Tax avoidance by large businesses is still a topic that attracts attention, with politicians keen to state that they will be tough on those that abuse the rules. The OECD is coming to the end of its ambitious two-and-a-half-year BEPS project to design a new framework for international tax, and has issued its final package of measures. But, has the OECD really found a better and more internationally coherent approach to tax?
What’s the problem?
The OECD has, for the first time, made a statement about the quantum of tax that is being lost by so-called Based Erosion and Profit Shifting (BEPS) from which the project name derives; the estimate is US$100bn - $240bn annually. Clearly, there is an issue to be addressed.
Is this just about major multinationals?
One very important point is that although to a large extent the project was aimed at addressing the tax mitigation techniques used by the major multinationals, potentially any business that has international aspects will be effected to some extent. In addition, despite what politicians may say, the OECD is more concerned with being balanced and fair than penalising taxpayers, and in the long-term, international groups may find that some of the ideas proposed by the OECD lead to a more consistent experience.
Although the BEPS proposals are not legally binding on any country, the UK has been at the forefront of the project and can be expected to follow the project recommendations, although we will need to wait for more detail on when any new rules will come into effect. The recommendations fall into three broad categories: coherence, substance, and transparency.
The lack of coherence across territories is one reason for the gaps and imbalances. Examples of BEPS recommendations that will affect the UK are:
- Interest deductibility – the UK has fairly generous rules that allow financing costs to reduce taxable profit, although there are some restrictions. The OECD’s new approach is to limit tax deductibility based on a percentage of the profit before interest.
- Patent box – the UK’s regime that achieves a 10% tax rate on profits from patents is considered harmful and open to abuse, and so will need to be redesigned.
The BEPS proposals have a relatively simple principle at their heart – to match the taxable profits in a territory with the value that has been created there. One key change in this area is to the definition of permanent establishment. This is a longstanding international tax concept, under which a company resident in one country can fall within the charge to tax, based on activities undertaken, in another country. There is a general view that the current rules on what does and what does not constitute a permanent establishment have been exploited, and so must be changed. One common situation is where a UK company has a sales team overseas and that team plays the principal role leading to the conclusion of customer contracts. This is a good example of where many smaller businesses could be affected.
The key here is the introduction of country-by-country reporting, whereby tax authorities in each country in which a group of companies does business will have access to key facts and figures about the tax paid by that group around the world. This alone is considered to have the potential to reduce aggressive tax planning as tax authorities will now have a clear picture.
Tax rules developed over time have simply not kept pace with modern business. These changes are expected to have a major impact over the years to come.
For further information on these changes and how they might impact you, please contact your RSM advisor or RSM UK's specialist International Taxation team members below.