part-1-of-report-to-g20-dwg-on-the-impact-of-beps-in-low-income-countries

fairskat

part-1-of-report-to-g20-dwg-on-the-impact-of-beps-in-low-income-countries

PART 1 OF A REPORT TOG20 DEVELOPMENT WORKINGGROUP ON THE IMPACT OF BEPSIN LOW INCOME COUNTRIESJULY 20140


TABLE OF CONTENTSExecutive Summary .................................................................................................................................. 3Key findings ....................................................................................................................................... 3Interim conclusions .......................................................................................................................... 4Next steps ......................................................................................................................................... 4Section 1: Introduction ............................................................................................................................. 6Section 2: What is BEPS? .......................................................................................................................... 8Section 3: BEPS as a domestic resource mobilisation concern .............................................................. 10Section 4: BEPS in the developing country context ............................................................................... 12a) The nature ong>ofong> cross-border tax planning may differ between developingand developed countries ........................................................................................................ 12b) Developing countries may lack the necessary legislative measures needed ong>toong>address BEPS ........................................................................................................................... 12c) Accessing relevant information is ong>ofong>ten difficult .................................................................... 12d) Building and maintaining capacity ong>toong> implement highly complex internationalrules that leave room for discretion in their application ........................................................ 13e) Need for political impetus and support for effective measures ong>toong> counter BEPShighlighted in regional consultations ...................................................................................... 14f) The acute pressures on developing countries ong>toong> attract investment can trigger acompetitive ‘race ong>toong> the botong>toong>m’ ........................................................................................... 14Section 5: The high priority BEPS action items for developing countries .............................................. 15a) Excessive or unwarranted payments ong>toong> MNE affiliates – eroding the tax baseong>ofong> developing countries .......................................................................................................... 15b) Developing countries face challenges due ong>toong> new models for doing business,such as global value chains ..................................................................................................... 16c) Developing countries struggle ong>toong> obtain the information they need ong>toong> assess andaddress BEPS issues ................................................................................................................ 17d) Developing countries ong>reportong> that they lose out from treaty abuse. ...................................... 18Section 6: Other high priority BEPS issues for developing countries ..................................................... 20a) Developing countries face challenges in obtaining the data needed ong>toong> applythe arm’s length principle ....................................................................................................... 20b) Developing countries lose out from indirect transfer ong>ofong> assets ............................................. 20c) Base erosion through wasteful tax incentives designed ong>toong> attract investment –a major cause for concern ...................................................................................................... 211


Section 7: Perspectives ong>ofong> international organisations .......................................................................... 24Section 8: Interim conclusion and next steps ........................................................................................ 25Interim conclusions ........................................................................................................................ 25Next steps ....................................................................................................................................... 25Sources ................................................................................................................................................... 26References .............................................................................................................................................. 27Annex A: Action items in the OECD/G20 BEPS Action Plan ong>ofong> most relevanceong>toong> developing countries.......................................................................................................................... 28Annex B: Special meeting ong>ofong> the OECD Task Force on Tax and Development on base erosionand prong>ofong>it shifting (BEPS) and developing countries and summary ong>ofong> the BEPS consultations ............. 32Annex C: Glossary ................................................................................................................................... 352


EXECUTIVE SUMMARYAt the G20’s request, the OECD is leading the development ong>ofong> a strategy ong>toong> address base erosion andprong>ofong>it shifting (BEPS). The Development Working Group (DWG) has asked the OECD ong>toong> draw ong>toong>getherthe experiences ong>ofong> developing countries and international organisations in a ong>reportong> (ong>ofong> which this isPart 1) on the main sources ong>ofong> BEPS in developing countries and how these relate ong>toong> the OECD/G20BEPS Action Plan (‘the Action Plan’) on this issue. Annex A ong>ofong> this ong>reportong> identifies the relativesignificance ong>toong> developing countries ong>ofong> each ong>ofong> the 15 Actions contained in the Action Plan.The findings ong>ofong> this ong>reportong> are derived from dialogue and consultation with developing countries, andthe experiences ong>ofong> international organisations working with developing countries. Directconsultations with developing countries were held in February and March 2014 at events organisedby the OECD (in Asia and Latin America), the African Tax Administration Forum (in South Africa) andthe Centre de rencontres et d’études des dirigeants des administrations fiscales (in Paris). The ong>reportong>also draws on dialogue with developing countries at meetings ong>ofong> the Task Force on Tax andDevelopment (in Ocong>toong>ber 2013 and March 2014), the meeting ong>ofong> the OECD Global Forum on TaxTreaties (in September 2013) and the meeting ong>ofong> the OECD Global Forum on Transfer Pricing (inMarch 2014).BEPS relates chiefly ong>toong> instances where the interaction ong>ofong> different tax rules leads ong>toong> some ong>partong> ong>ofong> theprong>ofong>its ong>ofong> Multinational Enterprises (MNEs) not being taxed at all. It also relates ong>toong> arrangements thatachieve no or low taxation by shifting prong>ofong>its away from the jurisdictions where the activities creatingthose prong>ofong>its take place. The international nature ong>ofong> tax planning means that unilateral and uncoordinatedactions by countries will not suffice and may actually make things worse. The Action Planong>toong> address the issues that lead ong>toong> BEPS is a collective international effort which stands ong>toong> assist bothdeveloped and developing countries.BEPS impacts on domestic resource mobilisation in developing countries. For some ong>ofong> the poorestcountries, which rely very heavily on tax revenue from MNEs, BEPS has a ong>partong>icularly significanteffect on vital tax revenues. The impact ong>ofong> BEPS on developing countries, however, extends beyondrevenue. BEPS undermines the credibility ong>ofong> the tax system in the eyes ong>ofong> all taxpayers. If the largestand most high-prong>ofong>ile taxpayers are seen ong>toong> be avoiding their tax liabilities, confidence andeffectiveness ong>ofong> the tax system is undermined.It is important ong>toong> recognise that the risks faced by developing countries from BEPS, and thechallenges faced in addressing them, may be different both in nature and scale ong>toong> those faced bydeveloped countries. This means that BEPS actions for developing countries may need specificemphases or nuances compared ong>toong> those most suitable for advanced economies.Key findingsThis ong>reportong> finds that developing countries ong>ofong>ten face policy and other conditions that impact ontheir abilities ong>toong> address base erosion and prong>ofong>it shifting. In ong>partong>icular:Some developing countries lack the necessary legislative measures needed ong>toong> address baseerosion and prong>ofong>it shifting.3


Developing country measures ong>toong> challenge BEPS is ong>ofong>ten hindered by lack ong>ofong> information.Developing countries face difficulties in building the capacity needed ong>toong> implement highlycomplex rules and ong>toong> challenge well-advised and experienced MNEs.The lack ong>ofong> effective legislation and gaps in capacity may leave the door open ong>toong> simpler,but potentially more aggressive, tax avoidance than is typically encountered in developedeconomies.Developing countries and international organisations identify the following key BEPS issues as beingong>ofong> most relevance:Base erosion caused by excessive payments ong>toong> foreign affiliated companies in respect ong>ofong>interest, service charges, management and technical fees and royalties.Prong>ofong>it shifting through supply chain restructuring that contractually reallocates risks, andassociated prong>ofong>it, ong>toong> affiliated companies in low tax jurisdictions.Significant difficulties in obtaining the information needed ong>toong> assess and address BEPSissues, and ong>toong> apply their transfer pricing rules.The use ong>ofong> techniques ong>toong> obtain treaty benefits in situations where such benefits were notintended.Tax loss caused by the techniques used ong>toong> avoid tax paid when assets situated in developingcountries are sold.In addition, developing countries ong>ofong>ten face acute pressure ong>toong> attract investment throughong>ofong>fering tax incentives, which may erode the country’s tax base with little demonstrablebenefit (included in this ong>reportong>, not as an integral ong>partong> ong>ofong> BEPS, but ong>ofong> first order concern ong>toong>developing countries that impacts on the tax base).Interim conclusionsBEPS has the potential ong>toong> considerably impact on domestic resource mobilisation in developingcountries. The risks faced by many developing countries, however, may differ from those faced bymore advanced economies. For these reasons, developing countries have highlighted some ong>ofong> theaction items in the Action Plan are ong>ofong> more relevance than others. They have also identified anumber ong>ofong> issues, such as tax incentives, that are ong>ofong> concern ong>toong> them, but which are not addressed inthe Action Plan.Next stepsAn expanded version ong>ofong> this ong>reportong> (Part 2 will be presented in September 2014) will set out how theDWG might assist developing countries meet the challenges ong>ofong> the most relevant BEPS issues theyface. This ong>reportong> will:Confirm which ong>ofong> the 15 actions included in the Action Plan are ong>ofong> most relevance ong>toong>developing countries and whose corresponding outcomes can be expected ong>toong> benefit them.4


Discuss other BEPS-related issues not in the Action Plan, including wasteful tax incentives,the lack ong>ofong> comparability data in developing countries and tax avoidance through theindirect transfer ong>ofong> assets located in developing countries.Discuss capacity building initiatives that, in the developing country context, must go handin-handwith regulaong>toong>ry measures. This will include a discussion on actions needed ong>toong>ensure that developing countries can fully benefit from the most relevant issues containedin the Action Plan and how specific BEPS actions may need ong>toong> be adapted (for examplesimplified) or supplemented (for example with additional guidance) ong>toong> ensure they areeffective for developing countries.5


