OECD proposes major changes to corporate tax rules

Major changes to Irish and international corporate tax rules have been proposed by the Organisation for Economic Co-operation and Development.

The proposals, published today, aim to ensure that corporate profits are taxed where economic activities generating the profits are performed, and where value is created.  

They are intended to clamp down on the practice of artificially moving profits to low or no tax jurisdictions.

Among the recommendations are changes to the practice of transfer pricing, particularly for intangibles such as software, patents and royalties, and changes to bilateral tax treaties to more closely match taxation with what the OECD calls "relevant substance".

The reports also proposes a standard country by country reporting form for multinationals, which will disclose the activity, employment level, profits and tax paid in each country in which the company does business.  

The information would only be disclosed to tax authorities, not to the general public.

The OECD has also concluded that it is possible to implement some key changes by way of a single international legal agreement that would change elements of all bilateral tax treaties in one go.

And it said there is no point in trying to establish a special tax regime to cover the digital economy, as it is difficult to separate the so-called digital economy from the non-digital economy.es.  

The OECD proposals do not call for any changes to the rate at which countries levy corporation tax.

The seven measures published today are part of 15 action points to address an issue known as base erosion and profit shifting (BEPS) - the use by multinational companies of different tax regimes around the world to reduce their effective tax rates to extremely low levels.

BEPS hitting smaller companies and tax resources

While the OECD said the vast majority of such practices are legal, their effect is depriving hard pressed governments of tax resources.

They also act as a disadvantage to smaller companies who cannot compete with the very large multinationals when it comes to tax planning and take advantage of the network of international tax treaties.

Tax treaties were originally agreed between countries so that firms would not face the problem of double taxation - being taxed by two countries for the same piece of business. 

However in recent years, some companies have become adept at exploiting differences between various tax treaties, resulting in the phenomenon of "double non-taxation".

This issue has been exacerbated by the rise of the digital economy - with its reliance on easily moved intangible goods such intellectual property and patents. 

This had made it easier for companies to split up their global "value chains" and put different parts in different countries in order to minimise their tax payments.  This can result in big differences between where products or services are made, where they are sold, and where companies declare profits and pay tax.

Some 44 governments, including Ireland, are part of the BEPS project, with the OECD being asked to produce a single set of international tax rules to protect the tax base (ie the profits governments can apply corporate tax rates to) and which will also offer increased certainty and predictability to taxpayers.

Today's measures are the first of 15 "deliverables" from the OECD, with the remainder due by September of next year.  

While today's seven measures have been agreed by all countries, they are not formally finalised as they may be impacted by some of next year's deliverables.  

Nevertheless the OECD is encouraging member states to start working towards implementing the measures in domestic tax laws.

It said that when international treaty and domestic law changes will have been made, the problem of base erosion and profit shifting will have been substantially tackled.

In particular it is urging countries to change laws now to deal with so called "hybrid mismatches", which enable a company to claim tax relief in two jurisdictions for the same expense, or which allow the claiming of a relief in one country without a corresponding taxation in another state.

Of more importance to Ireland is action against so called "treaty shopping" and other abuses of the tax treaty system.  

The OECD said this practice undermines sovereignty and deprives states of revenue. It said a minimum standard for a new anti-abuse clause in tax treaties should end the practice of treaty shopping (where companies look around for the most tax efficient treaty arrangement, and locate a part of their profits in a country purely to reduce their tax bill).

It has also produced an updated set of transfer pricing rules to deal with the heavy and growing reliance of modern businesses on intangible property and the risk of base erosion and profit shifting through transfers of intangibles.  

This could particularly affect companies that locate the ownership of intellectual property such as software or pharmaceutical formulae in Caribbean islands which charge zero corporation tax. 

These measures will be presented at a meeting of G20 Finance ministers in Australia at the weekend, and will go before G20 leaders in November, where support will be sought for a single multilateral agreement to implement key anti-BEPS measures.  

Read the OECD's FAQ section on BEPS

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