Unless you're a tax policy wonk, you could be forgiven for missing the big news this past October that the G20 and nearly 50 governments around the world agreed to a new set of global tax rules designed to modernize the corporate tax code.
The new rules, which were proposed as part of the Organisation of Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) initiative were designed to foster global harmonization on corporate tax policy. But as more tax authorities start to adjust their tax laws to address the new framework, the stage is rapidly being set for an increase in global tax conflict.
I recently spoke to Prof. Philip Baker QC, a Barrister and an international tax specialist for Field Court Tax Chambers in London, and visiting professor in tax law at Oxford University, who is one of the world's leading authorities on international taxation. He told me that part of the problem arising from BEPS is that its goal was never quite clear from the beginning.
"One of the most interesting things is that nobody sat back before the BEPS project started and asked what problem BEPS is really trying to solve," he explained. "So BEPS, in a sense, is an umbrella for a whole number of issues broadly concerned with the taxation of the profits of multinational companies."
Those concerns primarily lie in large multinationals shifting their profits beyond their borders to lower tax regimes. And while the intention is a noble one to be sure, there is a risk that tax authorities may be left to their own devices when it comes to implementing laws to enforce BEPS.
"What's going to be interesting to see is how different authorities pick and choose to implement BEPS. Some will say, "'I like this part, but I don't like this part;'" others will advance their own political agendas through the BEPS process. Some governments feel they need to be seen doing something about corporate tax structuring."
The one thing that will be consistent across all government tax authorities is an overall increase in power and more data than ever. Under the country-by-country reporting mandate in BEPS, corporations will need to disclose the amount of revenue, profit and tax paid in each country in which they do business, along with details on total employment, capital and assets used in each location. All countries will have access to this information on a global basis. So, hypothetically, tax authorities in Germany can see what a company is paying in Ireland and Switzerland and every other market in which they do business. This is a level of corporate tax filing transparency that has never been available before and it may end up giving global tax authorities the ammunition they need to launch an unprecedented amount of audits and investigations into corporate tax strategies.
According to Prof. Baker, this puts the issue of taxpayer rights squarely in the spotlight. He explained:
"As a result of BEPS, tax authorities are being given greater power than ever before. The correlative of that is that there has to be greater protection of tax payer' rights as a balance. The big concerns with regard to country-by-country reporting are, first of all, confidentiality. This is some very sensitive information that a company may not want to share with a country who has, say a government-owned competitor. The second concern is that companies do not want this information will be used as a basis for very aggressive approach to investigation."
So far, the notion of a global Taxpayers' Bill of Rights to correspond with BEPS has not manifested itself in a clear way. And while multinationals wait, BEPS has continued to be met with skepticism, most notably in the United States.
Though the U.S. Treasury department has given BEPS a vote of confidence, it has been met with a chilly reception in the halls of Congress. Certain members of the House question whether or not a byproduct of this transparency would mean U.S.-based multinationals having their security compromised. That would not be something big corporate donors would look favorably on, and with the 2016 election looming, no Congressman or woman wants to draw the ire of their potential donor base.
Baker warns that if countries like the U.S. prove to be resistant to implementation, BEPS could struggle to gain momentum.
While the OECD continues to encourage countries to conform with these new standards ahead of its first deadline on December 31, 2017--something that 26 percent of countries say that won't be able to do--the early indication for 2016 seems to imply that the end result could be an international tax landscape that's even more fragmented than before.