Action Plan Could Signal Seismic Shift in Tax Landscape, But Significant Challenges Lie Ahead
While today's Action Plan on Base Erosion and Profit Shifting from the Organisation for Economic Co-operation and Development (OECD) -- presented to the G-20 finance ministers at their meeting in Moscow -- represents a significant development in global collaboration to modernize the international tax system, the scale of the report and its ambitions for change could signal a potential seismic shift in the international tax landscape, according to KPMG LLP, the U.S. audit, tax and advisory firm.
Commenting on the Action Plan on Base Erosion and Profit Shifting (Action Plan) published by the OECD today, Greg Wiebe, Global Head of Tax at KPMG International, said: "Bringing today's proposals to fruition within the 24-month timetable presents an enormous challenge. There is undoubtedly an urgent need to work quickly as uncertainty helps no one, but modernizing over 75 years of international tax laws in just two years' time without jeopardizing the aspects of the current system that operate as intended and are fit for purpose will not be straightforward."
Manal Corwin, principal and national leader for International Corporate Services at KPMG LLP and former deputy assistant secretary for tax policy for international tax affairs at the U.S. Treasury Department, also commented: "Today's report proposes significant changes to the international tax landscape in a very short period of time. We are encouraged that the OECD is emphasizing the importance of consulting with a range of non-governmental stakeholders as it moves forward. KPMG believes this dialogue is a critical step to the plan's ultimate success, and we look forward to engaging constructively with the OECD during the consultation process."
Action Plan Addresses Several Key International Tax Areas
KPMG LLP highlighted that today's Action Plan focuses on a number of key areas including the digital economy, intangibles, hybrid mismatch arrangements, harmful preferential regimes, aggressive tax planning, and greater transparency and disclosure.
The "digital economy" in its broadest sense presents difficult and complex issues to international business. KPMG LLP's Corwin said "we welcome the planned holistic approach to understanding the business models in this sector before making specific proposals."
The plan's call for action to address what it refers to as "hybrid mismatches" was anticipated and is likely to have a significant impact on multinational companies. KPMG LLP said this is also likely to be one of the most ambitious areas of the plan as it will require changes to domestic law and extensive coordination among countries.
The Action Plan also calls for revamping the work on what it describes as "harmful tax practices" adopted by certain jurisdictions. "We believe providing clarity and establishing consensus around the criteria for identifying these practices versus acceptable tax competition would be welcome," Corwin said.
The Action Plan also calls for improving mechanisms for dispute resolution. "We encourage the widespread adoption of mandatory arbitration and recommend the OECD go further in opening up access to the Mutual Agreement Procedure (MAP) to facilitate earlier and swifter resolution of disputes," said Corwin of KPMG LLP.
Areas for Ongoing Dialogue
Although the OECD's earlier report (issued in February 2013) indicated it did not intend to depart from the arm's length principle in regard to transfer pricing, today's Action Plan suggests that consideration is now being given to measures which go beyond that principle. KPMG LLP said a departure from this universally established standard raises serious concerns.
The Action Plan proposes changes to domestic legislation to require greater "disclosure" to global tax authorities regarding certain "aggressive transactions." KPMG LLP said that providing clear definitions and establishing consensus as to the transactions to which this will apply will be essential to the effectiveness of this proposal.
The Action Plan also calls for enhanced documentation requirements. "The proposals around re-examining transfer pricing documentation appear to be moving toward a version of country-by-country reporting to tax authorities," said Corwin of KPMG LLP. "If this is what is intended, it will be important to ensure that the practical considerations and costs to the taxpayer are fully assessed and appropriately taken into account relative to the benefits such reporting would serve in addressing base erosion and profit shifting."
In addition, a number of the proposals will require domestic law changes that may be in conflict with European Union rules (such as limitations on the deductibility of interest expense, Controlled Foreign Corporation rules and treaty anti-abuse rules). KPMG LLP noted that, in the past, resolving these conflicts has presented significant challenges. It is not clear whether the potential benefits of a coordinated action plan will provide sufficient incentives to overcome these challenges.
Finally, the Action Plan proposes adoption of a multilateral convention among participating governments to implement a number of the proposed actions. KPMG LLP's Corwin said: "This will present some considerable challenges, but it may be the only realistic mechanism for effecting change within the proposed time frames."