As the lead U.S. delegate to the OECD's Committee on Fiscal Affairs, the body responsible for carrying out the technical work on the base erosion and profit-shifting project, Robert Stack, Treasury deputy assistant secretary (international tax affairs), has the daunting task of defending the U.S. position while also trying to find consensus on tough policy issues.
To many U.S. stakeholders, Stack did a remarkable job of balancing those sometimes-competing interests during the 2014 phase of the BEPS action plan. An informal survey of tax practitioners revealed nothing but praise for Stack's role in driving the U.S. agenda. Practitioners appreciated his accessibility and willingness to hear concerns and consult with stakeholders when formulating the U.S. positions, and they valued his straightforward approach when explaining the reasoning behind the action item proposals.
Some said that he did a masterful job of both protecting the U.S. government's own interests and preventing an unfair targeting of U.S. multinationals. They also praised his efforts at curbing some of the more "radical" proposals that came out of the working groups and his ability to channel them into more workable ideas.
In an interview with Tax Analysts, Stack shared his thoughts on how BEPS unfolded in 2014 and how his views on the project have evolved.
Tax Principles and Politics
Since joining Treasury in March 2013, Stack said, he has come to see how technical tax principles, tax policy, and politics are interrelated. "Because I came from a technical tax background, when I started in BEPS I viewed these issues through a technical tax lawyer prism," he said.
However, when one is advancing Treasury's tax policy interests at a multilateral level, "it's not sufficient to think about these issues solely in terms of the technically right answer," Stack said.
"We think that's really important, but there are many other factors that need to be considered for an effective, real-world solution," he continued. "Therefore, my approach to the work has shifted away from just defending the technical answers, to trying to appreciate the perspective of other countries that are having these BEPS issues so that you can shape solutions that'll work for everybody. It's very, very challenging."
Stack said that the recently announced German-U.K. proposal to address harmful preferential intellectual property regimes within the BEPS action plan is a good example of countries finding ways to compromise on tough policy choices. "Even though the U.K. has a sovereign right to have whatever patent box regime it wants, it also understood the OECD's perspective on preventing the misuse of IP regimes," he said. "I think that's a big accomplishment in BEPS and an example of countries evolving their views as they participate in this process."
The U.K. government deserves credit for making the move, and "it shows the rest of us that we, too, should be thinking of ways to leave our comfort zone in trying to make the system work better," Stack said.
Defending U.S. Interests
Asked how he would answer critics who view his role in the BEPS project as the defender of U.S. business against the rest of the world, Stack said that he and other U.S. officials have made it clear that the United States has always had an interest in minimizing the degree of stateless income and in working with other countries to do so.
"We have always been focused on protecting the U.S. tax base in the BEPS project," he said.
"And I do believe that because there are so many successful and prominent U.S. multinationals it is in the interest of the United States to be sure that our taxpayers are being treated fairly around the world, that they have rules that are clear and administrable, and that we as the U.S. government are not opening the door to rules that will create greater and greater tax disputes," Stack said. "So in those two senses we have had to be aggressive in defending the U.S. position in the BEPS space."
Stack said that it wouldn't be entirely fair to paint the BEPS initiative as "the U.S. against the world." The U.S. contingent has been able to find common ground with other countries on various action items, such as hybrids, he said.
"My thinking is that when you get action items where everybody's interests are more or less aligned, that's where it's been somewhat easier to find consensus," he said. However, there are some areas where the United States has had to be aggressive, he said.
"Transfer pricing is a good illustration of that," he said. "One of the weaknesses that we struggle with in the transfer pricing space is that it's been difficult for the U.S. to defend the arm's-length standard when it's used to put outsized returns in places with little or no tax."
To counter critics' argument that these rules are being used to put profit in low-tax places, the U.S. position is that a measure like the Obama administration's minimum tax proposal or the proposed treatment of foreign base company intangible income in the 2014 international tax reform draft of House Ways and Means Committee Chair Dave Camp, R-Mich. (which modified the option C provision in Camp's 2011 tax reform draft), would pick up the excess profits shifted to low-tax jurisdictions. "It would take a lot of pressure off the desire to change the transfer pricing rules to do indirectly what things like the minimum tax proposal are trying to do directly," he said.
"I have to be defensive in transfer pricing, not because I'm trying to defend stateless income," Stack said. "I'm trying to come up with other ways to handle stateless income but fight back to say I still think we need the arm's-length standard."
2014 Deliverables: The Good and the Bad
Asked which deliverables he was happiest with, Stack listed three: actions 1 (digital economy), 2 (hybrid mismatch arrangements), and 13 (transfer pricing documentation and country-by-country reporting).