SECTION 1: INTRODUCTIONAt the 2013 St. Petersburg Summit, Group ong>ofong> Twenty (G20) leaders recognised that “developingcountries should be able ong>toong> reap the benefits ong>ofong> a more transparent international tax system, and ong>toong>enhance their revenue capacity, as mobilizing domestic resources is critical ong>toong> financingdevelopment”.The G20 leaders endorsed the St. Petersburg Development Outlook, which committed the DWG ong>toong>“review relevant work on base erosion and prong>ofong>it shifting (BEPS) during 2014 in order ong>toong> identifyissues relevant ong>toong> low income countries (LICs) and consider actions ong>toong> address them”.The DWG has requested a ong>reportong> on the main sources ong>ofong> BEPS for LICs (and other low capacitycountries, hereinafter ‘developing countries’), how these relate ong>toong> the OECD/G20 BEPS Action Plan 1(‘the Action Plan’) and how the DWG might assist them ong>toong> meet those challenges. The DWG hasinvited the OECD 2 , as the organisation responsible for the Action Plan, ong>toong> lead the development ong>ofong>the ong>reportong>, working closely with the International Monetary Fund (IMF) 3 .This is Part 1 ong>ofong> the ong>reportong>, which was discussed at the meeting ong>ofong> DWG in May 2014. It identifies theBEPS issues ong>ofong> most significance for developing countries. Part 2 ong>ofong> the ong>reportong>, which will beavailable for the DWG meeting in September 2014, will i) highlight the actions developing countrieshave taken, many with international support, that indicate there are opportunities ong>toong> raiseadditional revenues from addressing BEPS issues and ong>toong> create a more certain and stable investmentclimate for business and ii) set out how G20 can assist developing countries address the challengesposed by these BEPS issues.Annex A describes each ong>ofong> the 15 actions identified in the Action Plan and sets out the relevance ong>ofong>each action ong>toong> developing countries, based on the consultations and experiences described in thebox below.1 At the request ong>ofong> the G20, the OECD developed an Action Plan ong>toong> tackle BEPS in a comprehensive manner.The Action Plan was fully endorsed by the G20 Finance Ministers at their meeting ong>ofong> 19 July 2013and by the G20 Leaders at their meeting on 5-6 September 2013, with a mechanism ong>toong> enrich thePlan as appropriate.2 The ong>reportong> is prepared under the responsibility ong>ofong> the Secretariats and Staff ong>ofong> the mandated organisations. Itshould not necessarily be regarded as the ong>ofong>ficially-endorsed views ong>ofong> those organisations or theirmember states.3 The DWG’s Terms ong>ofong> Reference states: “Tax and Development Secretariat will also work with otherinternational and regional organisations ong>toong> elicit the views ong>ofong> LICs, including the AfricanDevelopment Bank, African Tax Administration Forum, Asian Development Bank, Centre deRencontre des Administrations Fiscales, Economic Commission for Latin America and the Caribbean,Inter-American Center ong>ofong> Tax Administration, UN Committee on Tax and World Bank Group”.6


This ong>reportong> is based on:a) Direct consultations with developing countries at regional BEPS consultation events(involving Asian, Latin American and Caribbean, and Francophone countries) and the ATAFConsultative Conference on New Rules ong>ofong> the Global Tax Agenda (involving Africancountries).b) Consultations with developing countries at the Annual Meetings ong>ofong> the OECD Global Forumon Tax Treaties, the OECD Global Forum on Transfer Pricing, and the OECD Task Force on Taxand Development. The Co-Chairs’ Statement ong>ofong> Outcomes ong>ofong> the Task Force on Tax andDevelopment is contained in the Annex B below.c) The experiences ong>ofong> OECD, World Bank Group and EU from their Tax and DevelopmentTransfer Pricing Programmes. These are demand driven programmes so provide evidencefrom the developing countries ong>ofong> the issues they consider are highest priority and which theyare currently trying ong>toong> address. Assistance is being provided ong>toong> Albania, Bangladesh, Burundi,Cambodia, Colombia, Ethiopia, Ghana, Honduras, Jamaica, Kenya, Nigeria, Peru, Rwanda,Seychelles, Tanzania, Thailand, Uganda, Ukraine, Vietnam and Zambia. Feedback fromdeveloping countries is also received at OECD Global Relations events.d) The findings ong>ofong> a questionnaire sent ong>toong> the ong>partong>icipants ong>toong> the March 2014 Global Forum onTransfer Pricing and comments received on requests for public input in the context ong>ofong> theBEPS Project.e) Comments and information received from the IMF 4 .Annex C contains a glossary ong>ofong> terms used in this ong>reportong>.4 IMF (2014) provides an extensive account ong>ofong> current international tax issues for developing countries.7


SECTION 2: WHAT IS BEPS?BEPS refers chiefly ong>toong> instances where the interaction ong>ofong>different tax rules leads ong>toong> some ong>partong> ong>ofong> the prong>ofong>its ong>ofong> MNEsnot being taxed at all. It also relates ong>toong> arrangements thatachieve no or low taxation by shifting prong>ofong>its away from thejurisdictions where the activities creating those prong>ofong>its takeplace.It should be stressed that such planning by large MNEs is rarelyillegal. In some cases, it is simply a matter ong>ofong> exploiting theunintended mismatches between the rules on the taxation ong>ofong>MNEs put in place by different tax jurisdictions. In other cases,Approximately 25% ong>ofong>intercompany transactionsentered inong>toong> by Colombiantaxpayers are with lowrate tax jurisdictions.Source: Task ForcePresentation, 28 March 2014avoidance is possible because internationally developed principles have not kept pace with theglobal integration ong>ofong> the economy. No, or low, taxation is not a cause for concern per se, but itbecomes so when it is associated with practices that artificially segregate taxable income from theactivities that generate it. In these cases, what matters is when income from cross-border activitiesgoes untaxed anywhere.BEPS is a global issue that requires global solutions. The international nature ong>ofong> tax planning meansthat unilateral and unco-ordinated actions by countries will not suffice and may make things worse.The current OECD/20 Project, designed ong>toong> address the issues that lead ong>toong> BEPS, is a collectiveinternational effort which stands ong>toong> assist both developed and developing countries. It is importantong>toong> recognise, however, that the risks faced by developing countries from BEPS, and the challenges ong>ofong>addressing them, may be different both in nature and scale ong>toong> those faced by developed countries.For example, gaps in developing country tax legislation, ong>toong>gether with low administrative capacity,are likely ong>toong> mean that developing countries facing cruder or more aggressive tax avoidance thantypically encountered in more advanced economies. BEPS solutions need ong>toong> be developed andevaluated with such issues in mind and BEPS actions for developing countries may need specificemphases or nuances compared ong>toong> those more suitable for advanced economies.Crude tax avoidance in Nigeria:…most ong>ofong>ten, the companies making the payments are unable ong>toong> demonstrate thatcommensurate benefits were obtained for these payments.Source: OECD Questionnaire, March 2014In addition, there are issues that create significant base erosion and potential double non-taxation indeveloping countries but which are not identified in the Action Plan. For example, governmentsincreasingly ong>ofong>fer MNEs tax incentives (such as tax-free periods or ‘tax holidays’) and in theconsultation process developing countries voiced some doubts about the benefits ong>ofong> thesemeasures. This is a long standing concern for developing countries and an area where a considerableamount ong>ofong> work has been carried out by the IMF and the World Bank Group. As tax incentives have adirect impact on developing country tax bases, and can give rise ong>toong> the non-taxation ong>ofong> prong>ofong>it or ong>toong>taxation ong>ofong> prong>ofong>it at a low rate, it is important that this issue is considered alongside otherdeveloping country BEPS issues. Tax incentives are therefore included within the scope ong>ofong> thisong>reportong>.8


A further issue for developing countries, which was raised during the regional consultations, is thebalance between source and residence taxation embodied in bilateral tax treaties modelled on theOECD and UN Model Tax Conventions. This is an issue ong>ofong> allocating taxing rights between two treatyong>partong>ners. It is not a tax planning/avoidance issue and does not give rise ong>toong> BEPS. It is thus outside thescope ong>ofong> the OECD/G20 BEPS Project and this ong>reportong>. However, it is recognised that this is an issue ong>ofong>significance for many developing countries, and that the OECD/G20 BEPS Project provides anopportunity ong>toong> lay the ground for this legitimate debate. The BEPS consultations with developingcountries have also highlighted the need ong>toong> critically assess the costs and benefits ong>ofong> entering inong>toong>tax treaties, and balance the policy objectives ong>ofong> revenue collection on the one hand and creatingthe right environment for foreign direct investment (FDI) on the other.9


198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012SECTION 3: BEPS AS A DOMESTIC RESOURCE MOBILISATION CONCERNMoving ong>toong>wards a simpler, more equitable, transparent and broad based tax system has been aconcern for developing countries for decades. Yet half ong>ofong> sub-Saharan African countries still mobiliseless than 15% ong>ofong> their GDP in tax revenues, below the minimum level ong>ofong> 20% considered by the UNas necessary ong>toong> achieve the Millennium Development Goals (UNDP, 2010) by 2015. Several Asian andLatin American countries fare little better. The urgency ong>ofong> domestic resource mobilisation, and therisk ong>ofong> BEPS, come ong>toong>gether in sharp focus when developing countries’ reliance on corporate incometax is considered.As a share ong>ofong> all revenue, corporate income tax is more important in the poorest developingcountries than in developed countries, as Graph 1 below shows.Graph 1. Revenue from the corporate income tax as percentage ong>ofong> ong>toong>tal revenue20181614121086420High income Low income Lower middle income Upper middle incomeSource: IMF (2014)10


Extreme reliance on taxation ong>ofong> MNEs Rwanda ong>reportong>s that 70% ong>ofong> its tax basecomes from MNEs. In Burundi one company contributes nearly20% ong>ofong> ong>toong>tal tax collection. (Source: NSI,2010) In Nigeria, MNEs represent 88% ong>ofong> the taxbase. (Source: ATAF Conference, 18-19 March2014) In Peru related ong>partong>y transactions accountfor 26% ong>ofong> GDP. (Source: Task ForcePresentation, 28 March 2014)pricing a critical issue in the industry. BEPS risks inthis secong>toong>r therefore warrant ong>partong>icular attention.The impact ong>ofong> BEPS on developing countries,however, extends beyond revenue from the taxationong>ofong> MNEs. Companies operating only in domesticmarkets are at a competitive disadvantage if MNEsshift their prong>ofong>its across borders ong>toong> avoid or reducetax. More broadly, BEPS undermines the credibilityong>ofong> the tax system in the eyes ong>ofong> all taxpayers. If theIn some countries, reliance on MNE taxrevenue is marked. This is not ong>toong> downplaythe importance ong>ofong> other pressing tax mattersfacing developing countries (such as theinformal secong>toong>r); rather, it is critical thatdeveloping countries are able ong>toong> tax MNEs onthe full prong>ofong>its that they earn in theirjurisdictions according ong>toong> clear rules.Revenue loss from BEPS may be ong>partong>icularlyimportant for resource rich developingcountries. For these countries the taxation ong>ofong>natural resources is possibly the single biggestmake or break fiscal concern in the nextdecade. MNEs dominate the extractiveindustries, and commonly export minerals tong>ofong>oreign related ong>partong>ies, making transferThe government ong>ofong> Zambia says that “itis losing as much as US$2 billionannually ong>toong> tax avoidance, and addsthat the country’s mining industry is thebiggest culprit”.Source: Bloomberg, 25 November 2012largest and most high-prong>ofong>ile taxpayers are seen ong>toong> be avoiding their tax liabilities, confidence andeffectiveness ong>ofong> the tax system is undermined. This is ong>partong>icularly important for developing countriesas they face significant challenges with the taxing ong>ofong> “hard ong>toong> tax” secong>toong>rs, including small businesses(OECD, 2013).11


