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William Morris and Carol Doran Klein -- BEPS and Business

Posted on December 22, 2014 by Amanda Athanasiou and Margaret Burow

The business community's involvement in the OECD's base erosion and profit-shifting project reveals divided opinions about BEPS. "Some are quite angry that settled tax rules are being overturned," while others feel that the project can provide emerging economies the opportunity to participate in "a new and hopefully more stable international tax regime," said William Morris, chair of the Taxation and Fiscal Policy Committee of the Business and Industry Advisory Committee to the OECD (BIAC).

William Morris and Carol Doran Klein (William Morris and Carol Doran Klein)No one knows the importance of business's participation in the process better than Morris and Carol Doran Klein of the United States Council for International Business (USCIB), both of whom have played an influential role in the BEPS discussions on behalf of business this year.

One of the principal goals of the OECD, according to Morris, is to promote cross-border trade and investment, not to inhibit it. Business organizations like BIAC can help the OECD devise recommendations that have minimal impact on business, Morris said. BIAC can bring legal and accounting expertise from the advisory community, which can also help ensure that recommendations are technically sound, he said.

Companies will do the best they can to apply whatever rules get adopted, but there are critical things for policymakers to consider from a business perspective, according to Klein. "It's important for people who are writing the rules to understand what is actually happening in companies. You want people to make decisions based on facts as they really are," Klein said.

The BEPS process, according to Klein, should produce certainty, clarity, and predictability for business. "It's important for business to know what the tax rules are because tax is a cost, just like any other cost," she said. If you don't know how much it's going to cost to make an investment in a country, to employ people, buy materials, or do any of the things you have to do as a business, you can't estimate when you're going to make money -- the same is true for taxes, she explained.


Business's Participation

Klein said that business's most influential contribution to the BEPS project this year was probably in the discussion on the digital economy. "While the final recommendations for action 1 may not have been 100 percent positive, business supports the recognition that there's no such thing as a digital economy separate from the rest of the economy," Klein said.

Business's participation in the consultation process also met some success in action 13, country-by-country reporting. The initial report required information that would have been difficult for companies to provide and not terribly useful, said Klein. The input of business resulted in a significantly scaled back template. "That's how you hope the process will work -- that people will listen, take the issues into account, and make changes," Klein said.

The greatest disappointment from the BEPS project is probably the work done on action 6, Klein said. "Very little of what the business community recommended for the treaty abuse paper was included in the final recommendation," she said. "Governments could probably shut down treaty abuse completely, but it would come at a significant cost, which is that people entitled to treaty benefits will not be able to claim them."

The action has the potential to harm cross-border trade and investment because of the heavy focus on abuse, Klein said. Doubt can be a deal breaker when it comes to cross-border investment, which underscores the importance of business's need for certainty. If it's unclear whether treaty benefits will be available to protect a specific investment, "that may be the same as saying 'no, they're not,'" Klein said. The OECD seems to have lost sight of the fact that the vast majority of companies claiming treaty benefits do so legitimately, Klein said.


Reaching Consensus

Morris said he felt that the OECD has been successful in reaching out to stakeholders. Pascal Saint-Amans "has done an amazing job of holding together a disparate group of countries to produce the 2014-15 recommendations," he said. "I think a lot of people thought that couldn't be done."

Morris also had a positive view of key representatives from nonbusiness sectors. Morris said that Robert Stack, U.S. Treasury deputy assistant secretary (international tax affairs), has been "remarkable -- open, approachable and thoughtful," making "transparent the views and interests of the United States in a way that could be a model for others." He added that representatives such as Sol Picciotto and Richard Murphy of the BEPS Monitoring Group "ask serious questions that make us give better answers."

"Getting developing countries engaged and having them understand and agree to rules that are being adopted is a good thing," Klein said. But there are also serious practical problems, she added. "Some countries have real resource limitations -- they can't send people to Paris every other month and they don't have dozens of people that are familiar with the complex tax rules being discussed."

Klein said that while there seems to be political agreement on BEPS at a high level, "I think there are real doubts that the OECD is going to be able to reach consensus." Leaders of participating countries have expressed a commitment to BEPS, "but they haven't said they're going to give up their taxing jurisdiction and cede it to somebody else," Klein said.

Reaching consensus among the largest economies will pose the biggest challenge because they have the most at stake, Klein said. But unanimity isn't required, she pointed out. "You need consensus among the countries where you've got significant investments, and if you can get that, then having countries that don't agree where investment is less is not so bad."

Klein said the most important thing to remember in proceeding is to have principles that are applied consistently and make sense in terms of actual business transactions. This will be difficult if countries are only looking to raise revenue, she said.

There needs to be a principled basis for imposing tax or for analyzing a transaction, and it has to be the same whether it's inbound or outbound. "If the OECD can come up with some principles that people don't mind applying in both directions, then they have a shot at resolving these issues," Klein said.


Margaret Burow is a legal reporter with Tax Notes International.
E-mail: mburow@tax.org
Amanda Athanasiou is a legal reporter with Tax Notes International.
E-mail: aathanas@tax.org