BEPS experts ponder uncertain future for arm’s-length principle

The arm’s-length principle for international transfer pricing continues to have widespread support, a senior OECD official told a London conference amid concerns about the effectiveness of the base erosion and profit-shifting project.

A discussion on the future of the arm’s-length principle on November 29 was hosted by the Oxford University Centre for Business Taxation, whose director Michael Devereux noted that the BEPS project has “triggered a material hike in the complexity of applying” the principle. Richard Collier, an associate fellow at the Centre for Business Taxation, warned that “a continued vulnerability to avoidance will present recurrent and profound difficulties.”

Tomas Balco, the recently appointed head of the transfer pricing unit at the OECD’s Centre for Tax Policy and Administration, offered a personal perspective of “where countries think we are” in relation to the arm’s-length principle … Noting that a previous speaker argued that the principle may not have a long-term future, Balco said feedback from delegates to the OECD’s Working Party 6 on transfer pricing suggests that “nobody thinks the patient is dying.” Read more:

My news story for Tax Analysts, December 2 ($)

UK lawmakers question OECD as forum, urge tax transparency push

A continuing lack of transparency in the UK’s overseas territories and crown dependencies will significantly hinder efforts to curb global corruption, and more must be done to ensure that developing countries’ voices are heard on international tax reform, according to a cross-party committee of members of Parliament.

The International Development Committee welcomed the work done by the OECD through its flagship base erosion and profit-shifting project. “However, international tax discussions must be fully reflective of international concerns, including those of developing countries, and we remain concerned that the OECD – due to its composition – is not adequately reflecting the needs of the poorest countries in its policy outcomes,” the committee said in a report titled “Tackling Corruption Overseas,” published October 19.

Read more: My news story for Tax Analysts October 20 (paywall).

UK paves the way for public country-by-country reporting but stresses multilateral approach

Tax transparency campaigners have welcomed the UK government’s decision to accept a Finance Bill amendment that will enable HM Treasury to make regulations requiring large multinationals to publish country-by-country reports of their profits and taxes. The government, however, stressed that it intends to seek international agreement on a reporting model before using the new power.

Customers and taxpayers expect big companies to “play fair by them and by the country in which they operate,” Labour member of Parliament Caroline Flint said during a House of Commons debate on September 5. “It sometimes seems as though we are trying to catch jelly.”

Read more: My news story at Tax Notes 7 September (paywall) published by Tax Analysts.

Tax professionals urge UK government to delay interest expense reform

The U.K. government’s timetable for implementation of a key base erosion and profit-shifting project reform is too ambitious, tax professionals have warned.

There is “no need to rush” a review of U.K. law on deductibility of interest because existing rules already limit deductibility, the Chartered Institute of Taxation said …

The proposed restrictions are likely to have “significant adverse consequences” for heavily geared infrastructure and energy projects whose viability is often reliant on tax relief for interest, said Eloise Walker, partner at Pinsent Masons LLP, in a client briefing … Continue reading Tax professionals urge UK government to delay interest expense reform

BEPS implementation is the hard part, tax experts tell MPs

Tax experts have told members of Parliament on the UK’s Treasury Committee that implementation of the actions recommended in the OECD’s base erosion and profit-shifting project faces some difficult challenges and will depend on maintaining an international consensus.

Asked about calls for greater transparency regarding multinationals’ tax, they argued that public country-by-country (CbC) reporting would not necessarily help people decide whether a company such as Google is paying the right amount of tax.

Read more: My news story for Tax Notes, 15 June (paywall) published by Tax Analysts.

More than 20 countries sign up to automatic information exchange

The world is moving firmly in the direction of greater tax transparency, U.K. Chancellor of the Exchequer George Osborne declared after 19 European countries joined a pilot scheme for automatic exchange of information on beneficial ownership, launched by the G-5 European economies earlier this month. Read more: My news story for Tax Notes (paywall) published by Tax Analysts.

BEPS: OECD proposes “special measures” to shore up the arm’s length principle

Ofsted can make a school subject to “special measures” if it considers that the school is failing to give pupils an acceptable standard of education. I was reminded of this when an OECD paper published on 19 December proposed “special measures” to shore up the “arm’s length” principle underpinning the current, outdated international tax system. More on that below.

