Taxation and competition policy
17 February 2014
Posted by: Author: OECD
Moving towards a higher standard of transparency
Our fight against tax evasion goes back a long time. But since 2009, with the establishment of our Global Forum on Transparency and Exchange of Tax Information, we have successfully levelled the playing field by preventing countries from competing on the basis of lack of transparency.
Following a call from the G20 Leaders, we are now developing a standardised, secure and cost effective model of automatic exchange of tax information, which will allow Governments to strengthen their position in the fight against tax fraud and offshore tax evasion by individuals. Stay tuned as in a couple of days we will be making an announcement on the progress we have made in this field.
BEPS and harmful tax competition
But tax evasion is only part of the battle we are fighting. Countries are under enormous pressure to provide competitive regulatory and tax environments to promote growth and prosperity. Preferential regimes continue to be a pressing issue, but there is increased recognition that acting together will reinforce rather than weaken each country’s sovereign tax policies. Countries have long accepted that they should set limits and that they should not engage in harmful tax practices.
What is at stake here is the integrity of the corporate income tax. Tax policy is of course at the core of national sovereignty. Each country is free to devise its corporate tax system in the way it considers most appropriate. However, in a globalised world where economies are increasingly integrated, domestic tax systems designed in isolation are often not aligned with each other. This may result in double taxation or in double non-taxation – one of the root causes of BEPS.
BEPS distorts competition between multinational and domestic businesses
BEPS practices fundamentally distort competition, leading to higher effective tax rates for companies that operate within national borders than for MNEs. Competition should result in the most efficient firm gaining market share at the expense of the least efficient, but these artificial cost advantages distort that, weakening the vigour – and the benefits – of market competition.
As the work of the OECD has shown: less effective competition harms consumers, weakens economic growth and can badly damage incentives to innovate. We need to address BEPS to make tax policy more suitable to the more globally integrated world of the 21th century.
15 Actions to put an end to BEPS
In response to a G20 call, the OECD provided a report in February 2013 outlining the issues related to and root causes of BEPS. In July last year, we presented the G20 with an ambitious Action Plan to address BEPS in a comprehensive manner. The OECD/G20 BEPS Project has been launched with all G20 countries participating on an equal footing.
By the end of 2015, the BEPS Project will result in the most fundamental change to the international tax rules since the 1920s! The Plan will be rolled out over the coming two years and it will allow countries to draw up co-ordinated, comprehensive and transparent standards.
Specifically, the BEPS Project involves some of the following key actions:
- First, international tax rules will be developed to address the gaps between different countries’ tax systems, while at the same time respecting the sovereignty of each country to design its own rules.
- Second, the existing rules on tax treaties and transfer pricing will be revisited to fix their deficiencies. This will ensure that profits are taxed in the countries where the economic activities that generate them are carried out.
- Third, more transparency will be established, including through a "country-by-country” reporting by companies to tax administrations on their worldwide allocation of profits. This will be complemented by more transparency between governments, with the need for countries to disclose tax rulings and other tax benefits to their partners.
- Going forward, we will carry out a comprehensive analysis of the scale and economic impact of BEPS, including international spill-overs.
- Finally, to ensure that the Actions can be implemented faster, a multilateral instrument will be developed for countries that may want to amend the totality of their existing network of bilateral treaties at once, rather than proceed treaty by treaty.
Linking taxation and competition policies
The European Union has long been a champion for bringing the assessment of State Aid subsidies into competition policy. It consistently raises this topic at the OECD, in our competition committee – and it is right to do so. Whether deliberate or not, tax avoided can be just as distorting of market outcomes as are subsidies. That is why I am glad to see this gathering being held in the context of the Competition Forum.
We need to fight distortions to competition that can arise from tax avoidance, just like we do from other forms of government intervention, such as regulation. To reduce the impact of regulatory distortions, the OECD has a Competition Assessment Toolkit that provides a method for identifying regulations that restrict competition and revising them. The approach is practical and can deliver large benefits. The recent OECD Competition Assessment Toolkit project in Greece reviewed regulations in four sectors, ultimately making 329 specific recommendations for legislative changes, whose benefits are estimated at around EUR 5.2 billion annually, or 2.5% of GDP. These reforms are now a critical element of the Troika’s policy towards Greece.
States are of course sovereign in the application of their competition laws, just as they are in tax matters. But it is also true that no single country alone can tackle either issue effectively. The OECD is working to improve international co-operation in enforcing competition law – as everyone here will already know – and also taxation, through our BEPS project. In the absence of coordinated efforts, BEPS will simply shift from country to country, making it harder for countries to implement their desired tax policies in an effective manner. A coordinated response will help business by providing increased certainty and preventing double taxation, but it will also help governments to fight double non-taxation resulting from Base Erosion and Profit Shifting.
This article first appeared on oecd.org.