SECTION 4: BEPS IN THE DEVELOPING COUNTRY CONTEXTThe developing country experience ong>ofong> BEPS, and ong>ofong> countering BEPS, may be different from that ong>ofong>developed countries in six key areas. 5a) The nature ong>ofong> cross-border tax planning may differ between developing anddeveloped countries.Sophisticated tax planning structures may be less prevalent in, or ong>ofong> less pressing concern ong>toong>,developing countries, where the lack ong>ofong> relevant and effective rules may leave the door open formuch simpler tax planning strategies. Ineffective audit capacity may do little ong>toong> discourage moreaggressive and borderline tax planning practices. These differences in risks may need tailoredapproaches.b) Developing countries may lack the necessary legislative measures needed ong>toong>address BEPS.A common issue for developing countries is incompletelegislation or legislation that is insufficiently targeted atthe most important risks. Rwanda ong>reportong>s, for example,that its current transfer pricing rules are incompleteand are insufficiently effective ong>toong> counter prong>ofong>itshifting. In many cases, rules can be easilycircumvented. There is ong>ofong>ten more than one way inwhich prong>ofong>it can be shifted cross border, and legislationthat closes one route will be ineffective if it leavesother routes open. For example, legislation that“Delegates have ong>toong> ask themselveswhether they have all the legalinstruments needed ong>toong> adequatelydeal with base erosion”.Ivan Pillay, ATAF ChairSource: Moneyweb, 18 March 2014prevents prong>ofong>it shifting by means ong>ofong> transfer pricing will be ong>ofong> limited effectiveness if there is also noeffective measure in place ong>toong> prevent MNEs from introducing excessive interest-bearing debt inong>toong> acountry. Where such measures are in place, they may not be sufficiently robust.c) Accessing relevant information is ong>ofong>ten difficult.A common problem for developing countries is an inability ong>toong> obtain the information they requirefrom MNEs ong>toong> adequately assess the risk ong>ofong> BEPS or ong>toong> apply their rules ong>toong> counter BEPS. This may bedue ong>toong> any or all ong>ofong> the following: i) lack ong>ofong> effective information-gathering rules, ii) poor compliancewith such rules, or iii) limited capacity ong>toong> implement and enforce them, iv) inadequate ong>toong>ols (such ase-filing systems) ong>toong> capture information and then fully analyse it. Developing countries ong>reportong> thatthey face difficulties, for example, in obtaining information about the foreign operations ong>ofong> an MNEgroup ong>ofong>ten needed ong>toong> fully assess the risk ong>ofong> tax loss. This is explored in more depth below.5 On the importance and nature ong>ofong> international tax concerns for developing countries, see also IMF (2014).12


d) Building and maintaining capacity ong>toong> implement highly complex international rules thatleave room for discretion in their application.The number ong>ofong> tax and cusong>toong>ms staffavailable for every 1000 citizens is0.131 in Mozambique, 0.087 inTanzania and 0.099 in Zambia in 2010.These ‘tax staff per population ratios’are low compared ong>toong> the worldaverage ong>ofong> 0.82.Source: CMI, 2011Developing countries face specific challenges inapplying a complex set ong>ofong> rules designed ong>toong> countercross-border international tax avoidance. First, taxadministrations face competing priorities, ong>ofong>ten withwoefully inadequate staffing. Second, many taxadministrations are not competitive employers ong>ofong>skilled staff working on international tax avoidanceissues, and there is a constant drain ong>toong> the privatesecong>toong>r, ong>partong>icularly the large accountancy firms. Theseconstraints, combined with lack ong>ofong> experience, resultin a well-known asymmetry when ong>ofong>ficials areconfronted by well-advised large companies.Finally, many developing countries may not have an established practice for settling disputes withlarge taxpayers conducting complex internationaltransactions. The complex and fact-intensive nature ong>ofong>international tax rules means that disputes indeveloped countries are ong>ofong>ten settled by negotiationand compromise between the tax administration andtaxpayer. This practice may not necessarily transfer wellong>toong> the developing country context, where a culture ong>ofong>dealing with disputes in this way may be absent. Inaddition, the granting ong>ofong> wide discretion ong>toong> tax audiong>toong>rsmay open the door ong>toong> corruption. Improving theeffectiveness ong>ofong> dispute resolution while ensuring the« Ils ont besoin d’être mieux arméspour répondre au rapport de forceentre les multinationales et lesadministrations fiscales, souventdéfavorable aux pays endéveloppement ».Source: CREDAF Event, 25 March 2014integrity ong>ofong> the process needs ong>toong> be explored in much further detail in the developing countrycontext.Key messages from the Regional Consultations on BEPS concerning capacity issuesFor developing countries, it is crucial that tax policy measures are capable ong>ofong> implementation, given the currentconstraints on capacity and access ong>toong> information. Participants felt that implementation considerations shouldinform the development ong>ofong> the work on BEPS.Source: Seoul Event, 20-21 February 2014Africa must ong>partong>icipate in the OECD/G20 BEPS Project and use the opportunity ong>toong> shape the issues in the 15Action points in this project. We should use the opportunity ong>toong> ensure that sufficient attention is given ong>toong> thedifferent levels ong>ofong> readiness ong>ofong> African tax administrations and the resource and capacity limitations they have.Source: ATAF Event, 18-19 March 201413


e) Need for political impetus and support for effective measures ong>toong> counter BEPS highlightedin regional consultations.The success ong>ofong> these measures willbe determined not only by thetechnical accuracy ong>ofong> the solutionsproposed, but also by the politicalconsensus on the need for reforms.Source: Bogota Event, 28 February 2014An issue consistently raised by developing countries isthe need ong>toong> achieve political buy-in as a prerequisite ong>toong>making the legislative changes and resourcecommitment required ong>toong> counter base erosion andprong>ofong>it shifting. Lack ong>ofong> political awareness andcommitment is cited by many developing countries asa major barrier ong>toong> effectively introduce and apply rulesong>toong> address BEPS issues.f) The acute pressures on developing countries ong>toong> attract investment can trigger acompetitive ‘race ong>toong> the botong>toong>m’.Although outside ong>ofong> the remit ong>ofong> the BEPS Action Plan, investment-targeted tax incentives granted ong>toong>MNEs are eroding the tax base ong>ofong> developing countries, ong>ofong>ten with little demonstrable benefit. In1980, 40% ong>ofong> sub-Saharan African countries ong>ofong>fered tax holidays; in 2005, 80% did so (Keen andMansour, 2009). This has been identified by developing countries as a key issue, and is discussed inmore detail below.Participants at the Regional Consultation on BEPS in Seoul agreed that, in the regional context, the OECD/G20BEPS Project needs ong>toong> reflect the balance between the encouragement ong>ofong> foreign investment and the need fordomestic resource mobilisation for development.Source: Seoul Event, 20-21 February 2014Implications for developing countriesDomestic rules ong>toong> counter cross-border tax avoidance, and international standards andguidance, need ong>toong> address the full range ong>ofong> potential risks.Rules also need ong>toong> be implementable in the context ong>ofong> developing country resource andcapacity limitations – this might mean they need ong>toong> be simplified or more mechanical innature, and allow for limited discretion.The development ong>ofong> international tax rules and guidance needs ong>toong> take account ong>ofong> thelimitations on access ong>toong> information faced by developing countries.Improving the effectiveness ong>ofong> dispute resolution needs ong>toong> be explored in the developingcountry context.BEPS issues for developing countries cannot be addressed in isolation from capacity issuesand capacity building. It is critical that the BEPS actions take account ong>ofong> these capacityissues.Need for tax administrations, international and regional organisations, donors and NGOsong>toong> raise awareness ong>ofong> the significance ong>ofong> BEPS issues at developing country political levels.14


SECTION 5: THE HIGH PRIORITY BEPS ACTION ITEMS FOR DEVELOPINGCOUNTRIESDeveloping countries have identified the high priority BEPS Action Items, which are largelyconsistent across regions. This section ong>ofong> the ong>reportong> sets out the findings from consultations withdeveloping countries (see Annex B) and from the experience ong>ofong> the IMF, OECD, World Bank Groupand EU capacity development programmes with developing countries.It should also be noted that although not specifically identified as a priority many developingcountries recognise that the development ong>ofong> a multilateral instrument will be a useful mechanismfor implementing the OECD/G20 BEPS Project measures ong>partong>icularly in the area ong>ofong> changes ong>toong> doubletax treaties.The priority issues identified by developing countries are as follows:a) Excessive or unwarranted payments ong>toong> MNE affiliates – eroding the tax base ong>ofong>developing countries.Developing countries regularly ong>reportong> that a variety ong>ofong> payments between companies in the sameMNE group may unduly erode their tax base. They ong>reportong> that it is ong>ofong>ten difficult ong>toong> assess whethersuch payments are for real value received, or whether they are excessive or unwarranted. Thesepayments are typically for finance (e.g. interest payments), or for services, (e.g. management fees),or for intellectual property (e.g. royalty payments). Tax rules typically allow a deduction for suchpayments in arriving at the prong>ofong>it subject ong>toong> tax, which means that excessive payments caninappropriately reduce the amount ong>ofong> prong>ofong>it on which tax is paid.These types ong>ofong> payments arise in developed and developing countries but the risk ong>ofong> such paymentseroding the tax base in developing countries may be greater as MNE affiliates in developingcountries are generally recipients rather than providers ong>ofong> finance, services and intellectual property.Developing countries have expressed specific concerns that their tax bases are eroded throughpayments ong>ofong> interest on loans. A company is usually financed (or capitalised) through a mixture ong>ofong>debt and equity. Excessive interest payments can arise if developing country taxpayers are burdenedby excessive debt (known as “thinly capitalised”), or by an excessive price ong>ofong> debt. A deduction isnormally made for interest in arriving at the tax measure ong>ofong> prong>ofong>it; so the higher the level ong>ofong> debt in acompany, and thus amount ong>ofong> interest it pays, thelower the taxable prong>ofong>it.58% ong>ofong> the developing countryParticularly common are payments ong>toong> MNE affiliatesrespondents ong>toong> the questionnairefor services provided by other members ong>ofong> the MNEindicated that management fees andgroup, such as for legal or IT services, or for technical service fees regularlymanagement services or technical advice. For present transfer pricing enforcementexample, Mauritius ong>reportong>s that most ong>ofong> its transfer issues in their country.pricing issues arise where largeSource: OECD questionnaire, March 2014management/technical fees are paid. Such paymentsare by no means always excessive, and may representa fair return for valuable services provided. It is ong>ofong>tendifficult, however, for developing countries ong>toong> obtain the full information needed ong>toong> assess this.15