The OECD now has nine open consultations on proposed reforms to tackle base erosion and profit shifting (BEPS), following publication of six discussion papers in the week before Christmas. Continue reading BEPS: OECD proposes “special measures” to shore up the arm’s length principle

Luxleaks tax disclosures serve the public interest – prosecuting the source does not

More than 70 politicians and tax transparency campaigners have signed a letter to the Guardian deploring Luxembourg’s decision to bring criminal charges against a former PwC employee believed to have passed to the media confidential rulings awarded by Luxembourg tax authorities.

As The Guardian noted last night, 20 news organisations around the world have published detailed investigations into the tax affairs of several multinationals based on leaked tax rulings that PwC obtained in Luxembourg for some of its clients. Continue reading Luxleaks tax disclosures serve the public interest – prosecuting the source does not

Autumn statement: Tax competition in the UK and ‘jumping the gun’ on BEPS

This week’s autumn statement was more like a budget than this year’s budget, according to EY, with 59 policy measures listed in the full report compared to 56 in March.

We can now expect dozens of draft Finance Bill 2015 measures to be published on 10 December for consultation.

These will include the new “diverted profits tax”, which has had some commentators observing that the UK government may be jumping the gun as international efforts to reform the outdated corporate income tax system continue. Continue reading Autumn statement: Tax competition in the UK and ‘jumping the gun’ on BEPS

BEPS: Priorities and concerns (Tax Journal)

The G20/OECD project on measures to tackle base erosion and profit-shifting (BEPS) appears to be on track despite a very ambitious timetable. But the project is still in its early stages, and there are signs that expectations may be running a little too high.

New Zealand revenue minister Todd McClay declared on 3 July that the OECD Committee on Fiscal Affairs (CFA) had “approved the final recommendations for the first set of actions”. G20 finance ministers are to consider a report of the CFA, following its meeting last month to vote on a series of “deliverables” representing the outputs of several discussion drafts, public consultations and working groups. But the OECD is not expected to release any details before finance ministers meet in the Australian city of Cairns in September 2014.

Read more at Tax Journal.

The state of the tax debate (2): The importance of constructive dialogue

This is the second 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 Monday, 16 June.

The wider tax debate continues, and like a lot of political debate, the tax debate is highly polarised.

Terminology is a problem. How can we have a good debate when we can’t agree on what the words mean?

What do people mean by “avoidance”? [Avoidance is legal, evasion is not. Some avoidance may become evasion.]

Many people say BEPS is avoidance.

Some experts say no, it isn’t avoidance [although it may be “aggressive tax planning”] because multinationals are merely taking advantageous of incentives, or gaps in the system, and they’re clearly acting within the law.

If you follow the finance journalist Paul Lewis on Twitter you may have seen him using “evoidance” with an “e” (not “avoidance” with an “a”) to describe some companies’ tax arrangements.

It’s not helpful, surely, for well-known and respected journalists to make up words which are bound to confuse the debate further.

The tax barrister Jolyon Maugham and others challenged Paul Lewis on this last week, but they were pulled up by the campaigner Alex Cobham for focusing on the language rather than the story – while the public get angry, tax professionals focus on the meaning of words.

“Give peace a chance”

Over the weekend Jolyon Maugham on his blog, and Alex Cobham in his response [and see more recent comments], have effectively appealed for those involved in the online tax debate to “give peace a chance”. And that’s well worth a read.

A small number of tax professionals – it is only a small number – do seem to spend a lot of time venting frustration on blogs and Twitter at a lack of tax knowledge and understanding shown by some politicians, campaigners and journalists.

But are they being heard? Generally, tax professionals have about a few hundred followers on Twitter. Some have more than a thousand.

But the PCS union has 16,000 followers, and Richard Murphy 21,000. Paul Lewis has 74,000. UK Uncut has 71,000 on Twitter and 68,000 on Facebook.

Sharing knowledge, improving public understanding

There is a massive, legitimate public interest in combating tax evasion and avoidance.

