The G20 group of nations has endorsed plans to make the automatic exchange of tax information the global standard, and agreed to steps for cracking down on base erosion and profit shifting (BEPS).
Speaking after G20 leaders wrapped up their first day of discussions in St. Petersburg yesterday, the Russian President Vladimir Putin said that they planned to adopt a joint Action Plan for the prevention of BEPS. The Plan, developed in conjunction with the Organization for Economic Cooperation and Development (OECD), "stipulates a whole range of steps aimed at increasing transparency and improving international tax agreements," Putin said.
A declaration inked by participants in yesterday's meeting explains that the G20 has been in talks with the OECD to create a single global standard for the automatic exchange of information. The OECD has been mandated by G20 Finance Ministers to draw up a progress report on this work, which will be handed over in October. The aim is for the OECD to unveil the new standard, together with a Model Competent Authority Agreement, in February, 2014. In the meantime, the Global Forum on Transparency and Exchange of Information for Tax Purposes will establish a mechanism for monitoring and reviewing the implementation of the new standard.
The leaders' declaration calls on all other jurisdictions to join in this initiative at the earliest possible opportunity. They expect to begin the automatic exchange of information for tax purposes to be underway by the end of 2015.
BEPS is a key area of concern for the G20. The declaration claims that this practice, if left unchecked, can "undermine the fairness and integrity of our tax systems [and] fundamentally distort competition, because businesses that engage in cross-border BEPS strategies gain a competitive advantage compared with enterprises that operate mostly at the domestic level."
The need to address BEPS was stressed at the G20's Los Cabos Summit in 2012, and the OECD was asked to report on what action can be taken in this area. All non-OECD G20 countries have now signed up to a BEPS project, through which they will develop proposals and recommendations for tackling the issues identified by the OECD.
The leaders' declaration contains an annex setting out the 15 actions required to address BEPS. Top of the list is the need to ensure that the tax system can cope with the challenges presented by the digital economy. The G20 hopes to identify the "main difficulties that the digital economy poses for the application of existing international rules and develop detailed options to address these difficulties." Also high on the G20's priority list is the development of treaty provisions and recommendations for neutralizing the effect of hybrid instruments and entities, along with the strengthening of existing controlled foreign corporation (CFC) rules.
The concept, clear in these top three actions, that countries must work together to establish rules for cracking down on BEPS, is clear throughout the rest of the annex. For instance, action four calls on members to suggest best practices for the design of rules to prevent base erosion through the use of interest expense, and points to the necessity effective transfer pricing guidance on the pricing of related party financial transactions.
Actions eight to ten all deal with transfer pricing, concentrating on intangibles, risks and capital, and other high-risk transactions, respectively. The OECD wants to see rules created to stop BEPS via the movement of intangibles among group members, the transfer of risks among, or the allocation of excessive capital to, group members, and transactions which would not, or would only very rarely, occur between third parties. Action 13 emphasizes the importance of a re-examination of transfer pricing documentation, and the establishment of rules that will enhance transparency for tax administration without increasing compliance costs for businesses.
Action 13 may prove one of the more controversial in the document. It states that, under these new rules, multinational corporations would be required to provide all relevant governments with information on their global allocation of income, economic activity and taxes paid. Likewise, action 12 stipulates that taxpayers should have to disclose any aggressive tax planning arrangements. A modular design will be drawn up, "allowing for maximum consistency but allowing for specific country needs and risks." The G20 is especially interested in international tax schemes, and its work will explore the possibility of a wide definition of "tax benefit," with the aim of capturing such transactions.
In a similar vein, action 11 seeks the creation of methodologies for the collection and analysis of data on BEPS. The scale and impact of BEPS will be investigated, and the G20 will aim to identify what types of data should be collected. In this, it will take into consideration "the need to respect taxpayer confidentiality and the administrative costs for tax administrations and businesses."
Steps should also be taken to clamp down on the artificial avoidance of Permanent Establishment (PE) status, and work must be done to clarify that tax treaties are "not intended to be used to generate double non-taxation." Dispute resolution mechanisms should be made more effective, and, finally, jurisdictions wishing to implement measures developed in the course of this work on BEPS should be able to do so, using a "multilateral instrument."