Kenya ong>reportong>s that one ong>ofong> its key risks istransfers ong>ofong> locally developed intellectualproperty ong>toong> low tax jurisdictions withoutcompensation. A royalty is then chargedfor use by the Kenyan entity.Royalty payments ong>toong> MNE affiliates are alsocommon. The ability ong>toong> assess whether suchpayments are appropriate at all, or whether theyare excessive in amount, again requiressubstantial information, and a high technicalcapacity.Source: Task Force Presentation,28 March 2014A ong>partong>icular risk for resource-rich countries is thepricing ong>ofong> mineral export sales ong>toong> MNE affiliates.Several countries have ong>reportong>ed that they facechallenges in ensuring that minerals are exportedat a fair price, again citing lack ong>ofong> data and information, and shortage ong>ofong> skilled capacity.Implications for developing countriesNeed for effective and implementable rules ong>toong> counter base erosion through the paymentong>ofong> excessive interest, including through excessive debt. (Addressed in Action 4 ong>ofong> theAction Plan, as described in Annex A below)Need for effective and implementable transfer pricing rules ong>toong> counter base erosionthrough the payment ong>ofong> excessive royalties. (Addressed in Action 8 ong>ofong> the Action Plan, as,described in Annex A below)Need for effective and implementable, and if necessary simplified, transfer pricing rulesthat enable developing countries ong>toong> challenge excessive payments by MNEs in theircountries ong>toong> foreign related ong>partong>ies for management charges and service fees. (Addressedin Action 10 ong>ofong> the Action Plan, as described in Annex A below)b) Developing countries face challenges due ong>toong> new models for doing business, such asglobal value chains.Globalisation has had an important impact on the wayMNEs structure their business operations, bringing freshchallenges. The increasing mobility ong>ofong> capital and people,and the rapid adoption ong>ofong> technology ong>toong> improvecommunications, has resulted in restructuring ong>ofong> MNEbusiness models and operations. These changes are ong>ofong>tenbased on centralised functions at a regional or global levelrather than operations being managed within individualcountries. Often referred ong>toong> as “supply chainrestructuring”, these practices are usually driven bybusiness priorities, responding ong>toong> efficiencies availableKenya ong>reportong>s that some foreigncompanies operating in Kenyastructure their business activitiesin a way ong>toong> artificially avoidtaxation.Source: Task Force Presentation,28 March 2014from centralised planning, procurement and holding ong>ofong> intellectual property. However, they alsomake it easier ong>toong> shift prong>ofong>its between tax jurisdictions giving rise ong>toong> tax planning opportunities, andare ong>ofong>ten designed with tax minimisation in mind.Supply chain restructuring ong>ofong>ten involves the establishment ong>ofong> a central entrepreneurial company(the principal) in a low tax jurisdiction. Risks, such as bad debt, foreign exchange or invenong>toong>ry risks,are typically contractually transferred from, for example, a local distribuong>toong>r, ong>toong> that principal,without moving the risk outside the MNE group as a whole. In such cases, the application ong>ofong> thearm’s length principle in transfer pricing rules can result in prong>ofong>its being shifted from the local16


distribuong>toong>r ong>toong> the principal. This ability ong>toong> contractually shift risk between the members ong>ofong> an MNE(but not outside the MNE group as a whole) allows MNEs ong>toong> plan where prong>ofong>its are ong>reportong>ed, andthus tax paid.Supply chain restructuring ong>ofong>ten goes hand in hand with the migration ong>ofong> valuable intellectualproperty ong>toong> a centralised owner, ong>ofong>ten in a low tax jurisdiction, or where intellectual property isgiven favourable tax treatment. Where this happens, the income associated with that property alsomigrates, thus reducing the tax base.Developing country tax administrations ong>reportong> that they are seeing many such restructurings,resulting in challenges arising from capacity shortfalls and information gaps. In some cases faced bydeveloping countries, such restructurings are crude and abusive, with little or no substance behindthem. In other cases, the complex nature ong>ofong> the restructuring means that testing the transfer pricingrequires sophisticated analysis and comprehensive information in relation ong>toong> both the residenttaxpayer and the foreign principal. Successfully challenging such restructurings frequently involvesthe interaction ong>ofong> a number ong>ofong> tax rules – transfer pricing rules, tax treaties, the taxation ong>ofong> nonresidentsand rules concerning the transfer ong>ofong> intangible assets – all requiring strong technicalcapacity.Implications for developing countriesNeed for effective and implementable transfer pricing rules that enable developingcountries ong>toong> address mismatches between where prong>ofong>it is recognised, and where it is trulyearned. (Addressed in Actions 8, 9 and 10 ong>ofong> the Action Plan, as described in Annex Abelow)Need for effective rules that require MNEs ong>toong> supply relevant information required ong>toong>apply their transfer pricing rules. (Addressed in Action 13 ong>ofong> the Action Plan, as describedin Annex A below)Need ong>toong> update internationally developed principles ong>toong> ensure developing countries caneffectively tax foreign entities operating in their countries in line with the economicsubstance ong>ofong> their operations in those countries. (Addressed in Actions 1 and 7 ong>ofong> theAction Plan, as described in Annex A below)c) Developing countries struggle ong>toong> obtain the information they need ong>toong> assess andaddress BEPS issues.A major issue for developing countries is the ability ong>toong> obtain information needed ong>toong> assess the scaleand impact ong>ofong> cross-border tax avoidance, and ong>toong> take effective action ong>toong> counter such avoidance.Developing countries need data ong>toong> adequately quantify tax loss from cross-border tax avoidance,and ong>toong> pinpoint the sources and nature ong>ofong> such losses, as well as the effectiveness ong>ofong> measuresintroduced ong>toong> counter them. The Action Plan recognises that this is an issue for developed anddeveloping countries alike, and that work is needed ong>toong> develop indicaong>toong>rs ong>ofong> the scale and economicimpact ong>ofong> BEPS. It is also acknowledged that ong>toong>ols are needed ong>toong> moniong>toong>r and evaluate theeffectiveness and economic impact ong>ofong> the actions taken ong>toong> address BEPS.Developing countries also need ong>toong> be able ong>toong> obtain the information they require ong>toong> select the mostappropriate taxpayers for audit, and then ong>toong> effectively check or challenge their transfer pricing.Most developing countries have ong>reportong>ed that they face significant challenges in obtaining theinformation they need ong>toong> apply their rules. In ong>partong>icular, they express concerns over the difficulties in17


obtaining relevant information from taxpayers about the foreign members and operations ong>ofong> MNEgroups.Several developing countries have expressed strong support for the introduction ong>ofong> some form ong>ofong>country-by-country ong>reportong>ing. Country-by-country ong>reportong>ing was originally a transparency initiativepromoted by civil society calling for the public disclosure ong>ofong> taxes and other financial data fromMNE’s in each ong>ofong> the locations in which they operate. More recently, the debate has been taken upby the G8 which called on the OECD ong>toong> develop a common template for country-by-countryong>reportong>ing ong>toong> tax authorities by MNEs, but not publicly disclosed. Many developing countries see thevalue ong>ofong> this work in helping them ong>toong> assess the risks ong>ofong> prong>ofong>it shifting.Implications for developing countriesNeed for the development ong>ofong> indicaong>toong>rs ong>ofong> the scale and economic impact ong>ofong> BEPS, andong>toong>ols are needed ong>toong> moniong>toong>r and evaluate the effectiveness and economic impact ong>ofong> theactions taken ong>toong> address BEPS. (Addressed in Action 11 ong>ofong> the Action Plan, as described inAnnex A below)Need for development ong>ofong> international standards and guidance on transfer pricingdocumentation and information ong>reportong>ing, including a common template for country bycountry ong>reportong>ing ong>toong> tax administrations, that enable developing countries ong>toong> obtain theinformation needed ong>toong> assess the risk ong>ofong> transfer pricing abuse, and effectively addresssuch risk. (Addressed in Action 13 ong>ofong> the Action Plan, as described in Annex A below)To expand the developments on transfer pricing documentation and information ong>reportong>ingong>toong> capture wider BEPS risks. (Addressed in Action 13 ong>ofong> the Action Plan, as described inAnnex A below)d) Developing countries ong>reportong> that they lose out from treaty abuse.Around 3,000 bilateral tax treaties operate worldwide, and roughly 1,000 ong>ofong> these involvedeveloping countries.By way ong>ofong> background, most developing countries impose withholding tax on payments such asinterest, management fees and royalties made by a resident taxpayer ong>toong> a non-resident. These taxesare deducted from the payments by the payer, and then paid ong>toong> the local tax authority. They arethus a tax on the foreign recipient ong>ofong> the payment. Withholding taxes in developing countries areusually between 10% and 20% ong>ofong> the payment amount.The effect ong>ofong> tax treaties, which usually overridedomestic legislation, is ong>ofong>ten ong>toong> reduce that withholdingtax ong>toong> a lower rate or ong>toong> zero.Whilst developing countries generally agree thatbilateral tax treaties have been effective in preventingdouble taxation, and support a predictable investmentlandscape, they are concerned about their misuse.Zambia sees transactions that arestructured in a way ong>toong> exploit thefavourable terms found in aong>partong>icular treaty. The effect is thatZambia loses out on withholdingtax it would otherwise have beenable ong>toong> collect.Source: OECD Questionnaire,March 2014The concern is focused on the use ong>ofong> techniques(sometimes called “treaty shopping’’) ong>toong> obtain treatybenefits (typically the reduction ong>ofong> withholding taxes) insituations in which such benefits were not intended.Such techniques ong>ofong>ten involve the routing ong>ofong> payments ong>ofong> interest or royalties ong>toong> an affiliate in a non-18


