BEPS, Non-BEPS and BEPS-Plus - Possible Issues for Africa

IBFD Conference Livingstone, 18 June, 2015

Michael Lennard Chief, International Tax Cooperation Section &

Economic Affairs Officer

Financing for Development Office, United Nations

lennard@un.org

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The UN and Tax – the Big (and Evolving) Picture

•Addis Ababa Financing for Development Conference, 13-16 July 2015.

• The role of tax in development has been a major issue, including greater cooperation to achieve this.

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The UN and Tax – the Big (and Evolving) Picture

•Recognition of two aspects:

–Revenue for budgets.

–Investment climates that encourage the desired sort of investment.

•But different countries legitimately seek different balances between these two.

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The UN and Tax – the Big (and Evolving) Picture

• Tax has a very political dimension and it is not just all about BEPS.

•A political dimension has benefits but also downsides.

• The issue of a possible new UN Intergovernmental Commission on tax is dividing developed and developing countries.

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BEPS Issues

Permanent Establishments

• The Dependent Agent Exception?

• Preparatory and Auxiliary?

• Is the PE concept still “fit for purpose”? – the services economy dilemma and how to address “fees for technical services”?

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BEPS Issues

Transfer mis-pricing - Aligning

TP outcomes with value creation

• Intangibles such as IP.

• Transfer of risks/ excessive capital.

• Management Fees and Head Office Expenses.

• Use of profit splits – what does it mean for administrations & taxpayers?

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BEPS Issues

Transfer mis-pricing - Aligning

TP Outcomes with value creation.

• Documentation: Country by Country Reporting – Pros and Cons?

– Flows of information (Master File, Local File, C-by-C Report?)

– Conditions of access?

– Unilateral approaches?

– Euros 750 Million threshold?

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BEPS Issues

Transfer Mis-pricing - Aligning

TP Outcomes with value creation

• Substance over Form?

• “Special Measures”?

• Where is value created?

Relevance of UN TP work?

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BEPS Issues

Treaty Abuse

• Should there be a treaty?

• General Anti-avoidance Provisions vs. Limitation of Benefits Provisions.

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Secretariat Paper on Arbitration

• The Secretariat’s Mandate

– A balanced paper.

– For consideration by UN Tax Committee in October 2015.

– Arbitration issues for developing countries.

– And ways forward.

• Modus operandi?

• Likely timetable?

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A General Approach

• Certainty of a result not the “be all and end all”.

• Certainty of a result that upholds the spirit of the treaty is the “be all and end all”.

• But it is a much harder certainty to ensure.

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Where do we want to get to?

• “The goal in international arbitrations is to permit people from different countries and cultures to resolve their differences in ways that leave all parties feeling that the private system of dispute resolution serves a shared sense of justice”

Professor Margaret Moses

• Is there a sufficiently shared sense of tax justice – does BEPS throw any light on this?

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How do we get to it?

• Identify and analyse potential issues.

• Identify possible solutions: – Institutional provisions?

– Clauses?

– Training and capacity development?

– Other measures?

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How do we get to it?

• Try to match options with countries to which they are best adapted at a point in time and development, and in view of their development priorities.

• Variable geometries/ Non reciprocity?

• Staggered implementation?

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Some Questions?

• Are we talking too much about arbitration and too little about mediation, expert determination etc.

• Have we been too dismissive about the “sovereignty” argument. What would a close analysis reveal?

• Might institutional ADR solve many of the issues (especially the asymmetries) or create new ones?

• Likewise for a multilateral approach?

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Some Questions?

• How can we get over the concerns of e.g.:

– Cost?

– Asymmetries of expertise & experience?

– “Clubbiness”?

– Jurisdictional creep?

– Inconsistency?

– Excessive secrecy?

• Have we thought enough about enforcement?

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Non-BEPS Issues

• BEPS is (nearly) all about the corporate income tax.

• Source vs. residence preferences.

• Withholding taxes.

• Tax incentives (though it has been picked up as a parallel process).

UN’s Extractives Work Plan

• Overview Note.

• Capital Gains Taxation.

• Value Added Taxation.

• Decommissioning of Extractive Facilities (fiscal aspects).

• Tax Treaty Issues.

• Review of Invoicing and Costs.

• Permanent Establishment issues.

• Kinds of Government “Take” and Consequences

• Negotiation and Re-negotiation of Contracts (fiscal aspects)

Work Plan approved by Tax Committee – 30 October 2014

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“BEPS-Plus” Issues (more systemic issues)

• Spillovers

“Supporting the Development of More Effective Tax Systems: A Report to the G-20 Development Working Group by the IMF, OECD, UN and World Bank” (2011).

– “It would be appropriate for G-20 countries to undertake “spillover analyses” of any proposed changes to their tax systems that may have a significant impact on the fiscal circumstances of developing countries…in moving, for instance, from residence to territorial systems.”

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“BEPS-Plus” Issues

• IMF 2014 Spillovers Paper:

– “Base Spillovers”

• FDI (strong evidence);

• Profit (BEPS);

– “Strategic Spillovers”

• Tax Incentives (G20 paper);

• Tax Rates;

– Spillovers are macro critical;

– Especially large for developing countries;

– Call for a rethinking of int’l tax architecture.

“BEPS-Plus” Issues

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• (Global) Formulary Apportionment as an option?

• Practicality at a global level?

• Impact on developing countries?

• Impact on how we view and interpret the Arm’s Length Standard?

• Substance and form?

• Role of legislatures and courts?

“BEPS-Plus” Issues

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•Norm Making and Norm Taking

–Does BEPS represent the old order of things reshuffled or a new order? The right new order?

–Roles of African Countries

–Regional Organisations (ATAF, CREDAF, CATA)

–A possible BEPS by-product?

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“BEPS-Plus” Issues

•Regionalism/ multilateralism vs. unilateralism;

• Centripetal vs. centrifugal tendencies;

• Substance vs. form;

•Arm’s length vs. formulary apportionment (more below);

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“BEPS-Plus” Issues

• Certainty for taxpayers vs. certainty for administrations and the citizenry;

•One set of rules vs. variable geometries;

• “Tax avoidance” vs. “tax evasion”;

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Tensions in the Global Environment

•Healthy vs. harmful tax competition;

•Attacking tax abuses vs. protecting national champions;

• Policy purity vs. effectiveness on ground;

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Tensions in the Global Environment

• Goods economy vs. service economy;

• Pre-digital vs. digital economy focus;

• Information exchange vs. confidentiality;

• Role and intent of executive part of gov’t vs. that of legislature and judiciary.

Whither Arm’s Length

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• Practicality?

• Impact on developing countries?

•Will the architecture of ALP support or be an obstacle to the most legitimate and justifiable attempts to rebalance certainty of taxpayers with certainty for bona fide administration and the citizenry.

Conclusions

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• The key is finding workable balances and reasonable levels of certainty for all stakeholders.

• But some differentiated responsibilities, variable geometries and moderated timelines will be a necessary part of a solution passing the test of inter-nation equity.