by Julie Martin
Countries participating in the OECD/G20 base erosion profit shifting (BEPS) project sought to rewrite international tax rules for the digital economy and for intellectual property to increase their tax take at the expense of the United States, said Robert Stack, Treasury deputy assistant secretary (International Tax Affairs), May 13, at a National Tax Association conference in Washington.
According to Stack, during the BEPS negotiations countries were “more than happy to go after US multinationals who are US taxpayers because, after all, they don’t vote in those countries so [they are] a sitting target.”
The US is “one of the few countries that seems to have a vibrant digital economy,” consequently, the BEPS work in that area “had more of a flavor of people seeking to increase their revenue regardless of the principles that might be applied,” the US Treasury official said.
Similarly, Stack said, much of excess value in US companies relates to intellectual property. Countries pushed for rules making it easier find a permanent establishment so that, rather than looking at an MNE’s functions, assets, and risks undertaken in a country, officials could “grab some of that IP profit, which, unfortunately for the US, happens to be sitting in places like Bermuda,” he said.
“One of the extraordinary ways the United States did itself harm was to let this deferred income sit offshore and for every other country to think ‘by golly, that must be mine, the US is not taxing it,'” he added.
Stack has similarly claimed that the EU Commission has targeted US MNEs through a series of State aid decisions involving overly-generous tax rulings granted by EU countries. EU Competition Commissioner Margrethe Vestager has denied the charge.
Stack again touted the Obama administration’s minimum tax proposal, stating that it is designed to take foreign-to-foreign income stripping “off the table.” He said that the lack of effective controlled foreign corporation (CFC) rules or a minimum tax in a residence country has deleterious effects upon developing countries that “cannot be understated.”
He added that the BEPS plan provided CFC rules only as a study, as opposed to a minimum standard, at the UK’s instance. The UK likely did not want CFC rules to be BEPS minimum standards because it wishes to attract headquarters companies, he said.
Stack also said he found it personally frustrating that the US tax community does not seem to want tax certainty. If, during US tax reform negotiations, companies continue to insist on the ability to use tax planning techniques like check-the-box for foreign-to-foreign income stripping, other countries are not likely to go along with rules promoting certainty and stability, he said.
The US is trying to get the G20 to focus on the role of certainty in creating a good environment for growth and foreign direct investment, and has asked for academic work to be done in the area, he said.
Stack also said that one of the “core drivers” of the BEPS project was the belief that if countries undertook collective action to agree to international tax rules, countries would not go their own way and enact laws inconstant with the international agreements. He said that the EU’s recent proposal for public country-by-country reporting is an example of the failure of this objective.
Professor Stephen Shay of Harvard University said that is “inherently naive” to believe that in today’s world of enhanced transparency that the country-by country reports would be prepared but kept hidden from public view. He said that Unilever and Rio Tino are examples of companies that are already seeking to increase their tax transparency to engender public goodwill. Shay predicted that companies would compete in this area in the future.
Shay said that though enormous progress was made in the BEPS project, more changes to the international tax system are inevitable because it is unstable. He told attendees they should expect “BEPS 2,” though he doubted it would be called that.
He said the tax community has not solved the “Amazon problem” of how to tax companies that remotely sell into a country or the “platform problem,” typified by Uber and Airbnb’s tax structures, of how to tax groups that can operate from a platform located anywhere the world. These problems will only become more pronounced in the future, Shay said, as they extend beyond digital and non-manufacturing businesses.
For example, Shay said, GE is putting sensors into its aircraft engines which will likely be managed from somewhere like Singapore so that the service income will taxed similarly to Airbnb’s. “Everything is going to have this kind of component; this is a problem we have not solved from a tax point of view,” he said.
Professor Kimberly Clausing of Reed College provided an overview of her recent paper, which concludes that profit shifting by US multinationals cost the US Treasury between $77 and $111 billion in 2012.
Clausing said that 82 percent of all profit shifting by US MNEs goes to seven tax haven locations: Caymans, Netherlands, Switzerland, Luxembourg, Bermuda, Ireland, and Singapore. US MNEs pay an effective tax rate less than 5 percent in each of these jurisdictions, Clausing said.
“It is important to keep in mind that if our solution to profit shifting is simply to lower the US tax rate to 20 percent or even 15 percent, it will still be quite a bit higher than what you can achieve in these countries,” Clausing said.
Victoria Perry, Assistant Director in the Fiscal Affairs Department and Division Chief of the Tax Policy Division at the International Monetary Fund, said that IMF studies show that whereas BEPS causes tax losses of about 1 percent of GDP in OECD countries, losses are about 1.3 percent of GDP in non-OECD countries.
Perry said that the loss of tax revenue is of greater importance to low-income countries; for a typical low-income country, 1.3 percent of GDP is 10 percent of total tax revenue.
That said, multinational profit shifting is not the biggest problem that low income countries face in the tax administration arena, so they should not get too distracted by these issues, Perry said.
She said the granting of tax incentives is a big source of revenue loss for low-income countries. Beyond that, though, low-income countries face more basic problems, such as “getting the VAT to work right, trying to apply the personal income tax to capital income on the rich, trying to get excises at appropriate levels, and just the general problems of revenue administration,” she said.
– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.