This article first appeared in the June 15, 2015 edition of Tax Notes International.
Someone had to do it. U.S. multinationals hate the new British diverted profits tax (DPT), and someone had to give vent to their frustrations and say it was wrong to get ahead of base erosion and profit-shifting agreements. That someone was Robert Stack, U.S. Treasury deputy assistant secretary (international tax affairs).
The DPT "points in a disturbing direction," Stack said June 10 at the OECD International Tax Conference in Washington, acknowledging the "potent" politics that led the Conservative government to act. But the DPT and the proposed Australian version turn the agreed standard of permanent establishment on its head. "These countries don't believe they'll get their fair share under current rules or BEPS," Stack said. (Prior analysis: Tax Notes Int'l, Jan. 12, 2015, p. 109.)
Stack bemoaned the tendency of some countries to want to rewrite the bright-line rules of the PE article of OECD model treaties, pointing out that those countries agreed by treaty to draw a bright line in the form of the PE rules. So U.S. multinationals that play by the PE rules and plan to have activities elsewhere shouldn't be accused of making artificial arrangements, Stack said. He further objected to the idea that the U.K. and Australia won't make DPT assertions eligible for competent authority negotiation.
Despite his reservations about the U.K. DPT and the Australian proposal, Stack said the U.K. and Australia have done a service in shining a spotlight on the degree to which politics trump policy. He questioned the role of a standard-setting body like the OECD, given the U.K.'s and Australia's unilateral actions. "Do we need standards or don't we?" he asked. "Two of our closest friends are going their own way," he said. "How soon until others follow?"
Although in general the OECD's work is changing the international tax landscape, the U.S. is "extremely disappointed in the output and our collective failure in the BEPS project to do more and do better work than we've done," Stack said.
Stack noted two elements of the BEPS project that will drive change in corporate taxation: the refinement of transfer pricing rules and country-by-country (CbC) reporting requirements, which he praised as an "extraordinarily successful effort" arising from the OECD consensus process. On June 8 the OECD released a package of model domestic legislation and competent authority agreements to facilitate the implementation of CbC reporting standards developed under action 13 of the BEPS project, as well as the exchange of CbC reporting data between jurisdictions.
"There is evidence that multinationals are already adapting to the new environment -- an adaptation that could be helped with U.S. business tax reform," Stack said. He questioned whether that change in business behavior is the result of technical work at the OECD or headline risk and mused that other powerful political forces are at work, brought on by understandable public resentment against corporate tax avoidance in times of austerity.
Stack also questioned how to determine whether the BEPS project has been successful in curbing aggressive multinational tax avoidance. "When will countries think that BEPS concerns have been allayed?" he asked. "If it's driven by political pressure, do the concerns dissipate when the press coverage dies down? Will BEPS fears die down when effective rates of multinationals increase? Will countries be satisfied when [they can] post more tax revenues from multinationals? And if more revenues are the test, then how much revenue?"
Stack set out the U.S. wish list for a post-BEPS world: First, slow down the pace of BEPS work. Second, design administrable rules. Stack professed to be "shocked and appalled" that the tax administrators negotiating BEPS opted for approaches that grant a lot of discretion to tax examiners, saying he doesn't want tax administrators using "the pornography test" to determine what they don't like on audit. If that's the case, "Who needs rules?" he said.
Some countries must accept that there may not be much value added in their territory, so BEPS negotiators should better manage the expectations of their home governments, Stack added.
Third, and conversely, countries shouldn't race to the bottom in cutting taxes. "We should acknowledge that countries purposefully left gaps" that are now the subject of the BEPS project, he said. Some countries are reluctant to restrict interest deductions or have tightly controlled foreign corporation rules out of fear of discouraging inward investment, Stack added.
During another panel, Mike Williams, director (business and international tax) at HM Treasury in the U.K., said he gets the sense that the U.S. is "quite frustrated with dealing with other countries." However, he pointed out, not working with other countries on the BEPS project would be a worse outcome, so it's necessary to carry on with it. He also rebutted Stack's comment that political pressure trumped policy when the U.K. introduced the DPT, saying that U.K. tax policy is determined by the government and that its decision was legitimate.
Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, acknowledged that unilateral actions are happening. "Are they massive?" he asked. "I don't think so, compared to what would have been the case without the [BEPS] exercise."
Saint-Amans took issue with Stack's comment that BEPS is moving too quickly, arguing that moving fast forestalled more unilateral action. The BEPS project has been a significant exercise for the past two years, and the negotiators had to move quickly to prevent governments from acting unilaterally until the project concludes, he said. The BEPS discussions gave governments some patience, he added.
As for the howls that BEPS is politically motivated, Saint-Amans reiterated a phrase used by nongovernmental organizations that "tax policy is serious enough not to leave up to tax techies." Policymakers elected in democracies must be involved, especially when leaders speak about international tax for an hour and a half, as was the case at the G-20 leaders summit in Brisbane last November.
While it remains to be seen whether the BEPS project succeeds in curbing aggressive multinational tax avoidance, the next step in the process is monitoring implementation of the final BEPS project recommendations, which will be presented to G-20 finance ministers in October and to G-20 leaders in November. Saint-Amans suggested that perhaps some kind of peer review process could be one way to monitor implementation.
The U.S. and the Multilateral Instrument
Danielle Rolfes, Treasury international tax counsel, noted that the U.S. isn't among the 80 countries developing the multilateral agreement called for in BEPS action 15 . "The question is what's in it for us," she said. The U.S. chose not to participate because of resource constraints, and the decision was made that the instrument would cover only treaty-related items, she said. When the U.S. stepped back and looked at the treaty-related items likely to be included in the instrument, it didn't seem like a good use of its scarce resources to participate in the group developing the multilateral instrument, according to Rolfes.
Further, regarding the treaty-related work on hybrid mismatches under action 2, Rolfes noted that in general, U.S. treaties already include rules to address when it is appropriate to grant treaty benefits to hybrid entities, so again, it isn't necessary for the U.S. to participate in the group developing the multilateral instrument.
Regarding action 6 , Rolfes said the U.S. limitation on benefits clause adequately covers the purposes contemplated for the multilateral instrument by countries worried about treaty shopping, so the instrument offers the U.S. nothing new in the way of preventing treaty shopping.
The U.S. wants to persuade treaty partners to agree to mandatory binding arbitration, which some countries are reluctant to do. Rolfes implied that if mandatory arbitration were included in the multilateral instrument, the U.S. would sign it. In their June 8 communiqué endorsing the completion of the BEPS project, G-7 leaders called for effective implementation and monitoring of the BEPS outcome and encouraged more countries to join in its commitment to mandatory binding arbitration.
Saint-Amans said he hopes the multilateral instrument will establish a minimum standard for mandatory arbitration with peer review to make competent authorities accountable to their political masters.
Lee A. Sheppard, Tax Analysts.
Stephanie Soong Johnston, Tax Analysts.