BEPS – some questions and check the box

Reading through the BEPS paper and in particular the examples at pages 73 to 81 of the paper and listening to the debate in Paris on 26 March poses for me some interesting questions :

  • Can business oppose the elimination of double non taxation?
  • Can one address BEPS without changing the check the box rules?
  • What is acceptable tax competition amongst governments?
  • What is the “right” % of GDP for Corporate Income Tax to take?


Can business oppose the elimination of double non taxation?  The hybrid finance example

There was considerable discussion about the respective problems of double taxation and double non taxation. Now, I have been a consistent advocate of the need to avoid double taxation and there was clear recognition in Paris from Government that double taxation is economically inefficient and should be avoided – this is positive and something which business should welcome. The other side of the coin is double non taxation. Business takes advantage of double non taxation opportunities, but the question to pose is does business have an intellectually robust position to oppose the removal of these opportunities? I struggle to find one as I do not believe it improves economic efficiency and is generally the result of mismatches between fiscal regimes. When those mismatches are removed then I think that business has to accept that, so long as there is a reasonable transition period to reorganise.

In the example on the hybrid treatment of redeemable preference  shares, the question has to be asked, why does country L continue to allow the dividend treatment of the receipt from country T and why does country T allow a tax deduction for a redeemable preference share? If these rules are changed then I can’t see the business community arguing against the change per se. There is a discrimination argument under treaties, yes, but it is clear what generates the double non taxation. I also assume that arranging debt in the target company’s jurisdiction is acceptable and not base erosion, it’s the hybrid giving rise to the double dip that is not acceptable – it would be helpful if the example actually said that.

Can one address BEPS without changing the check the box rules?

Turning back to the other examples, the US outbound planning example clearly relies on a number of building blocks, the dual resident company to remove income from the EC (helpfully facilitated by Ireland) and the form of LOB in European treaties which focus on ultimate ownership , not where the income ends up being parked (ie in Bermuda). But the foundation for all this is the US tax treatment, both in terms of check the box and the rules which allow the proceeds in Bermuda to be effectively loaned back to the US as upstream loans without being recognised as profit repatriation and therefore without US tax becoming due.

Now an argument can be made that this “incentive” is just the same as other “incentive” regimes. I struggle with this. Only a US owned subsidiary can benefit from the check the box rules and any group ultimately owned outside the US will have to deal with its own CFC regime if it owns some of its subsidiaries under a US holdco. So I don’t see that anyone can benefit from this regime. Also comments have been made that other “light touch” CFC regimes allow the same. This may in part be true, but I don’t think they permit the rolling up of passive income in the way that the US system does in say Bermuda?

A more fundamental question to debate is what was the intention of check the box on its introduction? Was the intention to allow the structures described in the BEPS paper? What is the “spirit of the law” in regard to check the box and subpart F in terms of compliance with the MNE guidelines?

What is acceptable tax competition amongst governments?

I was troubled by this question and I think it is a key question in BEPS. I thought the comments of Mike Williams were very helpful as a clarification. To paraphrase, he drew a distinction between fair tax competition and artificial tax profit shifting. He defined fair tax competition as tax regimes which are transparent, which are available to all taxpayers and which require substance. He defined artificial tax profit shifting as locating the taxable profits earned in substance in country A in country B for tax reporting.

I think this is very helpful and should prompt a debate to define both of these terms in a way that business can understand the letter and the spirit of the law as it should be applied in this area.

What is the “right” % of GDP for Corporate Income Tax to take?

This wasn’t debated in Paris but I think it is an important question. On page 16 of the report Figure 2.1 shows the ratio of CIT as a % of GDP. The graph is fairly steady and indeed a recent IMF analysis describes corporate tax payments as “robust” in the same period. The report goes on “these trends in the relationship of corporate income tax to GDP do not necessarily imply either the existence or non-existence of BEPS practices.” The figures are OECD un-weighted average in a period when the membership of the OECD has changed. The question I have is what is the consistent percentage which governments seek going forward? Is the BEPS project about raising the % of GDP that corporate income taxes provide, or is it about ensuring that all corporate taxpayers pay their fair share of a consistent corporate tax burden. If the second point is the aim then one would expect lower rates of corporate tax but more consistently paid tax (which is broadly what the UK  said recently).

This is an important issue and one on which business is entitled to clarification.

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