Regarding the action 1 report, Stack (who co-chairs the Digital Economy Task Force) said that the U.S. contingent had deep concerns at the beginning of the project over some countries' efforts to develop special rules for the digital economy. "We got the group to recognize that you can't ring fence the digital economy and that other BEPS action items were likely to deal with lots of issues that are specific to the digital economy," he said. "I thought the report did a very thorough job of analyzing the industry and the kinds of base stripping issues that arise there."
The outcome on country-by-country (CbC) reporting was good from a process point of view, Stack said. "That is one where we worked very hard with other countries and with the companies that would have to be making the [CbC] reports to see what kind of template they could live with and prepare efficiently without extreme use of resources," he said.
"What I like was that we were able to take an initial draft, listen to people, talk to the countries, and come up with a compromise where we reduced the number of items that companies would have to report on a [CbC] basis," he continued. "Another important thing is that when we were dealing with stakeholders, the question wasn't whether we were going to do [CbC] reporting -- that was already in the action item -- the question was how to do it. I think we had a very constructive relationship with stakeholders to get to a good place on that one."
The hybrids action item was notable because it was an area in which all of the countries had a shared interest in limiting the ability of taxpayers to use instruments that create a deduction in one country but no income inclusion in the other, Stack said. "People were able to quickly coalesce around a solution that's reflected in that report because there was some equality of interest among the countries," he said.
Stack said that he thought more work could have been done on action 8 dealing with intangibles. "We are consistently watching transfer pricing," he said. "We don't want the transfer pricing reports to become basically antiabuse rules or backstop [controlled foreign corporation] rules. We want them to clearly articulate the arm's-length standard."
Because the action 8 report reserved on the text of section B ("Ownership of Intangibles and Transactions Involving the Development, Enhancement, Maintenance, Protection and Exploitation of Intangibles"), the group will work in 2015 to find consensus in those areas, as well as the areas of special measures, risk, and recharacterization. "So I'm not unhappy yet, because it hasn't gone in a direction we don't want it to, but it's something we have a great deal of concern about," Stack said.
Asked to shed some light on how the action 6 treaty abuse group's proposal evolved from the controversial "double down" approach (a limitation on benefits provision coupled with a main purpose clause) to a minimum standard concept (a principal purpose test, an LOB with domestic antiabuse rules, or both), Stack said the compromise was reached over time.
"The U.S. made it pretty clear that the main purpose test was very subjective and would increase disputes, and in any case we were not interested in abandoning our LOB approach," he said. "I think when countries saw that there was this split between LOB and main purpose, the idea was born that maybe countries could do different things, as long as they met some kind of a minimum standard to which they would apply treaty abuse."
Stack elaborated on comments made October 2 by U.S. Treasury International Tax Counsel Danielle Rolfes that the working groups in 2014 tried to address too many difficult issues in a compressed time frame and that going forward there should be more coordination across different action items.
"We spent a lot of time debating the practicality of a hybrid rule that would in theory catch everything, but we worried a lot about whether in practice it could. Then when we had to get down to actually writing the hybrid rules we came up with, we were kind of rushed," Stack said.
At an October meeting of the CFA Bureau (the CFA's steering group), the delegates discussed how the BEPS process could be improved for the 2015 deliverables, Stack said. "The buzzword we used was 'scoping,'" he said. "Meaning, let's look at an action item and think about the things that are achievable in the time we have and focus like a laser beam on those issues."
Stack said that the "scoping" commitment is already happening with the work on action 4, which calls for limiting base erosion via interest deductions and other financial payments. The July 2013 action plan says that "in connection with and in support of the foregoing work, transfer pricing guidance will also be developed regarding the pricing of related party financial transactions, including financial and performance guarantees, derivatives (including internal derivatives used in intra-bank dealings), and captive and other insurance arrangements."
Stack said that the United States has been able to convince the action 4 working group that trying to address all of those related issues would be unwieldy and that it should focus its efforts on designing rules to prevent BEPS through interest deductions.
Asked whether he thinks the BEPS project will result in an increase in U.S. multinationals' effective tax rates, Stack said that the hope is that it will put a dent in the problem of stateless income. "You might think that if that occurs, the effective rates would go up," he said. "Instead of seeing this as an exercise to increase multinationals' effective rates, I think that if you can do away with stateless income you can raise the effective tax rates of the companies that can take advantage of stateless income -- which isn't everybody."
"And it plays into the notion that if you can broaden the base by reducing stateless income, we could actually lower the [statutory] rates, as the president and many members of Congress would like to do," Stack said.
What will a post-BEPS OECD look like? With participation in the project extended to non-OECD member G-20 countries, is it possible for the OECD to go back to the way it was after the last BEPS output is delivered?
While consensus might have been more easily achievable if the BEPS project had been restricted to OECD members, Stack said it was important to have non-OECD countries' voices heard. "It's good to have all affected parties at the table so we can constructively deal with the tax issues that concern all of us," he said.
Kristen A. Parillo is a legal reporter with Tax Notes International.