by Julie Martin
Tax experts, including officials from Germany, the IMF, World Bank Group, and OECD, offered their views on joint audits for multinational corporations, public country-by-country reporting, and developing country tax incentives at a conference, held May 23–24 in Washington, sponsored jointly by the World Bank Group and Tax Coop.
German tax department head, Michael Sell, told the conference that increased use of joint audits for MNEs should be made part of “BEPS 2.0,” namely, the implementation phase the OECD/G20 base erosion profit shifting (BEPS) project.
This new audit approach, being piloted by Germany and some of its neighbors, stands in contrast to the more typical situation where a multinational group is subject to separate audits for the same transaction by different countries, sometimes many years apart, Sell said. He said that a key benefit of joint audits is to guard against double taxation.
Sell said that tax disputes between multinationals and tax inspectors should be resolved at the earliest stage, as opposed to 6–8 years later, as is the case today. He said that disputes sometimes get so old that the individuals attempting to settle have had no involvement in the transaction or the audit, and must thus reach compromises about situations they are completely unfamiliar with.
Public country-by-country reporting
Sell also discussed some of the reasons behind the German Finance Ministry’s widely-publicized opposition to a proposed amendment to the EU accounting directive which would require multinationals to publicly report, on a country-by-country basis, tax information about the group’s operations in the EU and in non-EU countries considered to be tax havens.
The proposal, unveiled by the EU Commission on April 12, would apply to all MNEs operating in Europe, not just European-parented MNEs, that have consolidated turnover of EUR 750 million.
Sell said he is a strong supporter of country-by-country reporting under the BEPS plan, which calls for reports on multinational groups’ tax affairs to be exchanged among tax officials, but kept hidden from public view. He said he feared that the EU proposal for public release of the reports would jeopardize the BEPS plan agreement.
If the reports are made public by EU countries, non-EU country tax authorities would lose their incentive to provide information about MNEs to EU tax authorities, Sell explained. “You don’t have to be a game theorist [to understand] that it is advantageous to have a quid-pro-quo situation,” he said.
Sell also said that opponents of country-by-country reporting argue that tax related information provided in the reports, if made public, could provide a company’s competitors with information about the company’s cost structure. “Whether this argument succeeds or not, I don’t know,” he said.
Germany will submit its proposal on country-country reporting after the May ECOFIN meeting, he said.
Sell also said that in his view, the reason why there is now progress in international taxation, after decades of inaction, is because both the public and politicians now care about how much tax others pay.
Omri Marian, an Assistant Professor of Law at University of California, Irvine, said that the only reason why people now care about tax avoidance is because they know about it. This supports making country-by-county reporting public, Marion said, because without it, the only way people will learn about tax avoidance is through whistleblowers or through investigative journalism, which is not the best way for the public to become informed about tax avoidance.
Sell also said he disagreed with those that argue that the UN, rather than the OECD, should set international tax standards. It is not possible for the UN to attain the level of tax expertise required to set these tax standards, plus the UN already has a lot of very difficult work to do, Sell argued.
Manuel Montes, Senior Advisor for Finance and Development at the South Center, disputed this assertion, calling the argument “quite weak and quite false.” Montes said that if the UN put together a platform for tax cooperation, developing countries would send their best experts. Montes said that topics important to developing nations were ignored during the BEPS process because the issues are not a priority for developed countries.
Tax incentives
Victoria Perry, Assistant Director of the Fiscal Affairs Department and Division Chief of the Tax Policy Division at the IMF, said that tax incentives and tax holidays are big problem for most low income countries, and their use is growing.
Perry said that these incentives are often inefficient and ineffective, and in some cases, are associated with corruption. Countries have been advised to remove these incentives, or at least improve their transparency of administration. “The advice has not necessarily been successful and we have to ask ourselves why that is,” she said.
Perry said than an IMF survey of investors in over a dozen countries showed that most investors would have made their investment into the country without the tax incentive. For example, according to the survey, in Rwanda, virtually all investment would have been made without the tax incentive, and in Mozambique, over three-quarters of investors would have invested anyway, she said.
Perry said that governance of tax incentives is a huge issue. The IMF recommends that authority for granting tax incentives be placed only with the Ministry of Finance, and believes that transparency is necessary, as is measurement of the cost and benefits.
Jim Brumby, Director, Public Service and Performance, Government Global Practice at the World Bank Group agreed. Tax incentives offered by low income counties appear to be “the least effective and the most damaging and the most characterized by the use of discretion,” Brumby said.
Brumby said that developing countries are also very vulnerable to transfer mispricing. He said the World Bank Group is working with the OECD and IMF on a G20-mandated toolkit to help developing countries deal with the lack of comparable data in transfer pricing as well as with information asymmetry. The toolkit is expected to be released in draft form this fall.
“Simplification measures that establish a reasonable benchmark and that shift the burden of proof to taxpayers can help administrators lacking information and lacking capacity to establish effective administration of multinational enterprise transactions,” Brumby said.
Brumby also said there is room for optimism because changes can improve tax collection in developing nations. For example, he said, World Bank Group data and his own observations show that estimated profit shifting by multinationals enterprises is reduced by about 50 percent after a country introduces mandatory transfer pricing documentation requirements.
Christina Duarte, Cabo Verde’s former Finance Minister, said that if a country does not understand its competitiveness and advantages, it will be “taken over by international firms.” Duarte said that multinationals do not want to pay tax, and will attempt to convince countries that taxes determine 100 percent of the competitiveness of a country. Tax officials “must do their homework,” she said.
Grace Perez-Navarro, OECD Deputy Director, Centre for Tax Policy and Administration, acknowledged that only G20 countries were included initially in the BEPS process, but said that this was done because “they do represent 90 percent of the economy.” Developing counties are now welcome to implement the BEPS project outcomes, and can work on the remaining BEPS issues, she said.
Perez-Navarro said that work on tax incentives was not included in BEPS project because “this was, we thought, something that countries kind of do to themselves, and so we did not need to create an international framework to solve that problem.”
Later, OECD officials learned though regional network meetings just how concerned developing nations are about tax incentives, Perez-Navarro said. As such, the OECD decided to provide “some guidance to help countries, if they are going to design tax incentives, to at least do it in way that that actually achieves the objectives that they are seeking to achieve,” Perez-Navarro said.
– Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.
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