For one country to gain revenue, another has to lose.
The biggest hurdle to stopping multinational tax evasion isn’t the companies themselves. It’s the governments behind them.
As the OECD works on its plan to stop multinational tax evasion, the United States has already signalled it’s not happy with what’s being proposed.
The US has always been clear on its position: it will not agree to any plan that will cannibalise its tax base.
So you can understand why it is not overjoyed by recent moves by Great Britain and Australia to try to unilaterally collect more tax out of multinationals (GB & Australia have proposed a penalty tax on the transfer of local profits by multi-nationals to “tax haven” countries)
One of the US Treasury’s top officials has labelled these measures as evidence the debate is heading ”in a disturbing direction”.
US deputy assistant secretary for international tax affairs at US Treasury, Robert Stack, told the OECD international tax conference in Washington last week that the discussion about how to improve global tax laws is being driven by politics.
The need to fix budget deficits means that governments take actions that aim to raise more revenue for themselves, without taking account of the impact on the tax base of other nations.
Stack has been involved in negotiations on the OECD plan against profit-shifting known as Base Erosion and Profit Shifting (BEPS) and is a strong supporter of it.
But he’s worried that certain aspects of the BEPS plan – there are 15 parts to it – will fall down on implementation.
At the heart of the problem the OECD is trying to tackle is where a company has its location in the digital world.
There are no longer physical “permanent establishments”.
To try to create a virtual one, Stack says, will create winners and losers.
Tax authorities have to work out among themselves how and where to tax intangible items such as intellectual property.
For one country to gain revenue, another has to lose.
Stack’s fear: the United States will be the loser.
Most of the multinationals accused of dodging tax are US-based companies such as Apple, Google and Microsoft.
These companies have already complained to the US Treasury about Australia’s aggressive approach to getting more tax out of them.
By October, the OECD will have delivered its final BEPS plan.
What will happen next? Stack says 2015 will be a year in which the OECD will engage in “horse-trading”.
Or more unilateral moves.
Stack has condemned Britain’s Google tax, and Australia’s multinational tax avoidance legislation, saying they had “shone a spotlight on the degree to which political pressure can trump policy”.
To recap, the British government has proposed a diverted profits tax, whereby companies get hit with a 25 per cent levy on profits generated in Britain, but “artificially shifted” overseas.
The Abbott government wants to strengthen anti-avoidance laws to go after 30 companies with more than $1 billion revenue that shift profits through low-tax or no-tax nations.
Never mind that we don’t actually know what the government means by low-tax nation.
Or that Australia’s proposed laws were never costed by Treasury and may not raise a cent in revenue.
Or that the laws risk breaking Australia’s international tax treaties and could provoke revenge taxes being imposed on local businesses operating overseas.
The reality is that politics is already dictating how governments behave.
The Australian Senate inquiry into corporate tax avoidance – which gave the Australian public a closer look at the tax affairs of big companies from Google to Glencore – increased the stakes politically.
Tony Abbott and Joe Hockey’s hands were forced, even if reluctantly.
They couldn’t hand down a budget without addressing the multinational tax avoidance issue. Even if it was just months before the OECD was due to deliver its plan.
As Stack said: If “two of our closest friends are going their own way”, then “how soon until others follow”?
The OECD’s tax director, Pascal Saint-Amans, also isn’t thrilled about Britain and Australia’s unilateral moves.
But he believes that once BEPS is finalised, those moves won’t matter.
“Are they massive?” he told tax news publication Tax Analysts. “I don’t think so, compared to what would have been the case without the [BEPS] exercise.”
Without saying so directly, Saint-Amans is pointing out that in the end it may not matter if the US plays ball.
With the European Union, China, India, Brazil, and a bunch of nations looking to preserve their tax bases, the US will have to move in sync.
If multinationals can no longer shift profits to tax havens – that is, no longer pay zero tax because everyone is in agreement that tax has to be paid somewhere – then negotiations will have to begin on where that tax is paid.
Tax experts are warning that the laws could deter business investment and spark revenue wars with overseas tax authorities.
So what happens in the post-BEPS, no-more-tax-havens world?
The initial impact could be tax revenue wars.
In the longer term, however, the debate will inevitably return to tax competition.
Multinationals will always base themselves where they can get the most competitive tax rates.
Expect to see countries jumping over themselves to get more tax-competitive.
The Sydney Morning Herald
