The Paradise Papers have revealed more tax avoidance tales, but away from the spotlight moves are afoot to end the practice of ‘treaty shopping’, explains Ramona Dzinkowski
This article was first published in the January 2018 international edition of Accounting and Business magazine.
While the Paradise Papers have opened the world’s eyes to the mechanisms by which wealthy individuals and companies can shift earnings and manipulate international tax laws to minimise their taxes – avoidance, in the popular term – much has been going on behind the scenes to address just that.
Those initiatives aren’t necessarily fodder for the popular press, but instead live in the domain of policy papers and complex consultations. The Organisation for Economic Co-operation and Development (OECD) has been actively working on a response to the base erosion and profit shifting (BEPS) problem for some time, with, until recently, little or no fanfare – and, as the general public now knows, with good reason.
The OECD Action Plan, inked in 2013, is based on three fundamental pillars: introducing coherence in domestic rules that affect crossborder activities; reinforcing substance requirements in the existing international standards; and improving transparency, as well as certainty, for businesses that do not take aggressive positions.
In a nutshell, BEPS measures are intended to ensure that governments eliminate or modify preferential regimes that have the potential to attract paper income rather than substantial business activities. As regards the 2013 Action Plan, for the first time in history, says the OECD, all G20 countries have achieved consensus on complex technical issues.
Meanwhile, the EU Action Plan on Corporate Taxation, unveiled in 2015, attempts to close existing loopholes in EU rules. Once the new measures become applicable, the expectation is that profits will be reported where the economic activities that generate them are carried out and where value is created. This parallels country-by-country reporting – OECD Action 13 – which will affect multinational enterprises for reporting periods beginning after 1 January 2016 in many countries. In the US, country-by-country reporting will be for tax years beginning on or after 1 January, with filing to be completed some time in 2018.
Furthermore, on 7 June 2017, some 70 countries launched a new international tax convention to prevent ‘treaty shopping’, which has to date allowed companies and private individuals to exploit tax haven options.
The upshot is, according to the OECD, that the days of treaty shopping are gone. The new 7 June agreement will replace more than 1,100 bilateral tax treaties and, according to policy director Pascal Saint-Amans, ‘is going to kill treaty shopping’ altogether.
Whether the OECD initiatives and country-by-country reporting will eliminate the type of rule gaming revealed in the Paradise Papers remains to be seen, but for now international tax initiatives point distinctly to paradise lost.
Ramona Dzinkowski is a Canadian economist and editor-in-chief of the Sustainable Accounting Review
"The OECD has been actively working on a response to the BEPS problem for some time, with, until recently, little or no fanfare"