TEI submits further comments on OECD BEPS Action Plan.

PositionTax Executives Institute, Organisation for Economic Co-operation and Development, base erosion and profit shifting

October 16, 2013

On October 16, TEI submitted a second letter to the OECD commenting on the OECD's Action Plan on Base Erosion and Profit Shifting. TEI's comments addressed issues under the 15 individual items of the Action Plan, including transfer pricing aspects of intangible assets, changes to the OECD model treaty, and improvements to the mutual agreement procedure. The comments were prepared under the aegis of TEI's European Direct Tax Committee, whose chair is Alexander Kolbl of General Dynamics. Benjamin R. Shreck, TEI Tax Counsel, coordinated the preparation of TEI's letter.

TEI Background

TEI was founded in 1944 to serve the needs of business tax professionals. Today, the organisation has 55 chapters in Europe, North America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our nearly 7,000 members represent over 3,000 of the largest companies in Europe, the United States, Canada, and Asia.

Overall Comments on the BEPS Action Plan

TEI appreciates the OECD's efforts to ensure that the international tax system keeps up with the ever changing business environment. The BEPS project is the OECD's latest effort to address global tax issues faced by both tax authorities and multinational enterprises (MNEs). From a business standpoint, the ideal result of the project would be a clear, predictable, and principled set of rules that taxpayers can easily apply and tax authorities can easily administer. In this regard, it is crucial that the OECD Member States and other nations participating in the BEPS project reach consensus on changes to the current international tax system.

If consensus is not achieved, the base erosion and profit shifting issues that gave rise to the BEPS project will persist, or even be exacerbated. Indeed, it is especially worrisome that countries have already begun the process of "cherry picking" certain aspects of the Action Plan for unilateral implementation, rather than waiting for the OECD's recommendations and other output. At the same time, states continue to promote their "competitive" tax regimes in an effort to attract additional business and investment from MNEs. These contradictory actions do not bode well for reaching consensus.

As the OECD produces the detailed output under the Action Plan's steps, it should keep in mind that MNE operations are complex, diverse, and generally reflect the sophistication of the worldwide economy. Companies must continuously adapt to changing economic and regulatory conditions of that economy, which still has many barriers. This trend will only continue in the future. Unfortunately, the inherent complexity of the economy, and therefore MNE operations, makes it difficult for taxing authorities to understand how a particular business decision fits within an MNE's worldwide business model. Tax authorities do not deal with complex business issues on a day-to-day basis and are therefore at a natural disadvantage when assessing the underlying reasons for a business decision. For this reason, tax authorities may often assume that the decision was motivated solely or primarily by tax planning. However, business decisions are essentially driven by economic and strategic considerations. Tax considerations are secondary.

Of course, once a business decision is made, an MNE will consider the tax consequences and attempt to minimise them. Minimisation may include the use of favorable tax rules and regimes specifically devised by countries, including OECD Member States, to attract business investment. In many cases, these rules and regimes are a primary driver behind the relatively low effective corporate income tax rates reported by MNEs. And yet, these low effective tax rates have led to much of the political pressure behind the BEPS project. Regrettably, the Report and Action Plan far too often give the impression that the sole purpose or overriding reason for MNE activity is tax planning, especially in the case of transactions between related enterprises. Hence, there are multiple references in the Plan to "recharacterising" taxpayer contractual arrangements and "special measures" to address the purported failures of the arm's length principle.

Missing from the BEPS Report and Action Plan is consideration of the administrative environment in which MNEs operate, as well as their system of internal controls. Many MNEs are under continuous audit by multiple tax jurisdictions. The auditors in these jurisdictions have a natural incentive to be aggressive because of the perceptions that MNEs have deep pockets, are noncompliant, are willing to settle in the face of large assessments and accompanying penalties, and want to avoid the uncertainty of litigation. From a broader regulatory point of view, MNEs have strong internal controls to ensure compliance with legal obligations, both tax and non-tax. In the presence of these inherent checks on the tax planning of MNEs, many MNEs nevertheless manage to achieve a relatively low effective tax rate. Instead of taking this environment as evidence that MNEs have lawfully reduced their tax burden, the Report and Plan give the strong impression that MNEs are noncompliant. The BEPS Report and Action Plan therefore begin with the wrong frame and generally adopt an anti-abuse posture rather than a more considered and objective analysis. In our view, adopting the latter approach is more likely to result in principled changes to the international tax system that would accomplish the BEPS project's goals without creating significantly increased uncertainty for business.

Also missing from the BEPS report is the concept of administrative cooperation between tax jurisdictions outside of a mutual agreement procedure (MAP). A bilateral or multilateral advance pricing agreement program, if adequately funded and staffed, provides an efficient and transparent mechanism to avoid disputes in the transfer pricing area. Similarly, joint audits between two or more jurisdictions could also potentially be used to resolve disputes without the need to resort to the MAP process or changing the basic rules of the international tax system. The Action Plan is silent on these two approaches.

TEI urges the OECD to consider the use of optional safe harbours wherever possible while drafting the Action Plan's output. Safe harbours have the potential to dramatically reduce the compliance burden imposed on taxpayers, as well as to simplify tax administration, especially in the transfer pricing area. Further, safe harbours can prevent bilateral and multilateral controversy and relieve pressure on the MAP process. These benefits will only arise, however, if the safe harbours are consistent across multiple jurisdictions. If a safe harbour for a particular transaction is different for each bilateral agreement, then its utility is greatly reduced as the rules multiply across jurisdictions. We recommend that any safe harbours be optional at the election of the taxpayer.

Given the complex issues the Action Plan intends to address, we are concerned by the "one size fits all" implication of many of the outcomes of the current OECD work and the BEPS project. From the perspective of medium-sized and smaller international groups with cross-border transactions, the BEPS initiatives will result in higher compliance obligations without any added value for tax authorities. This will especially be the case in emerging markets. This would increase entry barriers and tax considerations would become more important to the underlying business decision making process. This may cause businesses to forego otherwise profitable investments because of the tax burden or the inability to forecast the tax consequences with certainty. De minimis rules or the implementation of safe harbours could ameliorate these problems and avoid needless controversy. It would also be good tax administration.

Finally, in its effort to combat the perceived problem of base erosion and profit shifting, TEI urges the OECD not to lose sight of the problem of double taxation. The OECD's goal is to promote economic growth and the global economy and not to create new barriers to entry. Any unrelieved double taxation that results from the BEPS project will run counter to that goal. Uncontrollable tax risks can lead to systemic risks for MNEs (large or small), which can lead to severe financial consequences. We therefore recommend that the OECD incorporate the point of addressing double taxation as an overall goal of the Action Plan and in the relevant action steps.

Comments on Individual Actions Items

The remainder of this letter provides comments on individual action items in the OECD's Action Plan. We begin with Actions 14 and 15, which the Institute supports, and then move on to the remainder of the Plan's actions.

Action 14: Make dispute resolution mechanisms more effective

Action 15: Develop a multilateral instrument

TEI supports each of these actions. As the Action Plan acknowledges, if fundamental changes are made to the rules governing the international tax system, then the MAP process will become more important than ever in settling treaty-related disputes. During the past five years, our members have experienced a significant increase in tax controversy without any corresponding increase in the capacity (or willingness) of tax authorities to effectively eliminate double taxation. The bilateral dispute resolution mechanisms are currently too cumbersome, expensive, and time consuming, with cases taking years to complete. In many cases, the MAP process is not legally or practically available at all. Indeed, generally only large MNEs have the capacity to engage in the MAP process.

An improved MAP process would be welcomed by taxpayers, even in the absence of any changes to the international tax system that...

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