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26 July 2018 OECD Secretary-General sends G20 finance ministers an annual progress report of the Inclusive Framework on BEPS and update on IMF/OECD Report on Tax certainty On 22 July 2018, the Organisation for Economic Co-operation and Development (OECD) published on its website the OECD's Secretary-General Report (the report) to G20 Finance Ministers and Central Bank Governors. The report was provided to the G20 Finance Ministers and Central Bank Governors meeting in Buenos Aires, Argentina on 21-22 July 2018, and consists of two parts. Part I is an update of the activities and achievements of the OECD's ongoing tax agenda and future progress needed, in particular through the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS). Part II is a progress report to the G20 by the Global Forum on Transparency and Exchange of Information for Tax Purposes. The report also includes as Annex 1 the text of the 2nd Annual Progress Report of the OECD/G20 Inclusive Framework on BEPS. The report also includes, as an annex, a report titled, UPDATE ON TAX CERTAINTY: IMF/OECD Report for the G20 Finance Ministers and Central Bank Governors (the updated report, also published separately on the OECD's website). This report, which was co-authored by the OECD and International Monetary Fund (IMF), provides an update to the March 2017 report on tax certainty, and examined survey responses from 724 enterprises headquartered in 62 different countries and with regional headquarters in 107 different jurisdictions, as well as 25 national tax authorities. At the end of the G20 Finance Ministers and Central Bank Governors meeting, the G20 also released a Communiqué highlighting the outcomes of the meeting. In the Communiqué, the G20 confirms that they remain committed to seeking a consensus-based solution to address the impacts of the digitalization on the international tax system by 2020, with an update in 2019. This effectively underscores the desire of the G20 that the OECD should continue to lead in addressing this issue. On 21-22 July 2018, the G20 finance ministers held a meeting in Buenos Aires, Argentina where the OECD Secretary-General presented a report updating the G20 on the activities and achievements in relation to the OECD's tax agenda and future progress needed. The report also includes, as annexes, two further reports: the 2nd Annual Progress Report of the OECD/G20 Inclusive Framework on BEPS and the UPDATE ON TAX CERTAINTY: IMF/OECD Report for the G20 Finance Ministers and Central Bank Governors. At the end of the G20 Finance Ministers meeting, the G20 also released a Communiqué highlighting the outcomes of the meeting. In addition to reaffirming the importance of the BEPS package and noting that defensive measures may be taken against jurisdictions that have not satisfactorily implemented the internationally agreed tax transparency standards, the Communiqué notes that the G20 remains committed to seeking a consensus-based solution to address the impacts of the digitalization of the economy on the international tax system by 2020, with an update in 2019. This effectively reaffirms their support of the OECD as the body that will lead the work in developing a long- term, global solution in this area. The Communiqué further welcomes enhanced tax certainty and capacity building. Part I of the report provides an overview and update of the activities and achievements in relation to the OECD's tax agenda and the actions required in the future, in particular through the OECD/G20 IF on BEPS. Part I is divided into four subtopics:
The 2nd Annual Progress Report of the OECD/G20 Inclusive Framework on BEPS (the progress report) is also included in this report as an annex. The report notes that during 2017, great progress was made in the implementation of the measures delivered under the G20/OECD BEPS project. It acknowledges the role of the BEPS IF and draws attention to the significant increase of its membership — currently numbering 116 jurisdictions in total.1 The report also mentions that many multinational enterprises (MNEs) have reported taking proactive steps to align their corporate structures with their economic activity, a BEPS-related goal that the G20 has set for the business world. Moreover, the report notes that the OECD's Task Force on the Digital Economy (TFDE) met on 11 July 2018 to continue to work on the tax challenges arising from digitalization following the release of their interim report in March 2018.2 An update on the interim report, prepared by the Secretariat, will be presented to the G20 finance ministers in June 2019, while the 2020 report should bring a common position to solve long-term challenges. The report notes that significant progress has taken place on tax transparency issues and acknowledges the strong support from the G20. As a response to the request of the G20 to the OECD to provide recommendations on how the criteria can be strengthened to ensure that they remain a lever for progress, including the successful delivery of the commitments made, the report contains a proposal. Based on the proposal, the basic criteria are the same as the OECD established in 2016 – compliance with the tax