The OECD has presented an action plan to G20 finance ministers meeting in Moscow today to counter double non-taxation and reform tax rules affecting the digital economy report Harris & Co chartered accountants Northampton who are specialist small business accountants.
The 15-point action plan is designed to address corporate tax evasion at an international level, with particular reference to the issues raised by the growing digital economy, but rules out the option of a move to unitary taxation.
OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) says fundamental changes are needed to prevent so-called ‘double non-taxation’ of multinationals and cases of low or no taxation ‘associated with practices that artificially segregate taxable income from the activities that generate it’.
OECD stresses the importance of addressing the digital economy, which it says ‘offers a borderless world of products and services that too often do not fall within the tax regime of any specific country, leaving loopholes that allow profits to go untaxed’.
The timeframe for the introduction of the new tax rules is tight, with full implementation of new rules envisaged by 2015. OECD secretary-general Angel Gurria said the action plan, which will be rolled out over the next two years, ‘marks a turning point in the history of international tax co-operation’.
The OECD wants to see closer international co-operation to close gaps that allow income to ‘disappear’ for tax purposes by using multiple deductions for the same expense, and ‘treaty-shopping’. It also calls for tougher rules on controlled foreign companies.
The OECD says domestic and international tax rules should relate to both income and the economic activity that generates it. The action plan wants to see existing tax treaty and transfer pricing rules amended, so that taxable profits cannot be artificially shifted, through the transfer of intangibles (eg patents or copyrights), risks or capital, away from countries where the value is created.
Bill Dodwell, head of tax policy at Deloitte said: “The OECD’s action plan is the most significant potential change to international taxation for decades. The plan aims to limit the potential exploitation of the international tax system, by reducing the scope for non-taxation of income.
‘The plan identifies the challenge of taxing the emerging digital economy, but recognises there is currently no consensus. This is problematic and a key hurdle for the OECD to overcome.’
Dodwell added that ‘these changes will undoubtedly lead to increased costs for businesses, but international co-operation with the OECD will be needed to make progress. ‘Businesses should also expect to see more imminent changes in connection with hybrid instruments and entities and the tax deductibility of interest".
A number of working groups will be set up to tackle individual action points and a multilateral framework will be developed so that individual countries can amend existing bilateral treaties. However, the tight timeframe means some groups will have to report as early as autumn 2014.
Charities and campaigning groups said it was important that the views of developing countries were included in the action plan. The proposals do not alter the balance of tax between source and residence countries, which is a goal of China, India and some developing countries.
ActionAid tax campaigns manager Chris Jordan said: ‘It’s vital that they [developing countries] have a seat at the table, so global tax rules aren’t stitched up by the major powers. Ultimately, the proposals will be judged by their effectiveness in turning a broken and unjust system into one that produces a fair result for all countries, companies and citizens.’