ADDRESSING BASE EROSION AND PROFIT SHIFTING (BEPS) Pascal Saint-Amans Director, CTPA, OECD

U.S. corporate tax regime and reform in international context BEPS: Defining the Issue BEPS: The Project Options to Address BEPS Next Steps Agenda 2

I. U.S. CORPORATE TAX REGIME AND REFORM IN INTERNATIONAL CONTEXT

Corporate tax reform has become a significant issue in United States U.S. statutory rate highest among OECD countries – But many tax preferences reduce the average effective rate to be more in line with OECD averages – Impact of these preferences varies significantly by industry and company Over the past 20 years, many OECD countries have been lowering their rates and broadening their base – Eliminating tax preferences can improve efficiency and competitiveness by creating a more level playing field – Also can improve efficiency of tax administration and reduce compliance costs U.S. Tax Regime and Reform 4

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In this context, corporate and international tax reform has become a significant political issue in the United States with proposals from the Administration and both sides of the aisle in Congress Key drivers include concerns about competitiveness and consistency with major trading partners – Major trading partners have generally moved to exemption/territorial system, rather than worldwide/credit system At the same time, the U.S. international tax rules should be re- examined to ensure a more level playing field – One key issue is double non-taxation, which can distort investment decisions by providing tax advantages to cross- border business as compared to businesses that operate primarily within one country U.S. Tax Regime and Reform 7

II. BEPS: DEFINING THE ISSUE

Double non-taxation is a political issue: “Top-down approach” British Prime Minister David Cameron, Speech, January 24, 2013 – “We want to use the G8 to drive a more serious debate on tax evasion and tax avoidance. This is an issue whose time has come. After years of abuse people across the planet are rightly calling for more action, and most importantly there is gathering political will to actually do something about it.” German Chancellor Angela Merkel, Speech, February 13, 2013 – “It's not right that giant global companies have huge sales here (in Germany), in all of Europe, in the United States and elsewhere and then only pay taxes somewhere in a tiny tax haven. That's why we're going to fight to finally put an end to tax havens at the G8 meeting this year in Great Britain.” Australia’s Assistant Treasurer David Bradury stated on – “Although there is a long way to go, it is clear that momentum to address these issues is building and that the focus of multilateral attention is now squarely on addressing situations of ‘double non-taxation’.” New Zealand, Statement of Minister for Tax, December 4, 2012 – “The reality is that tax regimes internationally have generally been developed for an industrial age, and have struggled to keep pace with new business models and technologies not contained by location or national borders...This is, as I say, a global problem requiring a global response and New Zealand will be involved in working up that response.” BRICS joint Communiqué, 18 January 2013 “ We express our concern at the erosion of the tax base … We commit to prevent the base erosion and profit shifting through cooperation amongst ourselves and with other countries. ” 9 BEPS: Defining the Issue

There is increasing concern internationally about the issue of double non-taxation of income that has been artificially allocated away from jurisdictions where real economic activity occurs – G20 Leaders’ Declaration, June 2012: “We reiterate the need to prevent base erosion and profit shifting and we will follow with attention the ongoing work of the OECD in this area.” – This issue has come to be known as base erosion and profit shifting (BEPS) Double non-taxation also distorts investment decisions and reduces economic efficiency Double non-taxation undermines integrity of tax system Some countries believe greater source country taxation, including on a unilateral basis, is necessary to address the issue BEPS: Defining the Issue 10

BEPS: Defining the Issue This issue is also an important part of the tax reform discussion in the United States – Anti-base erosion options in Chairman Camp’s discussion draft – Anti-base erosion proposals in the Administration’s Revenue Proposals and the President’s Framework for Business Tax Reform “The United States’ unique combination of a quasi-territorial tax regime, its enfranchisement of stateless income tax planning through idiosyncratic rules like check-the-box, and the lock-out effect leads to particularly large deadweight losses. The current U.S. tax system causes U.S.-domiciled multinational firms, first, to prefer investments in foreign high-tax countries over investments in the United States...; second, to establish low-tax affiliates of sufficient size and activity to serve as receptacles of stateless income; third, to invest time and resources in manning the various dials and gauges of the tax planning mechanisms...; and fourth, to retain the resulting earnings and cash in those low-taxed receptacles....” – Kleinbard, Stateless Income, F LORIDA T AX R EVIEW, vol. 11, pg. 699, (2011). 11