For too long serious tax knowledge has been shared and closely guarded by the relatively small number of people who depend on that knowledge for their livelihood.

Tax professionals are forever complaining that public, media and politicians don’t understand tax. But it’s arrogant to dismiss their concerns on the basis that they don’t understand.

It would be good if more of the moderate voices spoke out, contributed positively to the debate and tried to help to improve public understanding.

This is what a small but growing number of tax professionals have been trying to do just that for some time, including for example Heather Self at Pinsent Masons, Paul Morton at Reed Elsevier and Rebecca Benneyworth at ICAEW.

Last week for example Heather Self, responding on Twitter to a radio news report about Uber’s tax affairs, said this in a tweet addressed to Radio 4:

“Under current international rules, probably no UK permanent establishment. Rules do need updating for digital business…”

The character limit is a problem of course but it’s amazing, sometimes, what you can do in 140 characters. We need to see more of this measured, constructive engagement.

Transparency and reputational risk

I mentioned on the blog last week that Mazars is also playing a part. A consultation on the firm’s draft Board Charter closes at the end of this month.

The Board Charter includes a draft tax policy for companies to consider. The firm says it may be appropriate, as a guiding principle, that:

“… the amount [of tax] paid by a business in each jurisdiction in which it operates should be fair having regard to the amount of activity undertaken and/or value created there.”

There it is, the “fair” word. It may be controversial, but let’s have a proper debate about it.

Some tax professionals have told me privately that they don’t like to see giant internet companies accumulating billions of dollars tax-free in tax havens.

I believe that this disapproval, like their disapproval of evasion (which is unequivocal), reflects a sense of what is fair.

And Mazars hosted the recent debate on the Fair Tax Mark, which I wrote up for Taxation magazine.

Of course there are some real concerns about the FTM but at that meeting there was a lot of common ground.

Some very recent initiatives

Earlier this month Heather Self shared a platform with Richard D North of the Institute of Economic Affairs and John Christensen, director of the Tax Justice Network, at a debate co-hosted by JustShare and Christian Aid.

The topic was “Paying Up: Is tax a question of ethics?” You can watch the debate on YouTube.

It’s interesting to compare Mazars’ Board Charter with the CBI’s statement of tax principles, published last year. The CBI suggested that:

“UK businesses should only engage in reasonable tax planning that is aligned with commercial and economic activity and does not lead to an abusive result.”

PwC launched a debate on the future of tax only last week, with a view to producing its own “white paper”.

Kevin Nicholson, PwC’s UK head of tax, said his firm wanted to hear from “everybody”.

And last Friday the ICAEW held a “Tax Assembly” to promote debate about the future of tax – hashtag #taxassembly.

Rebecca Benneyworth, chairman of the Tax Faculty, was so pleased with the outcome that she addressed a tweet to George Osborne:

“@George_Osborne Superb tax event today between tax professionals civil society and others #taxassembly @ICAEW all committed to tax reform”

[For more on the Tax Assembly, see the Finance Innovation Lab’s report.]

Fair Tax Mark

A few things have struck me about the FTM, some of which emerged during the debate at Mazars.

First, several leading tax professionals have given it a cautious welcome, and I think this reflects a recognition that greater transparency is needed. There is some disquiet on the question of fairness, and I think this is the real challenge.

The aim of the Fair Tax Mark is:

“to help a company show the world that it is making a genuine effort to be open and transparent about its tax affairs and pays the right amount of corporation tax.”

But what is the right amount?

The FTM uses a set of criteria to determine whether a business has adopted a fair tax policy. And the fair tax policy suggests that the company is:

“seeking to pay the right amount of tax but no more in the right place at the right time, where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes”

The word “fair” is problematic for two reasons:

First, tax law is complex, with a range of allowances, reliefs and exemptions provided as matter of government policy.

As the CBI statement of principles said, companies are entitled to respond to incentives and exemptions.

So it’s difficult to judge whether a company deserves the accolade “fair tax business” without having a detailed knowledge of the company’s tax affairs and a thorough understanding of the tax system.

The second reason is that tax is, by definition, political.

It’s always a big debating issue at election time precisely because there is, inevitably, a range of opinions as to the role of government and how the cost of providing public services, infrastructure, security etc. should be shared. This is democracy.

