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10 • Fifty Shades of Tax Dodging 1.1 The elusive quest for reform of international taxation On the face of it, recent years have offered many new political initiatives to reform the international tax system. The OECD has come up with recommendations under the project entitled Base Erosion and Profit Shifting (BEPS). The EU has announced two tax packages during 2015 to deal with the cross-border challenges of taxation. And governments all over the world have announced change after change to try to shore up their tax base. Box 4 The year of scandals: Europe at the epicentre In just one year there has been a wealth of new revelations about multinational companies’ tax payments. Time and again, the companies exposed turned out to have European countries at the heart of their tax planning structures. Here are just a few examples from the past year: •• In November and December 2014, the LuxLeaks dossier exposed tax rulings with hundreds of multinational companies in Luxembourg. 18 •• In February 2015, SwissLeaks laid bare the financial information of more than 100,000 bank clients in a Swiss bank. 19 •• In February 2015, McDonald’s came under the spotlight when a report was released on the fast food giant’s tax payments. Among other things, the report showed that McDonald’s reported a turnover of more than €3.7 billion in one subsidiary with 13 employees in Luxembourg from 2009–13, leading to tax payments of only €16 million. 20 •• In June 2015, Walmart hit the news when a report detailed the company’s tax practices. The report pointed out that Walmart has subsidiaries in Ireland, the Netherlands, Luxembourg, Spain, Cyprus and Switzerland, despite not having any stores there. The report details some of the tax saving effects achieved through these European subsidiaries. 21 •• Meanwhile, two separate studies on the mining industry published in 2015 showed that the Netherlands had been used to minimise tax payments in Malawi and Greece. 22 1.2 BEPS: Reforming to preserve Base Erosion and Profit Shifting (BEPS) describes the largely legal techniques multinational companies use to dodge their tax responsibility. The term BEPS has also become synonymous with the OECD-led project to adjust the rules of international taxation. From its inception in 2013, the OECD gave itself two years to come up with recommendations on 15 different issues. 23 The project is a testament to how far up the political agenda international taxation has shot in recent years. However, as BEPS comes to an end in 2015, it is also becoming abundantly clear that it does not provide the solution to the very real problems facing developing countries. As far back as 2013, when the OECD started its BEPS project, a few warning lights were flashing. BEPS builds on an OECD-developed system of international taxation that generally allocates more taxing rights to the country where multinational organisations are based (which is often in the OECD) and fewer taxing rights to the countries where the multinational corporations do business (into which category most developing countries fall). 24 This broadly means that, in cases where multinational companies have internal trade between subsidiaries in developing and developed countries, it is the latter that receives more rights to tax the flows and hence to take more tax revenue. The fairness of this distribution of taxing rights has long been questioned. 25 The OECD acknowledged at the outset of the BEPS project that “a number of countries have expressed a concern about how international standards … allocate taxing rights.” 26 Rather than deal with this concern, however, the OECD chose to ignore it, stating in the inaugural programme of BEPS in 2013 that the reforms “are not directly aimed at changing the existing international standards on the allocation of taxing rights on cross-border income.” 27 This was one of the early indications that the OECD’s BEPS initiative was not really about changing the fundamentals of international taxation, but rather about offering reform that “aims to patch up existing rules rather than re-examine their foundation”, as civil society representatives expressed it. 28 As the BEPS project unfolded, the impression of a reform designed to preserve a system that has served the interests of rich nations for decades was unfortunately only reinforced. In mid-2014 the OECD itself acknowledged that the BEPS agenda did not have a good overlap with the concerns of developing countries, stating in a report to the G20 that developing countries had “identified a number of issues, such as tax incentives, which are of concern to them, but which are not addressed in the Action Plan [of BEPS].” 29
Fifty Shades of Tax Dodging • 11 After criticism stating that that BEPS was only a rich-man’s club deciding on issues to promote their own interests, the OECD announced towards the end of 2014 that 14 developing countries would be offered closer involvement in the BEPS process in addition to those that were involved as part of the G20. However, this meant that more than 100 developing countries were still excluded. This document that made the announcement was aptly titled “The BEPS project and developing countries: From consultation to participation”, which raised the obvious question of what the point was of involving developing countries a year after the BEPS action plan had been decided, and after half of the agenda items had been concluded. All in all, the attempt to counter the criticism and include a small group of developing countries ended up highlighting their very marginalisation in the process. In September 2015, the G20 finance ministers adopted a communique calling for the OECD to “prepare a framework by early 2016 with the involvement of interested non-G20 countries and jurisdictions, particularly developing economies, on an equal footing.” However, it is important to note that this call is not an invitation for all countries to join any decision-making process, but rather to join in following the BEPS rules after they have been adopted. 30 Only 4 per cent of large companies believe that all BEPS recommendations will be implemented in all OECD countries. 31 1.3 Will BEPS stop tax dodging? In September 2015, the outcomes of the BEPS process were presented. While the agreement reached included measures on country by country reporting, 32 which civil society organisations had long been calling for, the OECD decision to keep the information confidential and only make it available to a very limited number of countries, caused great concern (see Box 5). But this was not the only problematic part of the package. Instead of reaching agreement on abolishing the controversial ‘patent boxes’ (see section 3.4), the OECD countries adopted guidelines on how patent boxes should be designed, and furthermore underlined that all existing arrangements could continue with business as usual until 2021. 33 This decision caused civil society representatives to point out that “The OECD approach will simply legitimise ‘innovation box’ regimes and hence supply a legal mechanism for profit shifting, encouraging states to provide such benefits to companies. It will be particularly damaging to developing countries, which may be used as manufacturing platforms, while their tax base will be drained by this legitimised profit-shifting. Such measures should simply be condemned and eliminated.” 34 Even before the end of the project, a number of new OECD countries had announced that they have started establishing patent boxes (see section 4 on Report Findings). On the issue of anti-abuse provisions, the BEPS process managed to reach a welcome agreement. 35 Unfortunately, the concern remains that developing countries will not be able to use these provisions to prevent tax avoidance unless also given access to sufficient information about the multinational corporations operating in their countries. 36 The agreement also doesn’t address the lowering of withholding tax rates, which is a major concern regarding tax treaties (see section 3.5 on Tax Treaties). At the overall level, civil society expressed strong concern that BEPS still sticks to the principle of ‘arm’s length approach’, which means that subsidiaries of multinational corporations are treated as independent companies rather than one big company. 37 It is this approach that allows a multinational corporation to claim it has no profits in a given country, while at the same time having very large and untaxed profits in low tax jurisdictions. Only 5 per cent of businesses plan to become more conservative in their tax planning as a result of the BEPS project. 38
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