transparency standards of the exchange of information on request (EOIR) and the standard for automatic exchange of financial account information (AEOI) as well as participation in the multilateral Convention for Mutual Administrative Assistance in Tax Matters. However, the proposal would see the benchmarks strengthened. Generally, if a jurisdiction meets two out of three criteria it receives a compliant rating for EOIR purposes. Now, failing to meet the AEOI criterion will get a non-compliant result. At the G20 Summit in November, the OECD will report to the G20 leaders on the number of jurisdictions that are at risk of being not satisfactorily implementing the internationally agreed tax transparency standards. The report summarizes key findings of the UPDATE ON TAX CERTAINTY: IMF/OECD Report for the G20 Finance Ministers and Central Bank Governors (the update report), with the full update report included as an annex in the report. The update report presents approaches to improve certainty, which range from improving the clarity of legislation, increasing the predictability and consistency of tax administration practices, and driving more effective dispute prevention and resolution. While the original 2017 report on tax certainty3 focused on tax certainty in G20 and OECD countries, and recognizing that the issue is also of particular importance for developing countries, the update report also focusses on initiatives that can support developing countries in enhancing tax certainty. The report also highlights that one of the key tools increasing tax certainty for taxpayers is the availability of the Mutual Agreement Procedure (MAP), and includes a figure illustrating MAP outcomes, which are deemed encouraging since more than 85% of MAPs concluded in 2016 resolved the issue. The report considers that tackling tax crimes and other financial crimes is another important area where capacity building is increasing. The OECD, the report says, continues to provide capacity building support to developing countries through a variety of activities, and works together with the IMF, the United Nations (UN) and the World Bank Group (WBG) to better coordinate support and services to developing countries through the Platform for Collaboration on Tax (PCT), which was established in 2016. The report further states that Argentina has decided to host an OECD International Academy for Tax Crime Investigation in Buenos Aires, following the success of the Academy launched in Ostia, Italy in 2014.4 The 2nd Annual Progress Report (the progress report), which is published as Annex 1 to the report for the G20 finance ministers meeting, presents the current state of play in progressing the IF's mandate on BEPS, covering the period from July 2017 to June 2018. It outlines on the major developments in dealing with the tax challenges of the digitalized economy and the entry into force of the OECD's Multilateral Instrument (MLI), and discusses how countries are progressing in the implementation of the BEPS measures. The progress report contains an overview and four sections of substantive content. It also includes three annexes (Annex A, showing the membership of the IF, Annex B, cataloguing the BEPS Actions and Annex C, which describes the use of Country-by-Country (CbC) Reporting (CbCR) data to measure BEPS). Section 1 provides an introduction describing how the BEPS policy objectives are being achieved. By analyzing the objectives and outcomes per BEPS action, the progress report highlights that each of the BEPS Actions is designed to stop countries and companies from competing on the basis of a lack of transparency, a lack of substance or the exploitation of loopholes or differences in countries' tax systems. Section 2 describes the two major developments in advancing the BEPS agenda in the past year, i.e., the work on addressing the tax challenges of the digitalization of the economy and the coming into force of the OECD's MLI. The progress report describes the outcomes of the interim report on the tax challenges of the digitalization and the differences of opinion within the members of the IF, and reports that the IF will continue working on a coherent and concurrent review of the "nexus" and "profit allocation" rules and toward a consensus-based long-term solution by 2020. Furthermore, the progress report notes that the entry into force of the MLI follows the deposit of the fifth instrument of ratification by Slovenia on 22 March 2018, while earlier, Austria, the Isle of Man, Jersey and Poland deposited their instruments with the OECD. Since then, four additional jurisdictions (New Zealand, Serbia, Sweden and the United Kingdom) have deposited their instruments of ratification. The progress report notes that the entry into force of the MLI, just one year after the first signing ceremony, underlines the strong political commitment to a multilateral approach to addressing BEPS. The OECD expects that more than 30 additional signatories will deposit their instruments of ratification before the end of 2018. Section 3 describes the progress in respect of the peer reviews of the BEPS minimum standards, which the progress report notes are considered an essential tool to ensure the effective