Tax Break

John Fisher, international tax consultant

Archive for the tag “Base Erosion and Profit Shifting”

The Battle Of The BEPS

The storm clouds were already gathering at the G8 Summit

The storm clouds were already gathering at the G8 Summit

A hundred years after the countries of Europe drew their battle lines in France and promptly got stuck in the mud, the Paris-based OECD looks like it is facing a long period of trench warfare. Originally predicted to be half-finished by Christmas, the BEPS plan – if it is to be instituted at all – will almost certainly be wrangled over for months and years ahead.

Base Erosion and Profit Shifting was always going to be an ambitious project, but when the G8 (since deflated to the G7) and, subsequently, the G20 (G19) put their weight behind it in 2013, its prospects  started to look up. At a time when major western nations were hemorrhaging taxable profits to offshore and cheeky onshore jurisdictions, there was unanimous support for clobbering tax avoidance. Although Dave ‘Selfie’ Cameron and Vlad ‘The Impaler’  Putin led the charge (Putin displaying his famed respect for international law and order), it looked clear that the Americans, fresh from their FATCA foreign account disclosure victory, would quickly take over.

There is naive, and there is naive with knobs on.

The Americans, in the persons of Rep. Dave Camp and Senator Orrin Hatch, soon realized that the companies making the most bucks around the globe owe ultimate allegiance to Uncle Sam. Some, like Apple and Google, might have successfully sheltered much of their income offshore pending repatriation to the mainland, but that could be dealt with by Congress and the IRS without recourse to all those Europeans who were not even capable of winning or losing their World Wars on their own. BEPS, while having some strong points, was ultimately an attempt to wrench taxable profits out of the hands of the Americans.

Another hybrid white elephant

Another hybrid white elephant

Battling furiously to meet the September 2014 deadline for the first part of the 15 point project, OECD apparatchiks slogged overtime to produce heaps of words on transfer pricing and country-by-country reporting, treaty abuse, hybrids and the digital economy. While the transfer pricing recommendations were greeted with derision, the hybrid proposals were so complicated that they would require more acumen to implement than went into all the previous hybrid planning. And, as for the digital economy, the OECD more or less came out with its  hands up – apart from a recommendation about raising taxation through VAT (which many of us could have happily told Dave and Vlad back at their first meeting and saved them the money).  If none of this gets off the ground, one good thing that will have come out of  it all is that the Hybrid Mismatch document includes some great ideas for future tax avoidance. Somebody at the OECD also, rather belatedly, woke up to the fact that developing countries may have specific problems implementing BEPS; the technical guys have picked up their pens once more.

The proposals are now at various stages of public consultation – for ‘public consultation’ read ‘being rubbished’.

google taxMeanwhile, thanks to FATCA, the Automatic Exchange of Information project , which is running parallel to BEPS, continues to advance rapidly through the battlefield. It may well be that,  taken together with enhanced domestic anti-avoidance legislation by individual countries, this will bring a real solution to much of the tax avoidance and profit shifting that BEPS aims to stop –  in addition to dealing with tax evasion which is its raison d’être. As we have already seen in the wake of the British Parliamentary inquisition of Google, Amazon and Starbucks, although their practices were totally legal, the ability to ascertain and publicise their financial information led to a public backlash. Modern multinationals cannot afford the bad publicity – times they are a changin’.

Will the coming months herald the Battle of the BEPS, as the OECD  Task Force breaks through enemy lines on its way to victory? Or, will they usher in the Great Phut (one day, when the OECD tries the same gambit again,  to be known as the First World Phut)? Without the Americans joining in the war, and with professionals engaging it in hand-to-hand combat, the prospects are not high that the OECD staff will be home for any Christmas soon.

 

Dallas, Taxus

"The Kennedys"

“The Kennedys”

According to a study in the influential “British Medical Journal”, if you are looking for a safe profession (leaving aside Accountant or Lawyer), you would be better advised to plump for Bomb Disposal Expert or Formula 1 Racing Driver than Soap Opera Star. The BMJ informs us that characters in these B-TV sagas have three times the normal mortality rate across age groups. Taken together with the other essential ingredients of a Soap – halting scripts, multiple rambling semi-plausible plots, and the occasional totally implausible shock occurrence (remember when the entire 9th series of Dallas turned out to be a dream?) – “The Kennedys” could have easily qualified for a grant from the Soap Opera Arts Council.

