In recent times, there have been a number of enquiries into what the OECD calls Base Erosion and Profit Shifting (BEPS). Internationally, there is concern about multi-national companies using techniques such as arranging funding in low tax countries and charging high interest to their subsidiaries in high tax countries (called Base Erosion) or, through pricing mechanisms, arranging profits to be shifted from high tax countries to low tax countries (Profit Shifting).
The OECD is examining this with a view to encouraging member countries to introduce legislation aimed at limiting the resulting adverse revenue effects but despite some years of effort, no international consensus has been achieved.
The OECD reports that opportunities available to multi-national companies to minimise tax adversely affects:-
- Governments – which not only suffer reduced revenue, but have their tax system undermined due to seemingly unfair treatment of these multi-national companies.
- Individuals – because income is shifted away from countries where the income producing activities are conducted and consequently, residents of those countries bear a greater share of the tax burden.
- Businesses – particularly those that operate only in domestic markets, including family owned, new and innovative businesses. These have difficulty in competing with multi-national companies that can shift their profits overseas. National economies are distorted due to lack of fair competition.
The task of legislating in all of these countries is a very time consuming one. Some countries, including the UK, have gone ahead and addressed aspects of BEPS on a unilateral basis. Australia has announced that it has formed a joint working group with the UK to develop measures to address these problems.
The May 2015 Commonwealth Budget contained an announcement of amendments to our anti-tax-avoidance rules with a similar purpose.
The Tax Office is currently examining some 86 multi-national companies which include a number of technology companies. They are focusing on:
- The use of hybrid entities for tax arbitrage profiting from different tax rates.
- Transfer pricing between members of an international group where prices charged are lower or higher than market rates.
- Arranging funding through debt instruments with high interest charges.
- Creating offshore entities used for marketing or for procurement.
- Arranging for intangible assets to be acquired by overseas entities in low tax countries.
Any resulting legislation is expected to be very complex and there is a considerable danger that, in overcoming the problems of unfair tax planning strategies, there is a danger that legislation might result in companies becoming subject to Double Taxation – being taxed on the same income in two different countries.
It has been recently reported that the US has caused delays in achieving international consensus. Instead it is seeking to tax US headquartered companies on their world-wide income. In the words of the Australian Treasurer “…that country…has decided to not only go after the tax those companies owe in their (country) but they are trying to get the tax out of them that is owed in our (country) as well.
Andrew and Tony Lovett
11 August 2015
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