implementation of the BEPS project. Peer review results have already been published for BEPS Actions 5, 13 and 14, while the peer review of Action 6 has recently started. In regard to Action 5, the progress report notes that 175 regimes have been assessed by the OECD's Forum on Harmful Tax Practices against the standard for harmful preferential tax regimes, and that 31 have already been changed. Additionally, more than 17,000 tax rulings have already been identified and information is now being exchanged between IF members. Regarding Action 6, more than half of the 2,500 bilateral tax treaties in force and listed by the MLI signatories in their country positions will be updated to implement the Action 6 minimum standard when the bilateral agreements and the MLI enter into force and effect in respect of all signatories. In regard to Action 13, the progress report notes that more than 60 jurisdictions now have a comprehensive domestic legal framework for CbCR in place, including those with rules commencing after 2016. Finally, on Action 14, the progress report states that, based on peer review data, access to MAP is generally granted in eligible cases and that MAP guidance is generally clear and available. The progress report does note, however, that there are still a number of issues that require further attention, including the fact that a considerable portion of tax treaties need to be amended and improvements in MAP guidance are necessary. Section 4 of the progress report describes the wider BEPS implementation beyond the minimum standards. The progress report mentions that the BEPS recommendations included common approaches to facilitate the convergence of country practices on domestic legislation and treaty provisions to neutralize hybrid mismatches (Action 2), on building blocks of effective Controlled Foreign Company rules (Action 3), on limitation of the deductibility of interest expenses via intra-group and third-party loans (Action 4), and on domestic legislation relating to mandatory disclosure by taxpayers of aggressive arrangements or structures (Action 12). The progress report observes that some countries have started to implement these measures, particularly European Union (EU) Member States. In addition, the report notes that transfer pricing rules have been clarified and progress has been made during the course of 2018. Finally, in the context of Action 11 (on Measuring and Monitoring BEPS) the progress report states that a series of new data collection processes and analytical tools have been developed and are now being put in place. A new corporate tax statistics dataset will be released for the first time in November 2018, and will include three main categories of data (data on tax revenues, data on tax rates and data on tax incentives). In addition, future editions, from 2019 onward, will also include some statistics from CbC reports based upon countries' aggregated and anonymized data. Part II: Progress report to the G20 by the Global Forum on Transparency and Exchange of Information for Tax Purposes Part II of the report notes that tax transparency and exchange of information continue to expand; in the first six months of 2018, three jurisdictions have joined the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum), taking membership to 150 jurisdictions. The report provides an update of the status of the AEOI globally. Nearly 50 jurisdictions successfully commenced exchanges in 2017, while a further 53 jurisdictions are due to start sharing financial account information by September 2018, according to the report. The Global Forum will continue to closely monitor the progress made by the jurisdictions that started to exchange information in 2018 to ensure that their commitments are delivered in full and in a timely manner. Regarding the implementation of the EOIR standard, the report notes that in the second round of EOIR peer reviews, which commenced in 2016, 24 new ratings had been published as of 26 June 2018, of which 10 were "Compliant." 12 were "Largely Compliant" and 2 were "Partially Compliant." The report also provides a brief status update on the initial proposals of the Global Forum and Financial Action Task Force presented to the G20 finance ministers in October 2016 for ways to improve the implementation of the international standards on transparency, including on the availability of beneficial ownership information, and its international exchange. The report concludes that the remainder of 2018 will represent an intense period of activity, with the Global Forum fast-approaching one of the key milestones on the delivery of the AEOI commitments by more than 100 jurisdictions and further progress on the EOIR peer reviews. The introduction to the tax certainty update report (the tax certainty report) notes that the report on tax certainty published by the IMF and OECD in 2017 reflects the concerns of taxpayers and governments in G20 and OECD countries on this issue, especially in the context of international taxation. These concerns, the tax certainty report notes, come amid the spread and emergence of new business models and increased internationalization of business activities; heightened concern with aggressive tax