There will soon be fewer places for multinational companies and ultra-rich individuals to squirrel away money.
In November leaders of the G20 are expected to adopt a full range of measures to curb the practices of base erosion and profit shifting. Officials conducting ongoing work for the Organisation for Economic Co-operation and Development (OECD) to overhaul the international tax regime believe “behavioural change” by companies will be immediate.
Base erosion and profit shifting refer to efforts by multinational companies to move profits to low-tax jurisdictions, ensuring the countries where the profit-making activities take place lose out on the tax revenues.
The OECD has been working furiously on behalf of the G20 to implement the 2013 action plan to combat base erosion and profit shifting within the two-year completion window.
Major global firms such as Apple, Google and Starbucks have been accused of using aggressive tax strategies to reduce their tax obligations.
In 2013 United States senator John McCain accused Apple of being one of the country’s biggest tax avoiders, alleging that it had dodged paying tax on $44-billion of income.
The ire of governments over these practices has not abated. Most recently, Apple and fellow tech giants Google and Microsoft have been called to account for their tax practices in the Australian Senate.
According to the European Commission, tax avoidance and evasion loses the region an estimated €1-trillion a year.
The effect for developing nations is one of deepening global inequality. The Mail & Guardian previously reported on estimates that developing countries lost between $98-billion and $106-billion in 2010 solely to re-invoicing – about 4.4% of their total tax revenue.
Illicit capital flight from developing countries was estimated at anything between $500-billion and $800-billion each year, with commercial tax structuring contributing about 64% to the total, according to the African Tax Administration Forum.
The OECD’s global forum is also doing work on transparency and the exchange of information for tax purposes – aimed at ending bank secrecy and tax evasion, notably by high-net-worth individuals.
The base erosion and profit shifting action plan consists of 15 measures aimed at overhauling the international tax system that countries are expected to implement to shore up their tax bases.
These include measures to address the tax challenges of the digital economy, treaty abuse, the disclosure of aggressive tax planning arrangements and country-by-country reporting.
In 2014, member countries endorsed the first batch of deliverables relating to seven of the actions, according to an OECD report made to G20 finance ministers in February.
At the upcoming meeting of G20 finance ministers in September, to be followed by November’s gathering of G20 leaders, a package of measures covering the remaining nine actions will be presented for adoption.
Minimum standards relating to a number of the base erosion and profit-shifting actions are expected to be implemented by all member countries, according to Pascal Saint-Amans, director of the centre for tax policy and administration at the OECD. These include minimum standards on harmful tax practices and country-by-country reporting.
Country-by-country reporting on transfer pricing is due to begin by 2017, said Saint-Amans. It includes requirements by multinationals to provide all relevant governments with information on their global allocation of income, economic activity and taxes paid.
Although most countries are waiting for the finalisation of the base erosion and profit-shifting measures before implementing them, most have been “extremely impatient to move forward”, said Saint-Amans.
More importantly, the impact on the behaviour of companies should be immediate, he added. “This very strong signal should result in companies revising their tax [practices] immediately,” he said.
In South Africa, the Davis tax committee has also been examining base erosion and profit shifting in the context of corporate income tax. Late last year it released its first interim report on these practices, providing a South African view of the first seven deliverables.
The committee found it difficult to “reach solid conclusions about how much Beps [base erosion and profit shifting] actually occurs in South Africa and what exactly the tax gap is”.
It said the measures South Africa takes under the G20 and OECD action plan to address these practices “should not be adopted without taking into consideration the need to encourage foreign direct investment … and the need to preserve the competitiveness of South Africa’s economy on the international scene. A balance [must] be struck,” it added.
The committee called for caution on unilaterally implementing measures to address base erosion and profit shifting, citing the risk of double taxation and creating opportunities for further avoidance.
The Davis tax committee called for submissions on its second interim report, including inputs on the remaining nine actions, by August.
The OECD has also been driving related work on combating tax evasion. In September last year the forum released a new single, common global standard on the automatic exchange of tax information, according to the OECD report.
It is the latest step in work that began in 2009, aimed at ending bank secrecy. These efforts have seen countries traditionally viewed as tax havens, such as Switzerland, agreeing to exchanging information with other tax authorities.
Prominent Swiss banks were recently slapped with fines for illicit tax activity. In 2014 Credit Suisse reportedly paid some $2.6-billion in fines to US authorities for helping Americans evade taxation.
To date, 93 countries have committed to implementing the new standard on the exchange of information, said the OECD report, and the first automatic exchanges are due to take place in 2017 and 2018.
This signifies “the complete end of bank secrecy, and this is happening now”, said Saint-Amans.
The process will involve banks collecting the banking information of certain taxpayers, including account balances, the payment of interest and dividends, and all financial transactions, he said.
Implications for the wealthy
It will be sent to the “headquarters” government, which will share this information with the country of residence of the taxpayer.
The move will no doubt have implications for South Africa’s high-net-worth individuals.
According to a report by New World Wealth, at the end of 2014 there were approximately 46 800 high-net-worth individuals living in the country, with a combined wealth of $184-billion or “roughly 31% of South Africa’s total individual wealth”.
It forecasts that this number will rise to about 55 500 by 2017.
Concerns have been raised, however, over the failure by certain jurisdictions to comply with international efforts to target tax evasion.
In its report the OECD proposes “tougher incentives” to adhere to these measures. These include supporting the G20 in “expanding awareness” of the list of jurisdictions that have not met the exchange of information on request standard.
This would increase their impact, “providing greater incentive for jurisdictions to move quickly to address the shortfalls identified in their legal framework and administrative processes”, it said.