Tax law is necessarily complex in parts (as well as unnecessarily complex in other parts) and there are lots of quirks and anomalies, making it difficult to discern the underlying policy.

So how likely is it that there will ever be a consensus on what “fair tax” is?

We should see the FTM’s criteria for multinationals soon, and everyone should have the chance to comment on them before they’re implemented.

But it’s worth remembering that the FTM team is a group of individuals who have decided to try to bring something like Fairtrade into the tax arena.

It is just possible that someone else might decide to grown their own FTM, or perhaps a Tax Transparency Mark.

Online debate

I’ve listed here some of the key players in the online tax debate [in no particular order, except that generally “tax professionals” are in column 2] and I recommend that you tune in to what at least some of them are saying.

Richard Murphy Professional bodies / firms
Alex Cobham Heather Self
Martin Hearson Jolyon Maugham
Margaret Hodge Ben Saunders
Tax Justice Network Mike Truman
Christian Aid Judith Freedman
ActionAid Iain Campbell
Oxfam Jeremy Sherwood
Citizens for Tax Justice “Christie Malry”

I’ll share one thing that’s been troubling me.

We’ve seen several reports from Richard Murphy – and from NGOs such as ActionAid and Christian Aid – that have been challenged by tax experts and others.

For example, Richard Murphy’s recent report on the cost of tax evasion and shadow companies was criticised by HMRC as well as tax professionals. He estimated that the total UK tax lost because of unrecorded sales alone in 2011/12 “might have been £40bn”.

That’s more than HMRC’s estimate for the entire tax gap, £35bn.

HMRC said his methodology was seriously flawed.

What I wanted to see (even if I had to do it myself) was a detailed assessment of that estimate and of Richard’s warning about shadow companies.

But the report runs to 80 pages, the executive summary is 20 pages. I wouldn’t say it was clear and concise.

The problem is that if Richard is 80% right, it’s a scandal. Tax evasion is being greatly underestimated. But if he is 80% wrong, that’s also a scandal because – given the amount of press coverage and the limited response – the message may well undermine confidence in HMRC and the tax system.

It needs someone with the time, patience and expertise to review such reports honestly, on their merits, picking out strengths and weaknesses.

Perhaps a post-publication peer review?

But who would do that, and who would pay? If that’s a problem, remember that Richard is backed by the Joseph Rowntree Charitable Trust and others including the TUC and the PCS. His reports are routinely reported in the press, and he has a huge following.

So perhaps some of the energy that is expended by tax professionals in venting anger on Twitter could be harnessed into serious, detailed appraisal of this kind of research.

Richard has many critics among tax professionals, but my impression is that very often the criticism is a reaction to his debating style rather than the substance of what Richard has said. He does talk a lot of sense, but the purpose of much of his output is to hit back at his critics. He does tend to tar whole groups or organisations of people with the same brush.

For now, let me endorse what Jolyon Maugham told Richard on Twitter this morning [16 June]:

“You have a manner that can engage people’s destructive impulses.”

Government and parliament

Some of the tax professionals’ frustration with MPs is entirely understandable. If you haven’t listened in to the Public Bill Committee debates on the Finance Bill, I suggest that you don’t bother. Read the transcripts instead.

How much of the committee’s time has been wasted, I wonder, by MPs trying to score party political points instead of doing what they were there to do – to examine the detail of some far-reaching tax measures.

It’s often said that MPs made the law, so they should change it rather than complain about multinationals acting within the law.

But there are two reasons why that’s not the whole story.

First, much of the existing tax law was already there when the current MPs were elected.

Secondly, as I’ve already mentioned, the only lasting solution to BEPS is international agreement, followed by the required changes to domestic tax laws and international tax treaties.

Uncharted waters

To sum up, we are in uncharted waters but there are positive signs and reasons to hope that the tax debate will become less heated, more constructive, and that more tax professionals will get involved.

And if you’re running a business and a level playing field is what you’re looking for, then the BEPS project seems to be your best hope.

If it works, it will reduce the reputational risk that all multinationals now have to live with – no matter what their tax policy.

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]