planning; some fragmented and unilateral policy decisions; certain court decisions; and updates to the international tax rules, such as through the G20/OECD BEPS Project. The tax certainty report observes that the earlier 2017 report identified the major drivers of tax uncertainty for businesses as uncertain tax administration practices, inconsistent approaches of different tax authorities in applying international tax standards and issues associated with dispute resolution mechanisms. To enhance tax certainty, the report identifies a set of concrete and practical approaches and solutions. These include improving the clarity of legislation, increasing predictability and consistency of tax administration practices, effective dispute prevention, and robust dispute resolution mechanisms. It further outlined approaches to enhance tax certainty, including cooperative compliance programs, advance pricing agreements (APAs), and simultaneous and joint audits, robust and effective international dispute resolution mechanisms such as MAP and arbitration, and consistent implementation of international standards and guidance. The tax certainty report provides an update of the 2017 report in two dimensions: first, it discusses developments in the approaches in G20/OECD countries to enhance tax certainty, including a number of new, cross-border focused developments that were not identified in the 2017 report. Second, a new component focuses on the issue of tax certainty in developing countries. The 2017 report identified several practical tools for enhancing tax certainty in G20 and OECD countries. These included issues in tax policy design and legislation as well as issues in tax administration (such as avoiding and resolving disputes). The 2018 update provides further information on developments in a number of those areas. These include:
At the conclusion of its update section, the tax certainty report notes that there remains an important question with respect to how tax uncertainty influences investment. The OECD business survey, undertaken in advance of the 2017 report, suggested that businesses indicate that tax certainty is indeed important for investment. Yet, the report notes, a question remains whether such a relationship is sustained by data on actual investment behavior. A recent IMF study, the report outlines, sheds new light on this issue.6 This study, the tax certainty report says, uses an indicator on the perceived risk of countries related to transfer pricing regulation, derived from a survey of transfer pricing professionals. The study assesses how this perceived transfer pricing risk influences multinational investment. The identification strategy relies on a quasi-experimental approach, whereby affiliates of multinational groups are the treated group, while affiliates of purely domestic groups are the control group (not affected by transfer pricing regulation). The results indicate that higher transfer pricing risk (more tax uncertainty) systematically reduces investment in the multinational affiliates. This remains an open issue for the OECD and IMF to continue to address. In an expansion of the 2017 report's focus, the second section of the tax certainty update report sets out a series of discussions points in relation to tax certainty in developing countries. Though noting that, as the data from the original business survey is separated into its component parts, the sample size for each region is reduced, the report sets out a number of key results, including:
Overall, the report says, findings from the survey give some indications on why and how governments in developing countries may want to address tax certainty issues. Addressing issues on VAT and withholding, for example, appear of greater importance for developing countries. These areas thus might benefit from increased focus. Africa especially may gain from simplified approaches such as safe harbors. All regions may enjoy gains through adoption of international standards – this may especially be the case in Asia, where domestic administration concerns were often of a lower magnitude than in Africa and LAC, but international dimensions were more comparable. Spanning more than 110 pages, the differing sections of the report provide deep and clear updates on current developments, as well as setting out recommendations on how tax certainty may be improved in the future. Tax professionals are recommended to read the report, to understand how potential recommended changes may impact their own organizations and, importantly, decide what role they wish to have in terms of assisting governments with current discussions and recommendations into future practical tools and processes. 2 See EY Global Tax Alert, The OECD's interim report on tax challenges arising from digitalisation: An overview, dated 20 March 2018. 4 http://www.oecd.org/tax/crime/latin-america-academy-for-tax-and-financial-crime-investigation.htm. 5 See EY Global Tax Alert, OECD launches international compliance assurance programme pilot, dated 26 January 2018. 6 R. de Mooij and L. Liu, At A Cost: the Real Effects of Transfer Pricing Regulations, IMF Working Paper 18/69, International Monetary Fund, Washington, DC, 2018.
Document ID: 2018-5904 |