treaty country, through affiliates in a treaty country. Where this occurs, the country ong>ofong> the payerloses out on the withholding taxes that it would otherwise have been able ong>toong> collect.Estimates ong>ofong> lost withholding tax revenues for developing countries are hard ong>toong> make. However,dissatisfaction among developing countries is possibly on the rise with Mongolia, for example,scrapping treaties with several jurisdictions because, according ong>toong> the Mongolian Ministry ong>ofong>Finance, these arrangements are primarily used for tax avoidance by large extractive industrycompanies. The mining secong>toong>r makes up more than 80% ong>ofong> Mongolia’s exports and accounts for30% ong>ofong> GDP.Developed countries are beginning ong>toong> take these concerns on board. The Netherlands, for example,is conducting a review ong>ofong> its tax treaties with developing countries, with a focus on anti-abusemeasures. Mrs Lilianna Ploumen, Development Co-operation Minister, ong>toong>ld the Financial Times: “Bymaking use ong>ofong> loopholes in tax treaties in combination with differences between national tax rules,internationally operating companies can avoid paying tax. It means that poor countries miss out ontax revenues, funds they clearly need for matters such as infrastructure and education” (Houlder andBlas, 2013).Implications for developing countriesNeed ong>toong> identify the tax policy considerations that, in general, countries should considerbefore deciding ong>toong> enter inong>toong> a tax treaty with another country including carrying out acost/benefit analysis ong>ofong> the tax treaty. (Addressed in Action 6 ong>ofong> the Action Plan,as described in Annex A below)Need for development ong>ofong> domestic rules, and treaty provisions, that counter theunintended use ong>ofong> treaties ong>toong> avoid withholding taxes. (Addressed in Action 6 ong>ofong> theAction Plan, as described in Annex A below)19


SECTION 6: OTHER HIGH PRIORITY BEPS ISSUES FOR DEVELOPING COUNTRIESa) Developing countries face challenges in obtaining the data needed ong>toong> apply thearm’s length principle.The international standard in transfer pricing, which is routinely incorporated in domestic transferpricing rules, requires MNEs ong>toong> price their related-ong>partong>y transactions in line with the pricing theywould have used if they were conducting the sametransaction with an unrelated ong>partong>y. Financial dataabout transactions between unrelated ong>partong>ies that aresimilar ong>toong> the related ong>partong>y transaction (known as“comparable transactions”) is thus a prerequisite forcountries ong>toong> be able ong>toong> effectively enforce theirtransfer pricing rules.Developing countries frequently express concernsabout the availability and quality ong>ofong> financial data oncomparable transactions. This is reflected in thestatement in the United Nations Practical TransferIn Vietnam, data on actualtransacted prices betweenindependent ong>partong>ies (which hasbeen the main focus ong>ofong> the taxauthorities) is difficult ong>toong> obtainand apply.Source: EuropeAidPricing Manual for Developing Countries (2012): “It is ong>ofong>ten in practice extremely difficult, especiallyin some developing countries, ong>toong> obtain adequate information ong>toong> apply the arm’s length principle”.A recent International Finance Corporation (IFC)/World Bank Group survey ong>ofong> local tax practitionersin 25 countries in the Europe and Central Asia (ECA) region found that 76% ong>ofong> the responses statedthey ong>ofong>ten, very ong>ofong>ten or always, encounter difficulties in obtaining domestic comparableinformation (Loeprick, Cooper, and Christ, forthcoming). The issue ong>ofong> comparability is discussed indetail in a recent OECD discussion paper, Transfer Pricing Comparability Data and DevelopingCountries (OECD, 2014).Implications for developing countriesStakeholders need ong>toong> find approaches that address the lack ong>ofong> comparability data indeveloping countries.b) Developing countries lose out from indirect transfer ong>ofong> assets.This is a complex issue, but one which may have significant impact on the tax revenues ong>ofong> developingcountries, especially (but not only) those countries where income from extractive industries areimportant. At the heart ong>ofong> the issue is the taxation ong>ofong> the prong>ofong>it made by the owner ong>ofong> an asset whenthat owner sells it (for example, the sale ong>ofong> a mineral licence). In some circumstances the country inwhich the asset is situated has the right under its domestic rules, and its treaties, ong>toong> tax such prong>ofong>it.However, the IMF ong>reportong>s that the asset owner is sometimes able ong>toong> avoid this taxation by means ong>ofong>an ‘indirect transfer’; that is, the sale ong>ofong> the shares in the company that owns the asset rather thanthe sale ong>ofong> asset itself, or the sale ong>ofong> the shares ong>ofong> another company that owns the shares ong>ofong> the firstcompany.20


Although many developing countries have rules that allow the taxation ong>ofong> a prong>ofong>it on such indirecttransfers, challenges arise both in discovering the transaction in the first place, and collecting the taxfrom the foreign company that sold the shares.Implications for developing countriesDeveloping countries at risk need ong>toong> enact effective rules ong>toong> tax capital gains where‘indirect transfers’ are used.Developing countries need ong>toong> have sufficient information ong>toong> identify indirect transfers.(Addressed in Action 13 ong>ofong> the Action Plan, as described in Annex A below)Developing countries at risk need effective procedures ong>toong> tax the foreign company that hasrecognised the capital gains. (For example through membership ong>ofong> the MultilateralConvention on Mutual Administrative Assistance 6 )c) Base erosion through wasteful tax incentives designed ong>toong> attract investment – a majorcause for concern.In 2011, the OECD and other internationalorganisations ong>reportong>ed ong>toong> the G20 DWG that taxincentives, including corporate income taxexemptions in free trade zones, continue ong>toong>undermine revenue; where governance is poor, theymay do little ong>toong> attract investment — and when theydo attract foreign direct investment (FDI), this maywell be at the expense ong>ofong> domestic investment or FDIinong>toong> some other country. Since then, the situation islikely ong>toong> have deteriorated as more evidence hasemerged ong>ofong> the proliferation ong>ofong> tax incentivesdesigned ong>toong> attract invesong>toong>rs. Forgone tax revenues asa result ong>ofong> tax incentives ranged between 9.5% and16% ong>ofong> GDP per year in the Eastern CaribbeanCurrency Union over a three year period, while theeffect ong>ofong> tax incentive regimes on FDI appeared ong>toong> bevery modest (Chai and Goyal, 2008).Invesong>toong>r Motivation SurveysCountries SurveyedWould have investedeven if Incentiveswere not providedRwanda (2011) 98%Uganda (2011) 93%Guinea (2012) 92%Tanzania (2011) 91%Vietnam (2004) 85%Thailand (1999) 81%Mozambique (2009) 78%Burundi (2011) 77%Serbia (2009) 71%Jordan (2009) 70%Kenya (2012) 61%Tunisia (2012) 58%These figures need ong>toong> be set alongside the mostrecent Invesong>toong>r Motivation Surveys, for example in Guinea, Rwanda, Tanzania and Uganda, whichshow that over 90 % ong>ofong> invesong>toong>rs would have invested even if incentives were not provided (James,2013).6 See: www.oecd.org/tax/exchange-ong>ofong>-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm21


A study ong>ofong> 12 Western and Central African countries over the period 1994-2006 showed norelationship between tax holidays and investment (James and Van Parys, 2010).Tax incentives ranked 11 thout ong>ofong> 12 location facong>toong>rs ina survey ong>ofong> 7,000 firms in19 African countries.Source: UNIDO, 2011The damage ong>toong> the revenue base that erodes the resources forthe real drivers ong>ofong> investment decisions — infrastructure,education and security — is compounded by the lack ong>ofong>transparency and clarity in the provision, administration, andgovernance ong>ofong> tax incentives in developing countries. Thegranting ong>ofong> tax incentives for investment in developingcountries is ong>ofong>ten done outside ong>ofong> a country’s tax laws andadministration, sometimes under multiple pieces ong>ofong>legislation. The design and administration ong>ofong> tax incentivesmay be the responsibility ong>ofong> several different ministries (e.g., finance, trade, investment). Wherevarious Ministries are involved, they may not co-ordinate their incentive measures (tax and non-tax)with each other or the national revenue authority, with the result that incentives may overlap, beinconsistent, or even work at cross-purposes. Administrative discretion in the management ong>ofong>incentives can seriously increase the risk ong>ofong> corruption and rent seeking.The long-term costs ong>ofong> tax incentives include the economic burden that arises from international taxcompetition as competing countries put in place matching measures. This is ong>ofong> ong>partong>icular concern indeveloping countries where new measures are introduced or the existing measures are significantlyaugmented without properly assessing the likely reactions ong>ofong> other countries. This wasteful practiceleads ong>toong> the “race ong>toong> the botong>toong>m”, as countries make themselves collectively worse ong>ofong>f.There is a need ong>toong> assess the cost-benefit aspects ong>ofong> tax incentives, evaluate their effectiveness and convey theresults ong>toong> policymakers.Source: ATAF Conference, 18-19 March 2014Finally, tax incentives can create unintended tax-planning opportunities leading ong>toong> revenue leakages.For example, existing firms can reconstitute themselves as “new” ones ong>toong>wards the end ong>ofong> their taxholiday periods so that they can continue ong>toong> be tax-exempt. Likewise, companies can attempt ong>toong> recharacterisecertain activities so that they fall within the boundaries ong>ofong> qualifying business activities,such as R&D tax incentives. Similarly, tax incentives enable opportunities for prong>ofong>its and deductionsong>toong> be artificially shifted across MNEs with different tax treatments either domestically orinternationally. These tax planning opportunities are commonly exploited in both developed anddeveloping countries; however, their ill effects are especially pronounced in developing countriesthat have limited capacity ong>toong> detect and counter detrimental tax avoidance techniques.22


Implications for developing countriesTax incentives are not covered specifically in the Action Plan. However, action is required ong>toong>: Develop better guidance on assessing the costs and benefits ong>ofong> tax incentives ong>toong> informpolicy formulation. Calculate the amount ong>ofong> revenue forgone which is attributable ong>toong> tax incentives forinvestment, including revenue leakages due ong>toong> unintended tax planning opportunities. Conduct periodic reviews ong>ofong> the impact ong>ofong> tax incentives by assessing the extent ong>toong> whichthe incentives have the desired effects on investment and if these effects are achieved at areasonable price. Improve transparency and governance ong>ofong> tax incentives for investment by i) providing taxincentives through tax laws only and by ii) consolidating them under the authority ong>ofong> onegovernment body. Enhance regional co-operation ong>toong> avoid harmful tax competition.23


