The state of the tax debate (1): The BEPS project

This is the first of two extracts from my talk on “BEPS day”, part of the Summer Tax Programme at the Centre for Commercial Law Studies, Queen Mary University of London on 16 June.

I’m going to talk about the state of the debate around BEPS and tax avoidance, and the role played by the OECD, government and politicians, business groups, tax professionals, campaigners and the media.

There’s a lot to be positive about, I think.

The BEPS project is relatively new, still just a baby, albeit one that’s developing very quickly.

But the controversy about multinationals’ tax goes back many years.

KPMG said this in a paper called Tax in the Boardroom:

“Tax cannot remain in the ‘splendid isolation’ to which its technical nature and its perceived independence from the business mainstream have historically placed it. An attitude of benign assumption that tax is under control cannot provide the transparency demanded in these times of heightened sensitivity to corporate governance and responsibility issues.”

That was nine years ago.

HMRC said the KPMG paper noted that:

“Boards are coming under growing pressure to oversee their tax affairs in ways that reconcile their obligations to shareholders with the expectations of non-owner stakeholders, such as governments, pressure groups and the public.”

How much has changed since 2005?

In December 2010 a Financial Times editorial said country by country reporting would expose “the scandalous tax treatment of multinationals in the rich world”.

The FT said this:

“Current practice turns corporate tax largely into a voluntary gesture by the well-run multinational, whose methods of choice for locating income in lower-taxed jurisdictions are intragroup financial links and transfer pricing of intangibles such as intellectual property. As finance and intangibles grow in importance, so will the slipperiness of the corporate tax base.”

Last week the paper repeated the message, almost verbatim, in an editorial – the word “scandal” wasn’t in there, but the message was the similar.

Ambitious though it is, BEPS appears to be on track. On the face of it, big business is backing the project in principle. Reform at international level is seen as the only lasting solution.

But as the discussion moves on to deal with the technical detail, we’re now in a difficult period for many multinationals from a PR point of view.

Only last Thursday Brian Palmer, tax policy adviser at the Association of Accounting Technicians, was moved to write to the FT to point out that “steps in the right direction” were already being taken through the BEPS project.

Brian Palmer said the AAT hoped the outcome would be:

“a thorough overhaul of the existing outdated international legislation”

In the meantime, he said:

“… we shouldn’t lose sight of the fact that companies and taxpayers in general do have the right to organise their affairs in such a way as to minimise their taxation according to legislation.”

But on Saturday [14 June] UK Uncut renewed its tax protest against Vodafone, with so-called actions in nine British cities.

This despite the company having explained its tax position at great length and challenged what it called the “urban myth” of a £6bn unpaid tax bill.

How many of those taking part in the protests – the numbers were small, it seems – have tried to understand the tax issues? Perhaps all that UK Uncut needed to do was to point to Vodafone’s presence in Luxembourg.

So far as I could see, UK Uncut’s plans were completely ignored by the nationals in the run up to Saturday and by [Sunday] night only the Guardian online had run a story. Bu the Guardian website is hugely popular, with five million unique visitors every day, and this morning PSC, the union representing many of HMRC’s staff, retweeted a link to the story.

Why the lack of coverage elsewhere? Perhaps because the debate has moved on.

I’ve heard many times, in conversation with family and friends, people outside tax, something on the lines of

“These companies are doing nothing illegal, and if governments don’t like it they can change the law”.

Changing the law will take time. This was last week’s FT:

“The political and legal difficulties of agreeing mechanisms to avoid ‘double non taxation’ are enormous. It will take time to overcome them. For now, investigation, shaming and transparency may be the best tools to hand.”

The EC’s investigation into transfer pricing rulings concerns possible breaches of state aid rules, and the EC itself has pointed out that no one knows what the outcome will be. Ireland, at least, seems confident that there has been no breach. But the overall impression that many people will take from the EC announcement is that it’s further evidence of tax avoidance by big business.

For example, how on earth is the OECD going to bring about a single multilateral convention to replace 3,000 bilateral treaties?

“Kill 3,000 birds with one stone,” as Pascal Saint-Amans has put it.

“We will have consensus,” he said last month, but consensus “doesn’t mean unanimity”.

It means “everyone is sufficiently happy not to object”.

Understandably, the OECD hasn’t tried to estimate the size of the BEPS problem.

There’s been a focus on UK corporation tax and US multinationals recently, and there’s an “expectation gap” which you could define as:

the difference between tax paid and the tax that would be due under a system fit for the so-called digital economy

On the other hand, we don’t seem to hear about UK-owned businesses likely to pay less UK tax and more overseas tax if and when the balance of taxing rights changes.

BEPS is a critical issue for developing countries where, as the OECD said in its action plan:

“the lack of tax revenue leads to critical under-funding of public investment that could help promote economic growth”

Joseph Stead and his colleagues at Christian Aid and elsewhere are right to insist that developing countries are given a fair hearing.

And capacity building is of course a key issue for developing countries. Last month the OECD hosted a discussion on tax and development, in a live webcast.

Someone asked whether business could commit 0.7% of its tax expertise to developing countries’ governments to boost their tax take.

Alan MacLean replied on behalf of BIAC, the business and industry advisory committee to the OECD.

He said he thought most businesses would be happy to do whatever it took to ensure that tax capacity in developing countries was accelerated and grown to the level required for their tax systems to operate effectively.

He wasn’t sure that 0.7% was the right figure – it should be what’s relevant and appropriate in the circumstances and context of the particular country, he said.

Chris Lenon, the former chairman of BIAC’s tax committee, said in April that tax administrations clearly want interaction with business.

He wrote about the importance of educating tax administrations about multinational business models, but his understanding was that some businesses weren’t engaging because they thought to do so would be “too expensive”.

Surely multinationals themselves, as well as OECD, HMRC and Tax Inspectors without Borders, should be playing an active role in helping to improve understanding among tax officials in developing countries.

When I said that on my blog a few weeks ago, a few tax professionals expressed support for some kind of formal initiative. One asked me: “Where do I sign?”

But one contact told me he thought the problem might be that many companies’ tax departments were under-resourced – they have barely enough expertise to manage their own tax affairs.

There have been a number of public consultations on BEPS, and updates have been broadcast live on the web.

Of course, if you took part you might not be so happy about that.

I had to smile when a delegate at one of the public consultations objected to Richard Murphy live-tweeting the event as the OECS was broadcasting it live to the whole world.

The OECD’s last two BEPS updates were broadcast on the May bank holidays. But you can watch them back on the OECD website.

So the process is transparent. Or is it?

In May the Australian Treasury hosted a tax symposium in Tokyo, on BEPS and related issues. The event was closed to the media – apart from the opening and closing remarks.

A Tax Analysts report said a “troubling aspect” was the event’s sponsorship by “several firms and organisations that have a very big stake in the outcome of the BEPS project”.

Tax Analysts quoted Sol Picciotto, co-ordinator of the BEPS Monitoring Group, saying this:

“civil society should have at least equal representation with business at such events, and they should also be open to news organizations to ensure public awareness. This was far from the case at the Tokyo event”.

So that’s a real concern.

[More follows]