With newsprint and screens currently full of the  tragic moment in Dallas  exactly 50 years ago next Friday, my unhinged thoughts drifted unwittingly to other Reality Soaps and, particularly, those of the Taxploitation Genre.

The ink is not yet dry on the OECD Base Erosion and Profit Shifting Action Plan and hurriedly drafted scripts, including those of various tax authorities, are already prophesying the impossibility of reforming the taxation of the digital economy, which is so essential. Flashbacks remind us that the whole international tax mess started after the First World War, when  the Gentlemen’s Club of Europe and America decided that taxation should follow residence – so that profits did not remain in the hands of the off-screen Colonial extras who had their hands on  the raw materials , but flowed up to the stars at centre-stage.

The public and their governments now scream that , with the onset of internet maturity,  it is time to upset the digital world order – a rare Soap moment calling for  Tax Armageddon. Surely the time has come to look more closely at where transactions are being consummated –  recognizing that data-collection should be taxable where the data is collected?  But no, it is noted that there is absolute connectivity between the digital and old  economies – if we change digital, we have to change everything – and that exclusive Gentlemen’s Club seems to be saying: “That will not do. We cannot flash the bat outside the left stump”. They prefer to carry on with the same script tweaking it over the long-term trying to achieve governments’ stated goals.

Marilyn is far left, Carlos is far right (he was, after all, from Franco's Spain)

Marilyn is far left, Carlos is far right (he was, after all, from Franco’s Spain)

This brought back memories of my favourite soap during my formative years – the low-budget, cardboard-walled “Crossroads” about a Midlands Motel, which ran without interruption from 1964 to 1988. In its early years it followed all the normal rules until, in 1968, sometime around the assassination of RFK, the scriptwriter must have had enough of writing his daily drivel. In an act of devilish inspiration, and right under the noses of the sleeping producers, he decided to marry-off the extremely “working-class” Motel waitress, Marilyn Gates, to the local vicar, Peter Hope. I can picture the scriptwriter the night before the announcement  (episodes were filmed in a single take) on a bender in his cheap hotel (motel?) room, poring over the ubiquitous Gideons’ Bible hoping for an epiphany,  hitting on the enigmatic Mary Magdalene, and the deed was done.

When the producers woke up and realized that, while evolution is the thing with Soap Scripts, this one was going to end in tears, they probably did contemplate contributing to the statistics on which that BMJ article was based. However, they had a problem. Only a few weeks previously they had killed off Carlos, the beloved Spanish Chef who died saving children from a burning Orphanage. Another cardinal rule of Soaps is – you can’t kill people off too often; (they may have killed off the scriptwriter, but he would not have been missed unless he was planning the first Miss Crossroads competition for the Christmas special.) The solution was, literally, unbelievable. With the raising of a middle-digit to their intellectually superior viewers (including 10-year-old me),  one bright evening a few months after the wedding the episode opened with an announcement: “From today, there is a new Marilyn Hope” and, in keeping with the miracles promised by her Faith,  the said Marilyn Hope appeared as a prissy, blue-stockinged, Queen’s English-speaking, Vicar’s wife…….and they all lived happily ever after (or, at least, until they were buried by budgetary cuts in 1988).

And that is what the scriptwriters of the tax world might be trying to do to their governments and  us. Cornered in a dead-end without a feasible storyline, instead of bumping off the entire cast, they may just try and dress digital taxation up in a different pair of stockings (a bit of consumer jurisdiction VAT here, a service Permanent Establishment there).

john_f__kennedyOne cold Tuesday afternoon a few years back, I stood shivering on the Grassy Knoll. It was one of the most unremarkable places I have ever made a special point of visiting. Apart from the anonymously named “Sixth Floor Museum” behind me, the only indication of what happened that terrible Friday were two metal studs in the approach road marking where the bullets hit. Whatever Kennedy was, or wasn’t, he inspired new frontiers. The Tax World could do with another JFK right now. Obama’s policy wonks and speechwriters should get to work on their laptops.

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