SECTION 7: PERSPECTIVES OF INTERNATIONAL ORGANISATIONSThe findings set out above are primarily derived from consultations with developing countries. Theyalso reflect the experiences ong>ofong> the IMF, OECD and World Bank Group capacity developmentprogrammes with developing countries. A broadly consistent picture emerges from these varioussources.In ong>partong>icular, a direct source ong>ofong> evidence on the specific areas ong>ofong> international taxation that concerndeveloping countries can be found in the requests for assistance received by the IMF. The Fund hasprovided assistance in these areas for many years, typically as ong>partong> ong>ofong> wider advice in tax policy andadministration. The box below provides a ong>partong>ial listing ong>ofong> international tax ong>toong>pics and (non-OECD)countries in which the Fund has provided demand-driven assistance in the last few years. In its recentpaper focused largely on international tax concerns for developing countries (IMF, 2014), the Fundhighlights four areas ong>ofong> special, though by no means exclusive, concern: interest deductions, treatyabuse, arms-length pricing and (not in the BEPS Action Plan) indirect transfers ong>ofong> interest – all ong>ofong>which are noted above.Areas ong>ofong> recent IMF Technical Assistance in International TaxationThis has covered a wide range ong>ofong> ong>toong>pics and countries including: Transfer pricing issues:Bangladesh; Burkina Faso; Cambodia; Colombia; Dominican Republic; Egypt; El Salvador;Ethiopia; Guatemala; Malawi; Mauritania; Mongolia; Nicaragua; Panama; Ukraine. Issues related ong>toong> provisions ong>ofong> double taxation treaties:Burkina Faso; Costa Rica; Dominican Republic; Egypt; El Salvador; Georgia; Honduras;Indonesia; Malawi; Mauritania; Mongolia; Nepal; Panama; Uganda. Capital gains across borders:Mongolia; various AFR natural resource intensive countries. Holding companies, related ong>partong>y debt, thin capitalization, others:Bangladesh; Cambodia; Colombia; Egypt; Malawi; Portugal; Romania; Uganda; Ukraine.Source: IMF (2013)24


Interim conclusionsSECTION 8: INTERIM CONCLUSION AND NEXT STEPSThis ong>reportong> finds that BEPS has the potential ong>toong> considerably impact on domestic resourcemobilisation in developing countries. The risks faced by many developing countries, however, maydiffer from those faced by more advanced economies. For example, the granting ong>ofong> wasteful taxincentives may be far more significant ong>toong> developing countries than ong>toong> developed countries.Developing countries may also face less sophisticated and more abusive tax planning structures. Inaddition, developing countries ong>ofong>ten have limited capacity, experience and skills ong>toong> implementmeasures designed ong>toong> counter BEPS, and face challenges in obtaining the information they require.For these reasons, developing countries have highlighted that at the present time some ong>ofong> the actionitems in the Action Plan are ong>ofong> more relevance than others. Section 5 ong>ofong> this ong>reportong> highlights themain BEPS issues that developing countries have ong>reportong>ed – focusing on base-eroding payments,treaty issues, new business models and transfer pricing documentation. Although outside ong>ofong> theOECD/G20 BEPS Project remit, tax incentives are a major cause ong>ofong> concern for developing countries.As developing countries start ong>toong> address these issues, it is likely that some ong>ofong> the other issuesidentified in the Action Plan will assume greater significance and risk ong>toong> their tax base and will needong>toong> be addressed.Annex A below identifies which ong>ofong> the action items in the Action Plan are considered most relevantby developing countries in the light ong>ofong> these core concerns. It is clear from consultations withdeveloping countries, however, that addressing BEPS needs ong>toong> go beyond tax technicalconsiderations: implementation is equally important.Next stepsPart 2 ong>ofong> this ong>reportong> will be presented in September 2014 and will set out how the DWG might assistdeveloping countries meet the challenges ong>ofong> the most relevant BEPS issues they face. This Reportwill:Confirm which ong>ofong> the 15 actions included in the Action Plan are ong>ofong> most relevance ong>toong>developing countries and whose corresponding outcomes can be expected ong>toong> benefit them.Discuss other BEPS issues not in the Action Plan but which have a direct impact ondeveloping country tax bases, and can give rise ong>toong> the non-taxation ong>ofong> prong>ofong>it or ong>toong> taxationong>ofong> prong>ofong>it at a low rate, and consider actions needed ong>toong> ensure these issues are effectivelyaddressed. These include the granting ong>ofong> wasteful tax incentives, addressing the lack ong>ofong>comparability data in developing countries and tax avoidance through the indirect transferong>ofong> assets located in developing countries.Discuss capacity building initiatives that, in the developing country context, must go handin-handwith regulaong>toong>ry measures. This will take account ong>ofong> the capacity building initiativesalready underway between developing countries, international and regional organisationsand other development ong>partong>ners ong>toong> address BEPS related issues. It will include a discussionon actions needed ong>toong> ensure that developing countries can fully benefit from the mostrelevant issues contained in the Action Plan and how specific BEPS actions may need ong>toong> beadapted (for example simplified) or supplemented (for example with additional guidance)ong>toong> ensure they are effective for developing countries.25


SOURCESATAF Conference: ATAF Consultative Conference on New Rules ong>ofong> the Global Tax Agenda: OutcomesDocument, Johannesburg, South Africa, 18-19 March 2014.www.ataftax.org/images/ATAF_documents/OUTCOMES_ATAF%20Consultative%20Conference%20on%20New%20Rules%20ong>ofong>%20the%20Global%20Tax%20Agenda.pdfBloomberg: Matthew Hill, Zambia tax avoidance costs US$2 billion a year, Bloomberg News,25 November 2012.www.bloomberg.com/news/2012-11-25/zambia-says-tax-avoidance-led-by-miners-costs-2-billion-a-year.htmlBogotá Event: Regional Consultation on BEPS: Co-Chairs summary, Bogotá, Colombia, 27-28 February2014.www.oecd.org/ctp/co-chair-summary-LAC-regional-consultation-BEPS.pdfCMI: Odd-Helge Fjeldstad and Kari K. Heggstad, The tax systems in Mozambique, Tanzania andZambia: Capacity and constraints, Chr. Michelsen Institute (CMI) and NORAD, R 2011:3.www.cmi.no/publications/file/4045-taxation-mozambique-tanzania-zambia.pdfCREDAF Event: Consultation des pays francophones sur BEPS (Base Erosion and Prong>ofong>it Shifting),resume des discussions, Paris, France, 25 March 2014.www.credaf.org/tl_files/International/OCDE/BEPS/Consultation%20pays%20francophones_CREDAF.pdfEuropeAid: Transfer Pricing and Developing Countries.ec.europa.eu/taxation_cusong>toong>ms/resources/documents/common/publications/studies/transfer_pricing_dev_countries.pdfMoneyweb: Ingé Lamprecht, Where will the tax revenue come from? Moneyweb.co.za, 18 March2014.www.moneyweb.co.za/moneyweb-tax/where-will-the-tax-revenue-come-fromNSI: The North-South Institute, Domestic Resource Mobilization in Africa: An Overview, Winter 2010.www.nsi-ins.ca/wp-content/uploads/2012/10/2010-Domestic-Resource-Mobilization-in-Africa-An-Overview.pdfOECD Questionnaire: OECD Questionnaire on transfer pricing aspects ong>ofong> BEPS Global Forum onTransfer Pricing, March 2014.Seoul Event: Regional Consultation on BEPS: Co-Chairs summary ong>ofong> discussions, Seoul, Korea,20-21 February 2014.www.oecd.org/ctp/Co-chairs-summary-Seoul-2014.pdfTask Force Presentation: Developing country presentations at Task Force on Tax and Developmentmeeting, Paris, France, 28 March 2014.UNIDO: Africa Invesong>toong>r Report 2011: Towards Evidence-Based Investment Promotion Strategies,United Nations Industrial Development Organisation (UNIDO), 2011.www.unido.org/fileadmin/user_media/Publications/Pub_free/AIS_Report_A4.pdf26


REFERENCESChai, J. and Goyal, R. (2008), Tax Concessions and Foreign Direct Investment in the Eastern CaribbeanCurrency Union. IMF Working Paper, IMF WP/08/257, IMF Western HemisphereDeong>partong>ment, Washingong>toong>n, DC, www.imf.org/external/pubs/ft/wp/2008/wp08257.pdf.Houlder, V. and Blas, J. (5 September 2013), “G20 ong>toong> back moves ong>toong> expose tax evaders”, FinancialTimes.International Monetary Fund (2014), IMF Policy Paper: Spillovers in International CorporateTaxation, Washingong>toong>n, DC, www.imf.org/external/np/pp/eng/2014/050914.pdf.James, S. (2013), Effectiveness ong>ofong> Tax and Non-Tax Incentives and Investments: Evidence and PolicyImplications, World Bank Group, available at SSRN: http://ssrn.com/abstract=2401905.James, S. and Van Parys, S. (2010), The effectiveness ong>ofong> tax incentives in attracting investment: paneldata evidence from the CFA Franc zone, International Tax and Public Finance, Vol. 17/4, pp400-429.Keen, M. and Mansour, M. (2009), Revenue Mobilization in Sub-Saharan Africa: Challenges fromGlobalization, IMF Working Paper, IMF WP/09/157, IMF Fiscal Affairs Deong>partong>ment,Washingong>toong>n, DC, www.imf.org/external/pubs/ft/wp/2009/wp09157.pdf.Loeprick, Cooper, Christ, “The Devil is in the detail”: Transfer Pricing, the Arm’s Length Principle andthe availability ong>ofong> Comparable Information in Emerging Economies, World Bank Group(Forthcoming).OECD (2014), Transfer Pricing Comparability Data and Developing Countries, Paris, www.oecd.org/ctp/transfer-pricing/transfer-pricing-comparability-data-developing-countries.pdf.OECD (2013), What drives tax morale? Paris, www.oecd.org/ctp/tax-global/TaxMorale_March13.pdf.United Nations Development Programme (2010), What Will It Take To Achieve the MillenniumDevelopment Goals? An International Assessment, UNDP, New York, NY, pp. 26. Available atwww.undp.org/content/undp/en/home/librarypage/mdg/international-assessment---english-full-version/.27


