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Overview of OECD base erosion and profit shifting action plan

On 12 September the Tax committee hosted a lunch to give an overview of the Organisation for Economic Cooperation and Development's (OECD) base erosion and profit shifting action plan. Guest speakers were Lorene Chen, Tax Committee Chairperson and Director at KPMG together with her colleague, Ellen Ting, Tax Associate Director at KPMG Taiwan.

Large multinational corporations operating in multiple jurisdictions have come under fire in recent years for taking advantage of legal loopholes to minimize taxes. For example, Citigroup avoided paying US$11.5 billion in taxes thanks to tax shelters, Apple paid only 2% in corporate taxes outside the US while Facebook and Starbucks have paid very little in corporate taxes in the UK in recent years. The OECD's "Base Erosion and Profit Shifting Report" & "Action Plan" is part of a drive to develop a tax system which fits today's multinationals and the digital age.

On 19 July 2013, the OECD released the "action plan" for multilateral cooperation to the G20
Finance Ministers at their meeting in Moscow. This launched a global collaborative effort to modernize the international tax system. The OECD action plan describes 15 proposed actions, identifies expected outputs and establishes the anticipated timeframe for each output.

This speed and high degree of consensus is remarkable. It is expected to take just 24 months for the OECD to overhaul 100 years of tax laws and practice. The rapid action and unlikely consensus by G20 nations is being driven partly by a desire to increase revenue on the part of debt-strapped governments the world over but also for political and moral reasons. Tax avoidance to date has been legal but it no longer regarded as morally acceptable by the general public. While Taiwan is not a member of the OECD or the G20, it is likely to enforce the rules.

The first part of the action plan is aimed at addressing the challenges of the digital economy, where much online commercial activity is currently not taxed because of legal ways that companies are structured across multiple jurisdictions and revenue and income accounted for in the most advantageous tax centres.

Action two is aimed at neutralising the effect of hybrid corporate structures to prevent the exemption of payments that are deductible in other countries and deny deductions that are not taxable or have been deductible in other countries.

Action three is aimed at enhancing controlled foreign operating company (CFC) rules. If the CFC rule becomes effective, starting from 2015, Taiwanese parent companies, which "retain" the profits of their CFCs in offshore holding companies in low tax jurisdictions, shall recognize the pro rata share of the CFCs' profits as "current year investment income" and pay income tax at 17%, regardless of whether or not the CFCs distribute the profits in the current year.

Action four is aimed at limiting base erosion via interest deductions and other financial payments. Action five is aimed at countering harmful tax practices more effectively, taking into account transparency and substance while action six is aimed at preventing treaty abuse.

Action eight deals with transfer pricing, especially related to intangibles. For example, it will provide a broad and clear definition of intangibles and aim to ensure profits associated with intangibles are allocated in accordance with value creation. Actions nine and 13 deal with transfer pricing (TP) to counter the inappropriate transfer of risks or allocation of excessive capital among group companies.

The new rules will make it much more difficult to avoid taxes by shifting or parking large profits offshore. All companies will be affected by the changes and would do well to prepare well in advance to ensure compliance.

Action 13, for example suggests that multinationals may be required to provide all relevant governments with needed information on their global allocation of income and economic activity, ie people and taxes paid among countries. Therefore, companies are advised to review group policies on the basis of full disclosure to tax authorities regarding the allocation of group profit and prepared to defend any challenges that could result.