February 22 and 23, 2014 to discuss, among others, the thorny issue of how to deal with base erosion and profit shifting (BEPS) by multinationals.
Their communiqué reiterated the Group’s commitment to an effective, practical and sustainable global response to BEPS and affirmed the principle that profits should be taxed where the economic activities deriving the profits are performed and where value is created.
They also endorsed a Common Reporting Standard (CRS) for automatic exchange of tax information on a reciprocal basis, encouraging countries to adopt the standard as soon as possible.
BEPS Action
The OECD tax policy chief Pascal Saint-Amans said in a special address to KPMG clients in Australia that the political momentum for introduction of all of the BEPS action points was unstoppable and that the OECD was on track to meet its 2014 deadlines for a number of the deliverables.
There needs to be greater coordination between countries’ tax systems to eliminate mismatches, for example, in the taxation of so-called hybrid instruments and entities.
“Tax treaties should be aligned with their original purpose of eliminating double taxation. International agreements may have been too successful, not only facilitating greater investment and trade by eliminating double taxation, but also providing opportunities for double non-taxation (i.e. where income is not taxed anywhere),” Mr Saint-Amans said.
The onus should be on Governments, rather than businesses, to set the appropriate tax framework.
KPMG comment
BEPS was the headline international tax issue of 2013, with an ambitious OECD action plan released last July to address perceived concerns about tax avoidance by multinationals.
A major concern was the appetite and commitment of particularly major economies to reforming the international tax system to address the key issues identified in the BEPS action plan.
The G20 communiqué confirmed the appetite and commitment.
Fears here
The G20’s principle of re-aligning profit and tax has caused consternation about what this could mean for smaller countries like New Zealand. The concern is that our multinationals will pay tax overseas rather than in New Zealand, if other countries look to expand their taxation rules.
The OECD dismisses such concerns as distracting from the core BEPS issue that profits are currently being recognised in no or low tax jurisdictions, where there is no relevant activity by the multinational.
Nevertheless, there is a risk that the post-BEPS international tax framework may hinder, rather than help, New Zealand’s position.
Greater information sharing between tax authorities is an important part of BEPS. The OECD has suggested new transfer pricing documentation requirements and country-by-country reporting to improve transparency.
Reporting Standards
This will require multinationals to provide more information on their global operations, profits and tax paid, on jurisdiction basis.
The release of the Standard for Automatic Exchange of Financial Account Information by the OECD is designed to facilitate greater information sharing between countries about residents’ financial assets and income.
Crucially, low tax jurisdictions including a number of offshore financial centres are being encouraged to join. Under bilateral or multilateral treaties negotiated between Governments using this CRS, countries will be able to obtain information from their financial institutions about their account holders, and automatically exchange this on an annual basis.
Forty countries have already signed up to adopt the CRS. New Zealand is yet to do so, but a Tax Bill currently before Parliament contains draft legislation to bring bilateral and multilateral information sharing agreements into domestic law.
While the immediate aim is to allow New Zealand financial institutions to comply with the US Foreign Account Tax Compliance Act (FATCA) requirements, the legislation will also support other tax information sharing agreements.
Submissions on the Tax Bill were overwhelmingly against FATCA, mainly on privacy grounds. But this latest development suggests that information sharing will be the new norm.
Individuals and businesses must adapt accordingly.
The CRS is intended to reduce costs through a global framework.
Whether this goal is achievable will depend on the consistency with which countries apply the rules.
Chandan Ohri is Tax Partner at KPMG based in Auckland. KPMG is the Sponsor of the ‘Business Excellence in ICT Category’ of the Indian Newslink Indian Business Awards 2014.