ANNEX AACTION ITEMS IN THE OECD/G20 BEPS ACTION PLAN OF MOST RELEVANCE TODEVELOPING COUNTRIESAction 1Action 2ActionsAddress the tax challenges ong>ofong> the digital economyIdentify the main difficulties that the digital economy poses for theapplication ong>ofong> existing international tax rules and develop detailed optionsong>toong> address these difficulties, taking a holistic approach and consideringboth direct and indirect taxation. Issues ong>toong> be examined include, but arenot limited ong>toong>, the ability ong>ofong> a company ong>toong> have a significant digitalpresence in the economy ong>ofong> another country without being liable ong>toong>taxation due ong>toong> the lack ong>ofong> nexus under current international rules, theattribution ong>ofong> value created from the generation ong>ofong> marketable locationrelevantdata through the use ong>ofong> digital products and services, thecharacterisation ong>ofong> income derived from new business models, theapplication ong>ofong> related source rules, and how ong>toong> ensure the effectivecollection ong>ofong> VAT/GST with respect ong>toong> the cross-border supply ong>ofong> digitalgoods and services. Such work will require a thorough analysis ong>ofong> thevarious business models in this secong>toong>r.Neutralise the effects ong>ofong> hybrid mismatch arrangementsDevelop model treaty provisions and recommendations regarding thedesign ong>ofong> domestic rules ong>toong> neutralise the effect (e.g. double non-taxation,double deduction, long-term deferral) ong>ofong> hybrid instruments and entities.This may include: (i) changes ong>toong> the OECD Model Tax Convention ong>toong> ensurethat hybrid instruments and entities (as well as dual resident entities) arenot used ong>toong> obtain the benefits ong>ofong> treaties unduly; (ii) domestic lawprovisions that prevent exemption or non-recognition for payments thatare deductible by the payer; (iii) domestic law provisions that deny adeduction for a payment that is not includible in income by the recipient(and is not subject ong>toong> taxation under controlled foreign company (CFC) orsimilar rules); (iv) domestic law provisions that deny a deduction for apayment that is also deductible in another jurisdiction; and (v) wherenecessary, guidance on co‐ordination or tie-breaker rules if more thanone country seeks ong>toong> apply such rules ong>toong> a transaction or structure. Specialattention should be given ong>toong> the interaction between possible changes ong>toong>domestic law and the provisions ong>ofong> the OECD Model Tax Convention. Thiswork will be co‐ordinated with the work on interest expense deductionlimitations, the work on CFC rules, and the work on treaty shopping.RelevanceMediumLowAction 3 Strengthen controlled foreign companies (CFC) rules Low28


Action 4Action 5Action 6Action 7Develop recommendations regarding the design ong>ofong> controlled foreigncompany rules.Limit base erosion via interest deductions and other financial paymentsDevelop recommendations regarding best practices in the design ong>ofong> rulesong>toong> prevent base erosion through the use ong>ofong> interest expense, for examplethrough the use ong>ofong> related-ong>partong>y and third-ong>partong>y debt ong>toong> achieve excessiveinterest deductions or ong>toong> finance the production ong>ofong> exempt or deferredincome, and other financial payments that are economically equivalent ong>toong>interest payments. The work will evaluate the effectiveness ong>ofong> differenttypes ong>ofong> limitations. In connection with and in support ong>ofong> the foregoingwork, transfer pricing guidance will also be developed regarding thepricing ong>ofong> related ong>partong>y financial transactions, including financial andperformance guarantees, derivatives (including internal derivatives usedin intra-bank dealings), and captive and other insurance arrangements.The work will be co-ordinated with the work on hybrids and CFC rules.Counter harmful tax practices more effectivelyRevamp the work on harmful tax practices with a priority on improvingtransparency, including compulsory spontaneous exchange on rulingsrelated ong>toong> preferential regimes, and on requiring substantial activity forany preferential regime. It will take a holistic approach ong>toong> evaluatepreferential tax regimes in the BEPS context. It will engage with non-OECDmembers on the basis ong>ofong> the existing framework and consider revisions oradditions ong>toong> the existing framework.Prevent treaty abuseDevelop model treaty provisions and recommendations regarding thedesign ong>ofong> domestic rules ong>toong> prevent the granting ong>ofong> treaty benefits ininappropriate circumstances. Work will also be done ong>toong> clarify that taxtreaties are not intended ong>toong> be used ong>toong> generate double non-taxation andong>toong> identify the tax policy considerations that, in general, countries shouldconsider before deciding ong>toong> enter inong>toong> a tax treaty with another country.The work will be co‐ordinated with the work on hybrids.Prevent the artificial avoidance ong>ofong> PE statusDevelop changes ong>toong> the definition ong>ofong> PE ong>toong> prevent the artificial avoidanceong>ofong> PE status in relation ong>toong> BEPS, including through the use ong>ofong>commissionaire arrangements and the specific activity exemptions. Workon these issues will also address related prong>ofong>it attribution issues.HighMediumHighHighAction 8 Assure that transfer pricing outcomes are in line with value creation –IntangiblesMediumDevelop rules ong>toong> prevent BEPS by moving intangibles among groupmembers. This will involve: (i) adopting a broad and clearly delineateddefinition ong>ofong> intangibles; (ii) ensuring that prong>ofong>its associated with thetransfer and use ong>ofong> intangibles are appropriately allocated in accordancewith (rather than divorced from) value creation; (iii) developing transferpricing rules or special measures for transfers ong>ofong> hard-ong>toong>-valueintangibles; and (iv) updating the guidance on cost contribution29


arrangementsAction 9 Assure that transfer pricing outcomes are in line with value creation –Risks and capitalDevelop rules ong>toong> prevent BEPS by transferring risks among, or allocatingexcessive capital ong>toong>, group members. This will involve adopting transferpricing rules or special measures ong>toong> ensure that inappropriate returns willnot accrue ong>toong> an entity solely because it has contractually assumed risks orhas provided capital. The rules ong>toong> be developed will also require alignmentong>ofong> returns with value creationThis work will be co-ordinated with the workon interest expense deductions and other financial paymentsAction 10 Assure that transfer pricing outcomes are in line with value creation –Other high-risk transactionsMediumHighAction 11Action 12Develop rules ong>toong> prevent BEPS by engaging in transactions which wouldnot, or would only very rarely, occur between third ong>partong>ies. This willinvolve adopting transfer pricing rules or special measures ong>toong>: (i) clarify thecircumstances in which transactions can be recharacterised; (ii) clarify theapplication ong>ofong> transfer pricing methods, in ong>partong>icular prong>ofong>it splits, in thecontext ong>ofong> global value chains; and (iii) provide protection against commontypes ong>ofong> base eroding payments, such as management fees and headong>ofong>fice expensesEstablish methodologies ong>toong> collect and analyse data on BEPS and theactions ong>toong> address itDevelop recommendations regarding indicaong>toong>rs ong>ofong> the scale and economicimpact ong>ofong> BEPS and ensure that ong>toong>ols are available ong>toong> moniong>toong>r andevaluate the effectiveness and economic impact ong>ofong> the actions taken ong>toong>address BEPS on an ongoing basis. This will involve developing aneconomic analysis ong>ofong> the scale and impact ong>ofong> BEPS (including spillovereffects across countries) and actions ong>toong> address it. The work will alsoinvolve assessing a range ong>ofong> existing data sources, identifying new types ong>ofong>data that should be collected, and developing methodologies based onboth aggregate (e.g. FDI and balance ong>ofong> payments data) and micro-leveldata (e.g. from financial statements and tax returns), taking inong>toong>consideration the need ong>toong> respect taxpayer confidentiality and theadministrative costs for tax administrations and businesses.Require taxpayers ong>toong> disclose their aggressive tax planning arrangementsDevelop recommendations regarding the design ong>ofong> mandaong>toong>ry disclosurerules for aggressive or abusive transactions, arrangements, or structures,taking inong>toong> consideration the administrative costs for tax administrationsand businesses and drawing on experiences ong>ofong> the increasing number ong>ofong>countries that have such rules. The work will use a modular designallowing for maximum consistency but allowing for country specific needsand risks. One focus will be international tax schemes, where the work willexplore using a wide definition ong>ofong> “tax benefit” in order ong>toong> capture suchtransactions. The work will be co-ordinated with the work on co-operativecompliance. It will also involve designing and putting in place enhancedmodels ong>ofong> information sharing for international tax schemes between taxHighMedium30


Action 13Action 14Action 15administrations.Re-examine transfer pricing documentationDevelop rules regarding transfer pricing documentation ong>toong> enhancetransparency for tax administration, taking inong>toong> consideration thecompliance costs for business. The rules ong>toong> be developed will include arequirement that MNE’s provide all relevant governments with neededinformation on their global allocation ong>ofong> the income, economic activityand taxes paid among countries according ong>toong> a common templateMake dispute resolution mechanisms more effectiveDevelop solutions ong>toong> address obstacles that prevent countries from solvingtreaty-related disputes under MAP, including the absence ong>ofong> arbitrationprovisions in most treaties and the fact that access ong>toong> MAP and arbitrationmay be denied in certain cases.Develop a multilateral instrumentAnalyse the tax and public international law issues related ong>toong> thedevelopment ong>ofong> a multilateral instrument ong>toong> enable jurisdictions that wishong>toong> do so ong>toong> implement measures developed in the course ong>ofong> the work onBEPS and amend bilateral tax treaties. On the basis ong>ofong> this analysis,interested Parties will develop a multilateral instrument designed ong>toong>provide an innovative approach ong>toong> international tax matters, reflecting therapidly evolving nature ong>ofong> the global economy and the need ong>toong> adaptquickly ong>toong> this evolution.HighMediumLowThe above are the action items in the Action Plan that developing countries have identified as beingmost relevant ong>toong> their country. However, it is important ong>toong> note that the new rules that aredeveloped under the Action Plan will not in isolation address all ong>ofong> the base erosion and prong>ofong>itshifting issues faced by developing countries. Improved rules and access ong>toong> information will assist butdeveloping countries will also need ong>toong> build the capacity ong>ofong> their tax administrations ong>toong> implementthe new rules and effectively use the improved access ong>toong> information.Furthermore developing countries will need ong>toong> address the significant loss ong>ofong> revenue through thegranting ong>ofong> wasteful tax incentives.31


