I’ve finally got around to pronouncing on the OECD’s action plan on base erosion and profit-shifting. Surely the only response at this stage is that the jury is out. BEPS is an ordering principle for a quite disparate programme of work, and so it’s hard to reach an overarching verdict.
Later this week I’ll write about developing countries. In this post I want to highlight three things that I read in the action plan published a couple of weeks ago that at first sight seem to contradict what we know about UK tax policy – all areas that have been discussed on this blog before. This is to pose questions, not reach conclusions. It will be interesting to see how the UK position develops in these areas, as I think they might be useful yardsticks to measure how radical the OECD members really want this work to be.
1. CFC rules
The report says:
While CFC rules in principle lead to inclusions in the residence country of the ultimate parent, they also have positive spillover effects in source countries because taxpayers have no (or much less of an) incentive to shift profits into a third, low-tax jurisdiction.
This was precisely the argument that we made at ActionAid when the UK relaxed some of its CFC rules, which are designed to prevent the artificial diversion of profits into tax havens. Here is the government’s response in 2011, given by Treasury minister David Gauke:
Our corporate tax system is not the best way to help those [developing] countries; it is designed to protect the UK’s taxing rights, not those of other countries. Rather, it is for the countries themselves to have effective systems that build and protect their own tax base, and to ensure that they can access and act upon tax information…Such an assessment [of the impact of changes on developing countries] would not be relevant to the task of creating the most competitive corporate tax system in the G20 and encouraging more businesses to be based in the United Kingdom.
The Treasury rejected outright the position that is now stated in the BEPS Action Plan, when it came from an NGO and a parliamentary committee. Maybe this is a non-consensual area among the OECD members, because all that is promised is to “develop recommendations regarding the design of controlled foreign company rules.”
2. Patent box
The Action Plan says that:
the “race to the bottom” nowadays often takes less the form of traditional ringfencing and more the form of across the board corporate tax rate reductions on particular types of income (such as income from financial activities or from the provision of intangibles).
Yet the UK’s introduction of a ‘patent box’ that gives a lower corporate tax rate on income from exploiting patents is precisely this kind of measure. Having said that, the actions in this section – unlike the discussion – seem to shy away from anything that might counteract competitive measures per se, unless they are used for abusive structures:
Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime. It will take a holistic approach to evaluate preferential tax regimes in the BEPS context. It will engage with non-OECD members on the basis of the existing framework and consider revisions or additions to the existing framework.
Addressing “the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules” is one of the most intriguing parts of the BEPS agenda.
Many of the high profile cases such as Google and Amazon relate precisely to this point. As the action plan describes it:
In many countries, the interpretation of the treaty rules on agency-PE allows contracts for the sale of goods belonging to a foreign enterprise to be negotiated and concluded in a country by the sales force of a local subsidiary of that foreign enterprise without the profits from these sales being taxable to the same extent as they would be if the sales were made by a distributor.
My question here is, does the UK really want this change? A shift towards greater source taxation, which is what this would entail, would cost some countries more than they would gain. The UK’s track record, for example the way in which it disregards the OECD consensus by refusing to treat an internet server as a taxable entity, suggest that it favours a more residence-based system, not a more source-based system.
According to this McKinsey survey, the UK is a world leader in the share of eCommerce in its GDP, but it also has an internet trade deficit. This is because Britons do more internet shopping than most other countries. This suggests that the UK would stand to benefit from the change implied by the BEPS action plan, but also to lose from its current policy position. I wonder what is going on?