Tax officials from 11 developing nations described the most common practices MNEs use to shift profits out of their countries, obstacles that prevent their countries from stopping these practices, and their reactions to the OECD/G-20 base erosion profit shifting (BEPS) project, responding to a UN request for comments.
Brazil, Chile, China, Ghana, India, Malaysia, Mexico, Singapore, Thailand, Tonga, and Zambia responded to the survey, which was conducted by a subcommittee tasked with monitoring BEPS issues established by the UN Committee of Experts on International Cooperation in Tax Matters.
Chinese tax officials said the OECD/G-20 BEPS work on transfer pricing is the most important project from China’s perspective. Omitted from the OECD/G-20 plan, though, is a discussion of general anti-avoidance rules, which are needed to stop MNEs from exploiting tax loopholes, the officials said.
In a statement sure to cause concern among OECD nations, China’s revenue officials said that it would be useful for the UN to develop its own guidance on action plan items of interest to developing nations.
Indian tax officials said they generally supported the OECD/G-20 work, but worried that fundamental reform would not be achieved. “In many of the discussions and decisions at the OECD, India gathers the impression that the real issues are being swept under the carpet and the superficial ones are sought to be addressed,” the officials said.
The India officials also said the OECD/G-20 approach of expecting developing counties to implement all decisions made by developed countries “appears to be somewhat patronizing” and should be avoided.
While acknowledging that India’s transfer pricing officers “have gone overboard at times” in transfer pricing audits, the officials said that the country’s aggressive approach to transfer pricing has been successful in curbing MNE profit shifting. More profits are being declared in India as compared to a few years ago, while the judicial system, advance pricing agreements, and safe harbors provide a check on outcomes, the officials said.
Singapore tax officials said that it is important that BEPS recommendations not impede the growth of genuine substantive business activities. “In particular, tax incentives are a valuable tool for developing countries to spur investment in under-invested sectors and regions, and BEPS should not take away such tools as long as they are geared towards real development and substantial economic activities.”
Singapore’s officials also said they hoped the BEPS work would grow the “economic pie” for all countries, and not be “sidetracked by protectionism and development of rules for political expedience.”
Further, the Singapore officials said that BEPS recommendations should not adopt a “one size fits all” approach. “Instead, there should be adequate flexibility for countries to choose what meets their unique needs best. We should not be aiming to achieve one universal tax system for the whole world – this would undermine sovereignty and development.”
Thailand tax officials said that an action plan item to deal with business restructuring would be helpful to developing countries. The officials also said that insufficient legal infrastructure and limited information disclosure by MNEs of expenses such as royalties, pursuant to international accounting standards, were obstacles to preventing corporate tax avoidance.
Officials from Brazil said lack of effective exchange of tax information and lack of specific rules related to the digital economy prevented enforcement of tax laws. “We believe that the constant improvement of risk analysis tools to detect abusive practices is key to minimize the negative effects on the tax base,” the officials said.
The most frequently cited BEPS challenges within the group were transfer pricing abuse; excessive intercompany payments of interest, royalties, and service payments; abuse of treaty and permanent establishment rules; and non-taxation of foreign businesses selling through the internet.
The most frequently cited obstacles to addressing MNE tax avoidance were lack of transparency into MNE affairs, lack comparable companies for transfer pricing assessment, and inadequate skills of tax personnel.
The UN also posted two submissions by NGOs in response to the questionnaire.
Prior coverage. For the comments, see Brazil, Chile, China, Ghana, India, Malaysia, Mexico, Singapore, Thailand, Tonga, Zambia, Economic Justice Network and Oxfam South Africa, Christian Aid and Action Aid.