ANNEX BSPECIAL MEETING OF THE OECD TASK FORCE ON TAX AND DEVELOPMENT 7 ONBASE EROSION AND PROFIT SHIFTING (BEPS) AND DEVELOPING COUNTRIESAND SUMMARY OF THE BEPS CONSULTATIONSCO-CHAIRS STATEMENTParis, March 2014The OECD’s Task Force on Tax and Development met in Paris, France, on 28 March 2014, ong>toong> takesong>toong>ck ong>ofong> the ongoing efforts ong>toong> consult with developing countries and understand their perspectiveson the Base Erosion and Prong>ofong>it Shifting (BEPS) issues they are faced with. Governments, internationaland regional organisations, civil society and business representatives welcomed the significantprogress made in this consultation process since the previous meeting in Korea in Ocong>toong>ber 2013 andexplored how ong>toong> ensure that developing countries have an ongoing voice in the development ong>ofong> thework on BEPS ong>toong> reflect developing country needs ong>toong> better mobilise their domestic resources. Thismeeting was the culmination ong>ofong> a first round ong>ofong> consultations with the developing world, which wesummarise below, ong>toong>gether with future actions ong>toong> ensure there is an ongoing dialogue withdeveloping countries.BEPS consultations with developing countriesAs mandated by the G20 Leaders and reflected in the BEPS Action Plan ong>ofong> July 2013, developingcountries have been extensively consulted on their priorities and ways ong>toong> address BEPS challenges.This consultation process involved a combination ong>ofong> regional and global high-level policy dialogues.Following the Annual Meeting ong>ofong> the Global Forum on Tax Treaties ong>ofong> September 2013 and thePlenary Meeting ong>ofong> the Task Force ong>ofong> Ocong>toong>ber 2013, 4 Regional Consultations were held in Februaryand March 2014 (hosted by or in conjunction with regional tax organisations – CIAT, ATAF andCREDAF) ong>toong> discuss BEPS issues with countries in Asia, Latin America, Africa and for francophonecountries and ong>toong> explore how the current work in the context ong>ofong> the OECD/G20 Project on BEPSshould take those inong>toong> account, with a ong>partong>icular focus on developing countries. 8 Representatives ong>ofong>the UN Committee ong>ofong> Experts and IMF ong>ofong>ficials actively contributed ong>toong> these events.This first round ong>ofong> regional consultations was concluded with global meetings, where the mainoutcomes ong>ofong> the regional meetings were presented. The Annual Meeting ong>ofong> the Global Forum onTransfer Pricing was held on 26-28 March 2014, gathered over 330 senior tax ong>ofong>ficials from morethan 110 jurisdictions. On 28 March 2014, Government ong>ofong>ficials were joined by representatives from7 Co-Chaired by South Africa and the Netherlands, the Task Force is a multi-stakeholder advisory group set upong>toong> help ong>toong> improve the enabling environment for developing countries ong>toong> collect taxes fairly andeffectively. This statement reflects the views ong>ofong> the Co-Chairs and not necessarily those ong>ofong> allstakeholders.8In three ong>ofong> these Regional Consultations, the Global Forum on Transparency and Exchange ong>ofong> Information forTax Purposes also gathered countries views on the benefits and challenges for countries in the region inimplementing the global standards on auong>toong>matic exchange ong>ofong> tax information (AEOI).32


civil society and the business community at the Task Force’s Special Meeting on BEPS and DevelopingCountries. The final plenary session brought ong>toong>gether the lessons learned from the intensive regionaland global dialogue that has taken place over the past 6-8 months and proposed a number ong>ofong> waysforward.Lessons learned from the ongoing consultationsThe Task Force welcomed international efforts ong>toong> gather effective input from developing countries onthe work on BEPS. These meetings concluded that BEPS is ong>ofong> major significance for developingcountries due ong>toong> their heavy reliance on corporate income tax, ong>partong>icularly from MultinationalEnterprises (MNEs). The different meetings were consistent in emphasising the following keymessages:Some items ong>ofong> the Action Plan were considered ong>ofong> higher immediate priority by developingcountries. These include limiting base erosion via interest deductions and other financialpayments (Action 4), preventing tax treaty abuse and the artificial avoidance ong>ofong> PE status(Actions 6 and 7), transfer pricing, in ong>partong>icular base eroding payments (Actions 8, 9 and10), and transfer pricing documentation and Country-by-Country Reporting (Action 13).A number ong>ofong> other issues that are linked ong>toong>, but not specifically included in, the Action Planhave been considered as ong>ofong> key importance in developing countries. These were the grantingong>ofong> wasteful tax incentives which may erode the country’s tax base with little demonstrablebenefit and the significant difficulties developing countries face in obtaining relevant data,ong>partong>icularly comparable data for transfer pricing purposes.Capacity building is one ong>ofong> the biggest challenges faced by developing countries. The lack ong>ofong>effective legislation and gaps in capacity may leave the door open ong>toong> simpler, butpotentially more aggressive, tax avoidance than is typically encountered in developedeconomies. BEPS solutions for developing countries may need ong>toong> be tailored ong>toong> this reality,and concrete technical support will be needed ong>toong> enable developing countries increasetheir capacity ong>toong> improve their domestic resource mobilization.Political support is critical ong>toong> drive policy change that balances the encouragement ong>ofong>foreign direct investment with the need for domestic resource mobilisation. All stakeholdershave a role ong>toong> play in increasing awareness about the importance ong>ofong> BEPS for developingcountries and in ensuring that the required support is obtained from political decisionmakers.Further engagement with developing countries is crucial ong>toong> ensure that BEPS solutions areachieved at the global level. The first round ong>ofong> regional consultations was very effective andit is important ong>toong> continue the global dialogue on BEPS issues.Developing country input received so far will be fed inong>toong> the ong>reportong> for the G20 DevelopmentWorking Group (DWG). This ong>reportong>, which is being prepared by the Task Force Secretariat in closecooperation with the IMF and other international organisations, is focused on the main BEPS issuesand challenges faced by developing countries, how these are related ong>toong> the BEPS Action Plan, andhow the DWG might assist developing countries ong>toong> meet those challenges.33


Next stepsAs Co-Chairs, we encourage international and regional organisations and all stakeholders ong>toong> takefurther steps ong>toong> ensure that developing countries’ voices are taken inong>toong> account in the internationalefforts ong>toong> counter BEPS and strengthen domestic resource mobilisation. These steps include:Organising a further round ong>ofong> regional consultations ong>toong>wards the end ong>ofong> 2014 ong>toong> take song>toong>ckong>ofong> the impact ong>ofong> BEPS outputs due by September 2014, and ong>toong> input on the work underdevelopment with regard ong>toong> the other outputs due later in 2015, ideally in conjunction withother planned BEPS meetings hosted by international and regional organisations.Make full use ong>ofong> existing mechanisms ong>toong> channel input provided by developing countriesinong>toong> the OECD/G20 BEPS Project, e.g. through the comments ong>toong> be provided by allinterested ong>partong>ies on BEPS discussion drafts and public consultations; the directong>partong>icipation ong>ofong> Government ong>ofong>ficials inong>toong> the BEPS work at working group level; thepublication ong>ofong> summaries reflecting discussions held during meetings on BEPS; and the useong>ofong> questionnaires ong>toong> inform the relevant working groups.34


ANNEX CGLOSSARYArm’s length principleThe international standard that OECD member countries have agreed should be used fordetermining transfer prices for tax purposes. It is set forth in Article 9 ong>ofong> the OECD Model TaxConvention as follows: where “conditions are made or imposed between the two enterprises intheir commercial or financial relations which differ from those which would be made betweenindependent enterprises, then any prong>ofong>its which would, but for those conditions, have accruedong>toong> one ong>ofong> the enterprises, but, by reason ong>ofong> those conditions, have not so accrued, may beincluded in the prong>ofong>its ong>ofong> that enterprise and taxed accordingly”.CommissionaireA commissionaire is an arrangement recognised under the European civil law concept ong>ofong> agency.Under civil law, a commissionaire can enter inong>toong> sales contracts in its own name, but on behalfong>ofong> the principal, where the commissionaire does not usually bind the principal. In theory thecusong>toong>mer cannot sue the principal – there is no contractual relationship between the principaland the cusong>toong>mer.OECD/G20 Action Plan on Base Erosion and Prong>ofong>it Shifting (BEPS)The Action Plan, published by the OECD in 2013, setting out a plan ong>toong> provide countries withdomestic and international instruments that will better align rights ong>toong> tax with economic activity.The Action Plan (i) identifies actions needed ong>toong> address BEPS, (ii) sets deadlines ong>toong> implementthese actions and (iii) identifies the resources needed and the methodology ong>toong> implement theseactions.Permanent establishment (PE)For the purposes ong>ofong> the OECD Model Tax Convention, the term “permanent establishment”means a fixed place ong>ofong> business through which the business ong>ofong> an enterprise is wholly or ong>partong>lycarried on.The term “permanent establishment” includes especially:a) a place ong>ofong> management;b) a branch;c) an ong>ofong>fice;d) a facong>toong>ry;e) a workshop, andf) a mine, an oil or gas well, a quarry or any other place ong>ofong> extraction ong>ofong> natural resources35


In addition, the term includes a ‘’dependent agent” ong>ofong> a person in a country.Under most treaties, a “permanent establishment” ong>ofong> a non-resident person in a country isrequired in order for that country ong>toong> establish a right ong>toong> tax any business prong>ofong>it earned by thenon-resident person through the “permanent establishment”.Tax treatyThis is a bilateral agreement made by two countries ong>toong> resolve issues involving double taxationong>ofong> income and capital.Thin capitalisationA company is typically financed (or capitalised) through a mixture ong>ofong> debt and equity. Thincapitalisation‖ refers ong>toong> the situation in which a company is financed through a relatively highlevel ong>ofong> debt compared ong>toong> equity. Thinly capitalised companies are sometimes referred ong>toong> ashighly leveraged‖ or highly geared.Transfer pricingThis is the price at which an enterprise transfers physical goods, intangible property, or servicesong>toong> a related enterprise.36

More magazines by this user
Similar magazines