by Julie Martin
The OECD’s Pascal Saint-Amans sought to allay Australian lawmakers’ fears that the OECD will fail in its mission to curb tax avoidance through its base erosion and profit (BEPS) plan during an Australian senate hearing, as the senators weighed whether they should support immediate unilateral tax measures to protect Australia’s tax base or wait for the OECD’s BEPS output.
Saint-Amans also discussed BEPS work on interest deductions and how transfer pricing reforms will address marketing hubs.
The Australian Senate References Committee hearing, held April 7-9, followed suggestions made by a Australia’s Treasurer, Joe Hockey, to various media outlets last week that the federal government will propose tax measures similar to the UK’s diverted profits tax in its May budget.
Speaking via video conference from Paris, Saint-Amans, who is director of the OECD Center of Tax Policy and Administration, urged the senators is to wait for OECD BEPS guidance, slated to be complete in October, before adopting any unilateral measures. “If you act on your own it is going to be more difficult to fix the issues than if all the countries act together,” Saint-Amans said. He also said that Australia will be better informed to act once the BEPS action items are finalized, and that unilateral action will increase risks of double taxation.
Greens Senator Christine Milne questioned whether the OECD would truly be able to deliver reform through the BEPS initiative. “This committee has been given evidence from various witnesses that the United States is actually in this process to minimize damage to its own companies, in particular companies domiciled in the United States, and that they will attempt to undermine the BEPS plan and the OECD,” Milne said.
Milne said she was concerned that the US and other countries would delay the process and cause the OECD to deliver watered-down reforms and “meaningless” reporting requirements.
Saint-Amans responded that he strongly believed the OECD would deliver a meaningful package of guidance this October that makes significant change. The first seven measures agreed to “have teeth — these are not meaningless measures,” he said.
Saint-Amans added that the US is not the only country with an interest in maintaining the status quo. Luxembourg, Ireland, Switzerland, and The Netherlands are also not keen to amend the international tax rules, he said, as the current system helps them attract investment even though there is not a lot of business activity in their countries. Nonetheless, Saint-Amans predicted that countries will not block the BEPS process because they are aware that other counties would respond with unilateral tax measures.
Saint-Amans acknowledged that BEPS output is only “morally” binding, as opposed to legally binding, because countries are not required to adopt legislation to implement the rules.
Such “soft legislation” works, though, Saint-Amans maintained, because once a country agrees to a measure, there is an expectation from the international community that they will live up to their commitments. Soft legislation was used to combat bank secrecy, and now countries are agreeing to automatic exchange of information, he noted.
He also said also any amendments to the transfer pricing guidelines will become effective immediately because judges will use the guidelines to decide court cases as soon as the guidelines are final.
Interest deductions and marketing hubs
Saint-Amans reported that OECD countries and their BEPS partners are particularly keen to move in a coordinated fashion to implement the BEPS interest deduction measures. “This is probably the action where the divergence of views are the smallest among countries — there is a real [push] to make progress and to move at the same time and in the same direction.”
He noted that business has argued that a global allocation method of limiting interest deductions would impose high compliance costs on business and would potentially cause double taxation despite any global agreement on how to allocate interest because different countries define what constitutes interest differently.
“Probably we [will] go in the direction of a ratio, but which will have to take into account the different perspectives,” Saint-Amans said.
Saint-Amans also told the senators that OECD work on the transfer pricing guidelines should help Australia deal with the problem of companies selling products and services into Australia from low-tax marketing hubs, such as Singapore.
“The work will are doing will probably result in changing very significantly the amount of money you can shift to hubs even where you have some form of real activity but where you don’t have the absolute value creation,” he said.
Australia has good reasons to be concerned marketing hubs. During an earlier hearing session, government witnesses reported that $100 billion of related-party payments were made from Australia to Singapore in 2012-2013, a $40 billion increase over the prior year.
The issue of marketing hubs was also addressed during testimony offered by senior executives from Google and Microsoft, who were called to the inquiry to defend their companies’ tax structures and the low taxes they paid to the Australian Treasury.
Under questioning by Milne, Microsoft’s global tax chief Bill Sample said that in fiscal 2014, Microsoft’s Singapore hub received $2 billion of software products and services revenue from Australian customers, while only $100 million of consulting services revenue was booked in Australia that year.
Similarly, Google’s managing director for Australia and New Zealand, Maile Carnegie, said Google’s regional head office in Singapore receives all advertising revenue from sales in Australia, while Google Australia is compensated on a cost plus basis for sales and marketing support services and for research and development. In 2013, Google Australia was paid $258 million for its services, generating profits of $46 million, and paying just $7.1 million in taxes.
The Microsoft and Google representatives both confirmed at the hearing that their companies were under audit by Australian tax authorities, and that the tax authorities have refused to accept their advance pricing agreement (APA) applications.
Though not using a Singapore hub, Apple is also under audit by Australian tax officials and its APA application was rejected by the authorities, Apple’s managing director for Australia and New Zealand, Tony King said.
—Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
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