Australia: Base Erosion and Profit Shifting (BEPS) - sustaining Australia's corporate tax base
01 August 2013
Posted by: Author: Howard Badger
Author: Howard Badger
On 24 July 2013 the Assistant Treasurer David Bradbury released a 61 page Treasury scoping paper titled "Risks to the Sustainability of Australia's corporate tax base." ( Scoping Paper). This is a process aimed at addressing the perceived problem involving the ability of multinationals in the information age to locate profit generating activities and assets in low tax jurisdictions such that no tax or low tax is paid in Australia or anywhere else in the world. This ultimately leads to the tax burden being unfairly shifted to others within the tax system.
The Scoping Paper sets out Treasury's assessment of the risks facing the Australian corporate tax system and analyses a range of policy options to tackle the risks and makes findings and recommendations on reforms.
The principle recommendations of the Scoping Paper in tackling base erosion and profit shifting (BEPS) include:
- Expanding the scope of tax information released to the public and publishing an annual report on the business tax system,
- Review all bilateral tax treaties at least once a decade,
- Exploring options to improve exchange of information between tax administrations,
- Endorse the joint OECD and G20 action plan (refer below).
The Scoping Paper also singles out the challenges facing worldwide tax administrations as a result of the rise of the digital economy and the need for multilateral cooperation in addressing these issues. Other issues highlighted by the Scoping Paper in countering BEPS include assisting developing economies build their corporate tax base through sharing expertise and knowledge, countering the increasing use of strategies to exploit gaps and inconsistencies in tax treaties, and unilateral action that Australia can take to curb the BEPS risk.
The release of the Scoping Paper coincides with the OECD's release last week an "Action Plan" on Base Erosion and Profit Shifting
The Action Plan is strongly supported by the G20 (of which Australia will become chair in 2014). The Scoping Paper recommends that Australia endorses the Action Plan
The Action Plan sets out a 15 point plan that is to be further developed by the G20 and OECD under the BEPS Project. The OECD has also set an ambitious target of 2 years to complete the majority of the BEPS Project.
According to the OECD, the Action Plan "offers a framework for governments around the world to collect the tax revenue they need to serve their citizens. It also gives businesses the certainty they need to invest and grow".
What is BEPS?
In a nutshell, base erosion and profit shifting refers to the reduction in the size of the corporate tax net for example through ensuring activities and intangible assets that generate profit are located in low tax jurisdictions.
In other words, it is referring to the inadequacies of domestic and bilateral treaty laws in dealing with the problems of low or double non-taxation. Worldwide, these inadequacies often arise from poor domestic tax law design, inadequate integrity rules, and outdated treaties that allow multi-nationals to minimise taxes through tax arbitrage.
What is the 15 point plan?
The key components of the OECD's 15 point plan are to focus on:
- the digital economy,
- removal of tax arbitrage opportunities,
- excessive debt deductions,
- transfer pricing,
- preventing treaty abuse,
- artificial avoidance of permanent establishment status,
- strengthening the controlled foreign company rules,
- harmful tax competition between countries,
- improving data collection standards,
- more effective and efficient compliance.
Other recent reforms
The release of the Scoping Paper also follows recent Australian reforms and announcements including:
- changes to Australia's transfer pricing rules,
- changes to the general anti-avoidance rules,
- increasing transparency of large corporate taxpayers,joining a pilot scheme for multilateral exchange of information,
- announced 2013-14 Budget changes designed to crack down on corporate tax loopholes.
All Australian members of multinational companies (large and small), companies operating in the e-commerce space and companies that increasingly rely on intangible assets (e.g. intellectual property, goodwill, patents, or 'brand names') should consider reviewing their existing structures including their supply and distribution chains against the specific points raised in the Action Plan.
Whilst these reforms are an important step in protecting the revenue for the benefit of all Australians, we must be mindful that any reforms do not place Australian companies at a competitive disadvantage in the international context.