Commenting on the first day of talks, the Russian Finance Minister Anton Siluanov said: "In light of ongoing budget consolidation, the budget revenue base should be expanded. It causes widespread anger when companies operate in one country, pay taxes in the other, and take profit out of the countries where they operate and render services."
His comments echoed those of Putin, who warned that, "under the conditions of increasing globalization in the world economy, national-level efforts are insufficient to effectively counter unscrupulous taxpayer behavior. Clearly, each economy strives to create the most appealing tax regime possible for businesses, but that does not mean these regimes should be used for tax evasion."
The President claimed that, on the other hand, the implementation of the G20's Plan should result in "a significant reduction in the practice of channeling profits into offshore accounts and an increase in tax payment in the jurisdiction where a given product or service is produced."
Sandy Bhogal, Head of Tax at international law firm Mayer Brown, believes that "the G20's commitment to tackle tax avoidance could see significant changes to the interaction of tax regimes on a global basis." Bhogal cautioned that "their aim of linking the revenues of multinational businesses to particular territories and requiring reporting on a multilateral basis will be extremely complex to agree and implement.
"But it's still unclear as to how united they are on how to proceed so any global reforms may have to be brought in through changes between countries on a bilateral basis (as well as any global agreements) and also amend existing domestic laws. This process would take a considerable amount of time, even with the cooperation of all the relevant parties."
The G20 is made up of the following: Argentina, Australia, Brazil, Canada, China, the European Union (EU), France, Germany, Italy, India, Indonesia, Japan, Mexico, the Republic of Korea, Russia, Saudi Arabia, South Africa, Turkey, the UK, and the US..
The United Arab Emirates Cabinet on January 7, 2018, approved two double tax agreements concluded with Moldova and Croatia.
Taiwanese Premier Lai Ching-Te has directed the Ministry of Finance to work towards a Taiwan-US tax treaty.
Cyprus and Saudi Arabia signed a DTA on January 3, 2018.
According to preliminary media reports, Colombia and Japan are negotiating a DTA.
Georgia and Moldova signed a DTA on November 29, 2017.
Luxembourg and Kosovo signed a DTA on December 8, 2017.
Switzerland and the United Kingdom signed a DTA Protocol on November 30, 2017.
According to an update from the Liechtenstein Government, the new DTA with the United Arab Emirates will become effective from January 1, 2018.
According to preliminary media reports, the Netherlands and Liechtenstein held a first round of DTA negotiations over three days ending November 17, 2017.
Saudi Arabia's Cabinet on November 28, 2017, authorized the signing of a DTA with Bulgaria.
Bahrain's Cabinet has approved the signing of a new DTA with Hong Kong, the state news agency said November 13, 2017.
Hong Kong announced on November 24, 2017, that its DTAs with Pakistan and Latvia had entered into force.
Finland on November 2, 2017, confirmed that a new DTA signed with Germany will be effective from January 1, 2018.
The DTA between Cyprus and Iran will become effective from January 1, 2018.
India ratified a third Protocol to its DTA with New Zealand on November 2, 2017, publishing a Notice in its Official Gazette.
Gibraltar and the United Kingdom are considering launching negotiations towards a DTA, according to recent comments from the UK's Economic Secretary to the Treasury.
Barbados and Italy have exchanged instruments of ratification in respect of a DTA, which will now become effective from January 1, 2018.
Switzerland's Government on October 25, 2017, adopted a dispatch on the DTA concluded with Pakistan, enabling its ratification.
Spain and Portugal signed a DTA on October 18, 2017.
Pakistan and Latvia initialed a DTA on October 25, 2017.
Spain and Romania signed a DTA on October 18, 2017.
Denmark and Japan signed a DTA Protocol on October 11, 2017.
The Bahamas and Finland signed a Protocol to amend their TIEA on October 19, 2017.
The Dutch lower house of parliament on October 24, 2017, approved the ratification of a DTA signed with Zambia.
Cyprus and Mauritius signed a DTA Protocol on October 23, 2017.