Governments – not businesses – are responsible for determining the allocation of taxes, and for implementing laws that ensure those taxes are collected Most tax planning is legal – if governments are unhappy with results, governments should change the law, instead of blaming business Need for a level playing field – MNEs with access to sophisticated tax planning may be able to pay substantially lower taxes than businesses that operate primarily in one jurisdiction, creating an unlevel playing field, distorting investment decisions, and harming economic growth BEPS: Defining the Issue 12

III. BEPS: THE PROJECT

OECD BEPS project is developing a coordinated, comprehensive action plan to update the rules to reflect modern business practices – Unilateral action may lead to double, or multiple, taxation – May lead to increased uncertainty for business and controversy for governments No action is not an option! BEPS: The Project 14

BEPS: The Project Action plan to be approved by CFA at its June 2013 meeting U.S. MNEs and U.S. government need to remain engaged to ensure coordinated approach 15

IV. OPTIONS TO ADDRESS BEPS

Options to Address BEPS The Report identifies the following key pressure areas giving rise to opportunities for BEPS: – International hybrid mismatches in entity and instrument characterisation – Application of treaty concepts to profits derived from the delivery of digital goods and services; – Related party debt-financing, captive insurance and other intra-group financial transactions; – Transfer pricing, in particular in relation to the shifting of risks and intangibles, the artificial splitting of ownership of assets between legal entities within a group, and transactions between such entities that would rarely take place between independents; – The effectiveness of anti-avoidance measures, in particular GAARs, CFC regimes, thin capitalisation rules and rules to prevent tax treaty abuse; and – The availability of harmful preferential regimes. 17

Options to Address BEPS Report calls for action plan to include proposals to develop: – Instruments to neutralise the effects of hybrid mismatch arrangements and arbitrage. – Improvements or clarifications to transfer pricing rules to address specific areas where the current rules produce undesirable results from a policy perspective. – Updated solutions to the issues related to jurisdiction to tax, in particular in the areas of digital goods and services. These solutions may include a revision of treaty provisions. – More effective anti-avoidance measures. Anti-avoidance measures can be included in domestic laws or included in international instruments. Examples of these measures include general anti-avoidance rules, controlled foreign companies rules, limitation of benefits rules and other anti-treaty abuse provisions. – Rules on the treatment of intra-group financial transactions, such as those related to the deductibility of payments and the application of withholding taxes. – Solutions to counter harmful regimes more effectively, taking into account factors such as transparency and substance. 18

Options to Address BEPS Work is being conducted in three clusters – Countering base erosion Hybrids Treaty abuse Interest deductions – Jurisdiction to tax PE, including in the digital economy Withholding CFC regimes – Transfer pricing Intangibles Risk Must take a holistic, comprehensive approach 19

V. NEXT STEPS

There is no magic recipe to address BEPS issues, but OECD Committee on Fiscal Affairs will – provide solutions that ensure the effectiveness of the international corporate tax architecture (by eliminating double taxation and double non- taxation) – engage with business to provide a certain and predictable environment – engage with non-OECD economies to avoid multiple standards Next Steps 21

A Comprehensive ACTION PLAN on BEPS to be developed by June 2013 To give a sense of direction:  to provide countries with domestic and international instruments aimed at better aligning rights to tax with real economic activity  based on in-depth analysis of the identified pressure areas with a view to provide concrete solutions to realign international standards with the current global business environment  requiring “out of the box” thinking as well as ambition and pragmatism to overcome implementation difficulties (including to better ensure the elimination of double taxation through, e.g., arbitration) Next Steps 22

Next Steps The Action Plan will  identify actions needed to address BEPS,  set deadlines to implement these actions  identify the resources needed and the methodology to implement these actions. On substance, the development of the action plan will provide a comprehensive response which takes into account the links between the different pressure areas. Moreover, better information and data on BEPS will be sought. 23

Need for Business Input Business input is critical for the BEPS project to develop effective solutions that do not result in double taxation – Success of BEPS project is critical to avoid unilateral action by countries, which could result in multiple taxation and uncertainty for business Comments can be submitted through Business and Industry Advisory Committee (BIAC) – Conference to be held March 26 in Paris Input can also be provided to the governments of countries participating in the BEPS project 24

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