The G20 / OECD Action Plan to curb aggressive tax planning by multinationals

African Trade Union Tax Justice Campaign:Providing alternatives for financing Effective Public Social Services

Delivery and the implementation of Social Protection FloorsAbuja, Nigeria

17- 18 January, 2014

The G20 action plan

• G20 meeting in St Petersburg (Sep 20 13) adopts the OECD Base Erosion and Profit Shifting (BEPS) Action Plan to curb MNEs’ aggressive tax planning aiming at– (i) reducing the taxable income base (“base erosion”) or– (ii) moving profits away from economically relevant but

high tax-jurisdictions to economically irrelevant but low-tax jurisdictions (“profit shifting”).

• 15 measures, by 2015.• Implementation 2016-2018

BEPS

• contractual arrangements within a MNE and between a parent company and its subsidiaries can significantly depart from the commercial arrangements (incl. risk).

• These contracts are deemed valid because of the presumption that the contracting parties are acting in full autonomy from one another.– Does a subsidiary have sufficient legal “autonomy” however

when it is contracting with its parent company?– Can we speak of a “contract” if, in substance, the

contracting parties defend the same economic interests?

Why now?• The figures

– US: USD300bn (19%) of reportable income not properly reported to the IRS– EU: €1tr loss, €2000 per citizen, compares with total budget deficit EU27 of

€524bn– Oxfam: £100bn lost in tax avoidance by rich individuals– BVI – China, Caiman Islands – Brazil, India – Marutius, etc.– ActionAid: almost half of all FDI to developing countries goes through tax

havens• OECD public budget deficits are increasing• Domestic resource mobilisation in developing countries

– half of Sub-Saharan African countries mobilise less than 17% of their GDP in tax revenues, below the minimum level considered by the UN as necessary to achieve the Millennium Development Goals

Tax evasion vs avoidance

• Tax evasion:– Illegal, part of the shadow economy, links with

criminal activities & money laundering– transparency, access to bank account identity, force

tax havens, automatic exchange of information• Tax avoidance

– playing with the rules, part of the MNE business model

– much more difficult to detect

Key BEPS practices

• Manipulating intra group transfer pricing;• Excessive deduction of debt interest and other

payments;• Hard to value and shifting of intangibles;• Avoiding permanent establishment status; and• Opacity of MNE tax schemes.

The changing structure of the MNE

Today’s MNE

Transfer pricing

Hybrid mismatch

Hard to value intangibles

Industrial sites(France)

Suppliers(France)

Delivery of commodities & raw

materials

Empty ShellPrimary contractor

(Switerland)

Orders, buys & owns commodities & raw materials

Logistics& warehouses

(France)

Limited risk distributors

(France)

Customers(France)

Pays for manufacturing (processing cost + 6%)

Sale of the product, pricing set by the

Alpha Europe

Re-sale, pricing set to meet

2,5% margin

License fee (USA) 4,3%

Delivery of finished products

Group-wide reporting

What is missing

• Formulary apportionment method• Country-by-country tax reporting made public• Transparency of beneficial ownership• Transparency over dispute resolution

mechanisms• Developing country perspective• Impact on MNE workers

Developing countries• Challenges

– Capacity to monitor BEPS • telecom sector.• dedicating time, resource & audit staff, does not deliver quick results

– OECD Transfer pricing guidelines not implemented• Kenya (2006), Uganda (2011), Ghana (2012)• Rwanda , Burundi and Tanzania not yet.

– Bilateral agreements and treaties:• in most case favor the developed countries.• Limited treaty network

• Some positive re. transfer pricing– July 2012, the Kenyan tax administration (KRA) - OECD/WB/IFC training

programme • increase in the number of audit cases completed, revenue collected• recent case led to US$12.9m in additional revenue, another to US$10.9m.

Impact on workers• Tax avoidance does not happen in a vacuum, it is another form

of corporate short termism– harms government finance and public services.– But it also harms other stakeholders

• For workers can be assimilated to a legal restructuring with short termist goals.– affects profit levels, capacity to invest– affects the distribution of wealth created by the company– tax planning is one form of “regulatory planning” that may undermine

workers’ rights to collective bargaining (“aggressive social planning”)– Affects workers’ right to information (as a result of greater opacity) –

weakening bargaining power.